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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 2, 1998.
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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AMSCAN HOLDINGS, INC.*
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 5110 13-3911462
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
AMSCAN HOLDINGS, INC.
80 GRASSLANDS ROAD
ELMSFORD, NEW YORK 10523
(914) 345-2020
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF THE REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
COPIES OF ALL COMMUNICATION TO:
JAMES M. HARRISON
PRESIDENT MITCHELL S. PRESSER, ESQ.
AMSCAN HOLDINGS, INC. WACHTELL, LIPTON, ROSEN & KATZ
80 GRASSLANDS ROAD 51 WEST 52ND STREET
ELMSFORD, NEW YORK 10523 NEW YORK, NEW YORK 10019
(914) 345-2020 (212) 403-1000
(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE
NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: Upon
consummation of the Exchange Offer referred to herein.
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If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G check the following box. [ ]
CALCULATION OF REGISTRATION FEE
==========================================================================================================
PROPOSED
TITLE OF EACH CLASS AMOUNT PROPOSED MAXIMUM AMOUNT OF
OF SECURITIES TO TO BE OFFERING PRICE AGGREGATE REGISTRATION
BE REGISTERED REGISTERED PER NOTE(2) OFFERING PRICE FEE
- ----------------------------------------------------------------------------------------------------------
9 7/8% Senior Subordinated
Exchange Notes due 2007(1) $110,000,000 100% $110,000,000 $32,450
Guarantees of 9 7/8% Senior
Subordinated Notes due 2007 (3) (3) (3) (4)
==========================================================================================================
(1) This Registration Statement covers both the Prospectus filed hereby in
connection with the exchange offer for the Exchange Notes and the prospectus
filed hereby in connection with certain market-making activities by
affiliates of the Registrant.
(2) Estimated solely for purposes of calculating registration fee pursuant to
Rule 457.
(3) No separate consideration will be received for the Guarantees.
(4) Pursuant to Rule 457(n) no separate fee is payable for the Guarantees.
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THE REGISTRANTS HEREBY AMEND THE REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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* TABLE OF ADDITIONAL REGISTRANTS
PRIMARY
STANDARD
INDUSTRY I.R.S EMPLOYER
NAME, ADDRESS AND STATE OR OTHER JURISDICTION OF CLASSIFICATION IDENTIFICATION
TELEPHONE NUMBER INCORPORATION OR ORGANIZATION NUMBER NUMBER
- ---------------------------------- ------------------------------ -------------- ---------------
Amscan Inc. ...................... New York 5110 13-1771359
Trisar, Inc. ..................... California 5110 95-3420659
Am-Source, Inc. .................. Rhode Island 5110 05-0471630
SSY Realty Corp. ................. New York 6519 13-3500756
JCS Realty Corp. ................. New York 6519 13-3431738
- ---------------
* The address of these additional registrants is 80 Grasslands Road, Elmsford,
New York 10523. Their telephone number is (914) 345-2020.
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EXPLANATORY NOTE
This Registration Statement covers the registration of an aggregate
principal amount of $110,000,000 of 9 7/8% Senior Subordinated Notes due 2007
(the "Exchange Notes") of Amscan Holdings, Inc. ("Amscan" or the "Company"),
which will have been registered under the Securities Act pursuant to a
Registration Statement of which this Prospectus is a part, that may be exchanged
for equal principal amounts of Amscan's outstanding 9 % Senior Subordinated
Notes due 2007 (the "Notes") (the "Exchange Offer"). This Registration Statement
also covers the registration of the Exchange Notes for resale by Goldman, Sachs
& Co. in market-making transactions. The complete Prospectus relating to the
Exchange Offer (the "Exchange Offer Prospectus") follows immediately after this
Explanatory Note. Following the Exchange Offer Prospectus are certain pages of
the Prospectus relating solely to such market-making transactions (the
"Market-Making Prospectus"), including alternate front and back cover pages, a
section entitled "Risk Factors -- Trading Market for the Exchange Notes" to be
used in lieu of the section entitled "Risk Factors -- Lack of Public Market for
the Exchange Notes," a new section entitled "Use of Proceeds" and an alternate
section entitled "Plan of Distribution." In addition, the Market-Making
Prospectus will not include the following captions (or the information set forth
under such captions) in the Exchange Offer Prospectus: "Prospectus
Summary -- The Note Offering" and "-- The Exchange Offer," "Risk
Factors -- Exchange Offer Procedures" and "-- Restrictions on Transfer," "The
Exchange Offer," and "Certain Federal Income Tax Consequences of the Exchange
Offer". All other sections of the Exchange Offer Prospectus will be included in
the Market-Making Prospectus.
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Information contained herein is subject to completion or amendment. A
Registration Statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the Registration Statement
becomes effective. This Prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.
SUBJECT TO COMPLETION, DATED FEBRUARY 2, 1998
[AMSCAN LOGO]
OFFER TO EXCHANGE
ITS
9 7/8% SENIOR SUBORDINATED NOTES DUE 2007
($110,000,000 PRINCIPAL AMOUNT)
FOR ALL OF ITS OUTSTANDING
9 7/8% SENIOR SUBORDINATED NOTES DUE 2007
($110,000,000 PRINCIPAL AMOUNT OUTSTANDING)
AMSCAN HOLDINGS, INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME
ON , 1998, UNLESS EXTENDED.
Amscan Holdings, Inc., a Delaware corporation (the "Company"), hereby offers
(the "Exchange Offer"), upon the terms and subject to the conditions set forth
in this Prospectus and the accompanying Letter of Transmittal (the "Letter of
Transmittal"), to exchange up to an aggregate principal amount of $110,000,000
of its 9 7/8% Senior Subordinated Notes due 2007 (the "Exchange Notes"), which
will have been registered under the Securities Act of 1933, as amended (the
"Securities Act"), pursuant to a Registration Statement of which this Prospectus
is a part, for an equal principal amount of its outstanding 9 7/8% Senior
Subordinated Notes due 2007 (the "Notes"), in integral multiples of $1,000. The
Exchange Notes will be fully and unconditionally guaranteed on a senior
subordinated basis, jointly and severally, by certain of the Company's
Subsidiaries (the "Guarantors"). The Exchange Notes will be senior subordinated
unsecured obligations of the Company and are substantially identical (including
principal amount, interest rate, maturity and redemption rights) to the Notes
for which they may be exchanged pursuant to this offer, except that (i) the
offering and sale of the Exchange Notes will have been registered under the
Securities Act and (ii) holders of Exchange Notes will not be entitled to
certain rights of holders under the Exchange and Registration Rights Agreement
of the Company dated as of December 19, 1997 (the "Registration Rights
Agreement").
The Exchange Notes will be general, unsecured obligations of the Company,
will be subordinated in right of payment to all Senior Debt of the Company, will
rank pari passu with all senior subordinated debt of the Company and will be
senior in right of payment to all existing and future subordinated debt of the
Company, if any. The claims of Holders of the Exchange Notes will be effectively
subordinated to the Senior Debt, which, as of September 30, 1997, on a pro forma
basis giving effect to the Transaction and the Transaction Financings would have
been approximately $128 million, $117 million of which would have been fully
secured borrowings under the Bank Credit Agreement. The claims of Holders will
be effectively subordinated to the indebtedness and other liabilities of the
Company's Non-Guarantor Subsidiaries through which the Company conducts a
portion of its operations, which indebtedness and other liabilities were
approximately $3 million as of September 30, 1997. See "The Transaction" and
"Capitalization".
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SEE "RISK FACTORS" BEGINNING ON PAGE 20 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY HOLDERS WHO TENDER NOTES IN THE EXCHANGE OFFER.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date of this Prospectus is , 1998
(Cover text continued on next page)
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The Notes have been, and the Exchange Notes will be, issued under an
Indenture dated as of December 19, 1997 (the "Indenture"), among the Company,
the Guarantors and IBJ Schroder Bank & Trust Company, as trustee (the
"Trustee"). See "Description of Exchange Notes". There will be no proceeds to
the Company from this offering; however, pursuant to the Registration Rights
Agreement, the Company will bear certain offering expenses.
The Company will accept for exchange any and all Notes validly tendered or
prior to 5:00 p.m. New York City time, on , 1998, unless the
Exchange Offer is extended (the "Expiration Date"). Tenders of Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration
Date; otherwise such tenders are irrevocable. IBJ Schroder Bank & Trust Company
will act as Exchange Agent with respect to the Notes (in such capacity, the
"Exchange Agent") in connection with the Exchange Offer. The Exchange Offer is
not conditioned upon any minimum principal amount of Notes being tendered for
exchange, but is otherwise subject to certain customary conditions.
The Notes were sold by the Company on December 19, 1997 in transactions not
registered under the Securities Act in reliance upon the exemption provided in
Section 4(2) of the Securities Act. A portion of the Notes were subsequently
resold to qualified institutional buyers in reliance upon Rule 144A under the
Securities Act. The remainder of the Notes were resold outside the United States
in reliance on Regulation S under the Securities Act. Accordingly, the Notes may
not be reoffered, resold or otherwise transferred in the United States unless
registered under the Securities Act or unless an applicable exemption from the
registration requirements of the Securities Act is available. The Exchange Notes
are being offered hereunder in order to satisfy certain obligations of the
Company under the Registration Rights Agreement. See "The Exchange Offer".
The Exchange Notes will bear interest from December 19, 1997, the date of
issuance of the Notes that are tendered in exchange for the Exchange Notes (or
the most recent Interest Payment Date (as defined herein) to which interest on
such Notes has been paid), at a rate equal to 9 7/8% per annum. Interest on the
Exchange Notes will be payable semi-annually on June 15 and December 15 of each
year, commencing June 15, 1998. The Exchange Notes are redeemable at the option
of the Company, in whole or in part, at any time on or after December 15, 2002,
at the redemption prices set forth herein, plus accrued and unpaid interest to
the date of redemption. See "Description of Exchange Notes".
In addition, at any time prior to December 15, 2000, up to an aggregate of
35% of the principal amount of Exchange Notes will be redeemable at the option
of the Company, on one or more occasions, from the net proceeds of public or
private sales of common stock of, or contributions to the common equity capital
of, the Company at a price of 109.875% of the principal amount of the Exchange
Notes, together with accrued and unpaid interest, if any, to the date of
redemption; provided that at least $65.0 million in aggregate principal amount
of Notes and Exchange Notes remains outstanding immediately after each such
redemption. At any time on or prior to December 15, 2002 the Exchange Notes may
also be redeemed as a whole but not in part at the option of the Company upon
the occurrence of a Change of Control at a redemption price equal to 100% of the
principal amount thereof plus the Applicable Premium, together with accrued and
unpaid interest, if any, to the date of redemption. If the Company does not
redeem the Exchange Notes upon a Change of Control, the Company will be
obligated to make an offer to purchase the Exchange Notes, in whole or in part,
at a price equal to 101% of the aggregate principal amount of the Exchange
Notes, plus accrued and unpaid interest, if any, to the date of purchase. If a
Change of Control were to occur, the Company may not have the financial
resources to repay all of its obligations under the Bank Credit Agreement, the
Indenture and the other indebtedness that would become payable upon the
occurrence of such Change of Control. See "Risk Factors -- Payment Upon a Change
of Control" and "Description of Exchange Notes".
The Exchange Offer is being made in reliance on certain no-action positions
that have been published by the staff of the Securities and Exchange Commission
(the "Commission"), which
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require each tendering noteholder to represent that it acquired the Notes in the
ordinary course of its business and that such holder does not intend to
participate and has no arrangement or understanding with any person to
participate in a distribution of the Exchange Notes. In some cases, certain
broker-dealers may be required to deliver a prospectus in connection with the
resale of Exchange Notes that they receive in the Exchange Offer. See
"Prospectus Summary -- The Note Offering -- The Exchange Offer".
The Company does not intend to list the Exchange Notes on any national
securities exchange or to seek admission thereof to trading in any automated
quotation system. Goldman, Sachs & Co. ("Goldman Sachs") has advised the Company
that it intends to make a market in the Exchange Notes; however, it is not
obligated to do so and any market-making may be discontinued at any time. As a
result, the Company cannot determine whether an active public market will
develop for the Exchange Notes.
ANY NOTES NOT TENDERED AND ACCEPTED IN THE EXCHANGE OFFER WILL REMAIN
OUTSTANDING. TO THE EXTENT ANY NOTES ARE TENDERED AND ACCEPTED IN THE EXCHANGE
OFFER, A HOLDER'S ABILITY TO SELL UNTENDERED NOTES COULD BE ADVERSELY AFFECTED.
FOLLOWING CONSUMMATION OF THE EXCHANGE OFFER, THE HOLDERS OF NOTES WILL CONTINUE
TO BE SUBJECT TO THE EXISTING RESTRICTIONS UPON TRANSFER THEREOF AND THE COMPANY
WILL HAVE FULFILLED ONE OF ITS OBLIGATIONS UNDER THE REGISTRATION RIGHTS
AGREEMENT. HOLDERS OF NOTES WHO DO NOT TENDER THEIR NOTES GENERALLY WILL NOT
HAVE ANY FURTHER REGISTRATION RIGHTS UNDER THE REGISTRATION RIGHTS AGREEMENT OR
OTHERWISE. SEE "THE EXCHANGE OFFER -- CONSEQUENCES OF FAILURE TO EXCHANGE".
The Exchange Notes issued pursuant to this Exchange Offer generally will be
issued in the form of Global Exchange Notes (as defined herein), which will be
deposited with, or on behalf of, The Depository Trust Company (the "Depository"
or "DTC") and registered in its name or in the name of Cede & Co., its nominee.
Beneficial interests in the Global Exchange Notes representing the Exchange
Notes will be shown on, and transfers thereof will be effected through, records
maintained by the Depository and its participants. Notwithstanding the
foregoing, Notes held in certificated form will be exchanged solely for Exchange
Notes in certificated form. After the initial issuance of the Global Exchange
Notes, Exchange Notes in certificated form will be issued in exchange for the
Global Exchange Notes only on the terms set forth in the Indenture. See
"Description of Exchange Notes -- Book-Entry, Delivery and Form".
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NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITY
OTHER THAN THE EXCHANGE NOTES OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO
SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY OF THE EXCHANGE NOTES TO ANY
PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR
SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE
DATE HEREOF.
UNTIL , 1998 (90 DAYS AFTER COMMENCEMENT OF THIS OFFERING),
ALL DEALERS EFFECTING TRANSACTIONS IN THE EXCHANGE NOTES, WHETHER OR NOT
PARTICIPATING IN THE EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
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AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-4 under the Securities Act for
the registration of the Exchange Notes offered hereby (the "Registration
Statement"). This Prospectus, which constitutes a part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement, certain items of which are contained in exhibits and schedules to the
Registration Statement as permitted by the rules and regulations of the
Commission. For further information with respect to the Company or the Exchange
Notes offered hereby, reference is made to the Registration Statement, including
the exhibits and financial statement schedules thereto. With respect to each
such document filed with the Commission as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description of
the matter involved, and each such statement shall be deemed qualified in its
entirety by such reference.
The Company is presently subject to the information requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports and other information with the Commission.
The Registration Statement, such reports and other information filed by the
Company can be inspected and copied at the public reference facilities of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and the regional
offices of the Commission located at 7 World Trade Center, New York, New York
10048 and 500 West Madison Street, 14th Floor, Chicago, Illinois 60661. Copies
of such materials may be obtained from the Public Reference Section of the
Commission, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and
at its public reference facilities in New York, New York and Chicago, Illinois
at prescribed rates. The Company makes its filings with the Commission
electronically. The Commission maintains an Internet site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically, which information can be accessed at
,http://www.sec.gov..
As a result of the offering of the Exchange Notes, each of the Guarantors
will become subject to the informational requirements of the Exchange Act. The
Company will fulfill its obligations with respect to such requirements by filing
periodic reports with the Commission on its own behalf or, in the case of the
Guarantors, by including information regarding the Guarantors in the Company's
periodic reports. In addition, the Company will send to each holder of Exchange
Notes copies of annual reports and quarterly reports containing the information
required to be filed under the Exchange Act. So long as the Company is subject
to the periodic reporting requirements of the Exchange Act, it is required to
furnish the information required to be filed with the Commission to the Trustee
and the holders of the Notes and the Exchange Notes. The Company has agreed
that, even if it is not required under the Exchange Act to furnish such
information to the Commission, it will nonetheless continue to furnish
information that would be required to be furnished by the Company by Section 13
of the Exchange Act to the Trustee and the holders of the Notes or Exchange
Notes as if it were subject to such periodic reporting requirements.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in connection with, the more detailed information and financial statements and
notes thereto appearing elsewhere in this Prospectus.
THE COMPANY
Amscan Holdings, Inc. ("Amscan" or the "Company") designs, manufactures and
distributes decorative party goods, offering one of the broadest and deepest
product lines in the industry. The Company's products include paper and plastic
tableware (such as plates, napkins, tablecovers, cups and cutlery), accessories
(such as invitations, thank-you cards, table and wall decorations and balloons)
and novelties (such as games and party favors). The Company's products are sold
to party goods superstores, independent card and gift retailers, mass
merchandisers and other distributors which sell Amscan products in more than
20,000 retail outlets throughout the world, including North America, Australia,
the United Kingdom, Germany and Sweden.
The Company currently offers over 250 product ensembles, generally
containing 30 to 150 coordinated items. These ensembles comprise a wide variety
of products to accessorize a party including matching invitations, tableware,
decorations, party favors and thank-you cards. The Company designs, manufactures
and markets party goods for a wide variety of occasions including seasonal
holidays, special events and themed celebrations. The Company's seasonal
ensembles enliven holiday parties throughout the year including New Year's,
Valentine's Day, St. Patrick's Day, Easter, Passover, Fourth of July, Halloween,
Thanksgiving, Hanukkah and Christmas. The Company's special event ensembles
include birthdays, christenings, first communions, bar mitzvahs, confirmations,
graduations, baby and bridal showers and anniversaries, while its theme-oriented
ensembles include Hawaiian luaus, Mardi Gras and '50s rock-and-roll parties.
In addition to its long-standing relationships with independent card and
gift retailers, the Company is a leading supplier to the party superstore
distribution channel. Party goods superstores are growing rapidly by providing
consumers with a one-stop source for all of their party needs, generally at
discounted prices. The retail party goods business has historically been
fragmented among independent stores and drug, discount or department store
chains. However, according to industry analysts, there has been a significant
shift of sales since 1990 to the party goods superstore channel.
Company sales to superstores represented approximately 44% of total sales
in 1996. While the number of party superstores that Amscan supplies has grown at
a compound annual growth rate ("CAGR") in excess of 20% from 1993 to 1996, the
Company's sales to superstores have grown by a 47% CAGR during the same period.
With Amscan products occupying an increasing share of superstore shelf space in
many product categories, Amscan believes it is well positioned to take advantage
of continued growth in the party superstore channel.
Amscan's sales and cash flows have grown substantially over the past five
years. From 1991 to 1996, sales and Adjusted EBITDA (adjusted for non-recurring
items relating to the IPO, other income or expenses, and minority interests)
have grown at compound annual rates of 20% and 28%, respectively. During the
same period, Adjusted EBITDA margins increased from approximately 14% to 20% due
in part to the Company achieving greater economies of scale in manufacturing and
distribution, and significantly reducing selling expenses as a percentage of
sales. Sales and Adjusted EBITDA for the twelve months ended September 30, 1997
were approximately $207 million and $42 million, respectively, representing an
Adjusted EBITDA margin of approximately 20%.
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PARTY GOODS INDUSTRY OVERVIEW
According to industry analyst reports, the U.S. decorative party goods
industry (including tableware, accessories and novelties) generated
approximately $3.5 billion in retail sales in 1996 and has grown approximately
10% annually over the past several years. The Company believes this growth is
driven by several factors including favorable demographics and consumer spending
patterns, the emergence of the party superstore channel and growth in the number
of party events celebrated and party products available to consumers.
The Company believes that demographic trends favor continued growth in
decorative party goods sales. According to the United States Bureau of the
Census ("The Census Bureau"), between 1997 and 2005, population in the 10-19
year old age bracket is expected to increase by approximately 10%, and
population in the 20-24 year old age bracket is expected to increase by
approximately 15%. This suggests an increase in celebrations revolving around
teenagers and young adults including confirmations, bar mitzvahs, graduations
and bridal and baby showers. In addition, the 45-54 year old age bracket is
expected to increase by over 20% by 2005. According to The Census Bureau and the
United States Bureau of Labor Statistics, this population segment enjoyed the
highest median household income and spent the most money on entertainment in
1995. The Company believes that this population segment is a key buying group of
party goods for children and grandchildren, as well as products for adult
milestone events including birthdays, anniversaries and retirements.
Another factor contributing to growth in the decorative party goods
industry has been the emergence of party goods superstores which, according to
industry analysts, are poised for expansion as national penetration continues.
The Company believes that superstores are popular among consumers because of the
large variety of merchandise and substantial discounts they offer. Industry
analysts report that, over the past several years, the marketplace has begun to
accept a move toward the party goods superstore merchandising concept, similar
to earlier merchandising shifts in such product categories as toys, office
supplies, home furnishings and home improvements.
The Company believes that party goods sales volumes have also increased, in
part, as a result of:
- the creation of new product ensembles both in response to consumer
demand and as a means of stimulating customer purchases;
- the broadening of product lines through the addition of new items and
new accessories within ensembles;
- larger retail environments allowing retailers to employ marketing
techniques which result in increased average sales per customer; and
- the celebration of an increased number of party themes and events, such
as Hawaiian luaus, Mardi Gras and '50s rock-and-roll parties.
The Company believes that by introducing products for new types of
celebrations, offering multiple product ensembles for individual celebrations
(such as multiple Halloween or birthday ensembles) and increasing the number of
"add-on" accessories, party goods suppliers have increased the frequency and
volume of consumer purchases of decorative party goods.
COMPETITIVE STRENGTHS
Leading Supplier to the High Growth and High Volume Party Goods Superstore
Channel. In addition to its long-standing base of business with independent
card and party retailers, the Company believes that its products account for an
increasing portion of the retail sales by major superstore chains, including
Party City Corporation ("Party City"), Party Stores Holdings, Inc. ("Party
Stores Holdings"), Big Party Corporation, The Paper Factory, The Half-Off Card
Shop,
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Paper Warehouse Inc., and Factory Card Outlet Corp. Approximately 44% of the
Company's sales were generated from superstores last year, and based on
indications from these chains that they intend to continue to expand nationwide,
the Company expects that sales to this segment will continue to grow
significantly.
Single Source Supplier of Decorative Party Goods. The Company provides one
of the most extensive product lines of decorative party goods in the industry,
serving a wide variety of occasions. Amscan produces over 250 different
ensembles, generally containing 30 to 150 coordinated SKUs within each ensemble.
With 14,000 stock keeping units ("SKUs"), the Company is a one-stop shopping,
single-source supplier to retailers of decorative party goods. The Company
believes this breadth of product line provides enough variety that competing
retailers can each purchase Amscan products and still differentiate themselves
by the product they market to the end consumer.
Strong Customer Relationships. The Company has built strong relationships
with its customer base which operates more than 20,000 retail outlets. The
Company strives to provide superior service and, by involving retailers in
product development and marketing, seeks to become a strategic partner to its
customers.
Product Design Leadership. The Company believes one of its strengths is
its leadership in creating innovative designs and party items. The Company
believes its product designs have a level of color, complexity and style that
are attractive to consumers and difficult to replicate. The Company offers
coordinated accessories and novelties which, the Company believes, complement
its tableware designs, enhancing the appeal of its tableware products and
encouraging "add on" impulse purchases.
Strong and Committed Management Team. The Company's management team has
built the business into an industry leader with integrated design,
manufacturing, and distribution capabilities. Current management has been
instrumental in building the Company's strong industry position and in the
Company achieving a 28% CAGR in Adjusted EBITDA since 1991. The management team
and other key employees committed $6.4 million (including restricted stock
grants) to the Transaction.
OPERATIONAL REVIEW
- Design. Amscan's design staff of approximately 70 people develops and
manages the Company's broad line of party goods and keeps the product
line contemporary and fresh by introducing new ensembles each year. For
example, the Company introduced approximately 50 new ensembles for 1997.
- Manufactured Products. The Company is a vertically integrated
manufacturer enabling it to better control costs, monitor quality, manage
inventory and respond quickly to customer needs. The Company's
state-of-the-art facilities in New York, Kentucky, Rhode Island and
California manufacture paper and plastic plates, napkins, cups and other
products. These products constitute approximately 50% of the Company's
net sales. Over the past five years, the Company has purchased or leased
new plant and equipment having an aggregate value of approximately $47
million to support expansion and provide for future growth. Consequently,
the Company believes it is able to expand production by utilizing its
current facilities and equipment.
- Purchased Products. The Company sources approximately 50% of its
products from independently-owned manufacturers, many of whom are located
in the Far East and with whom the Company has long-standing
relationships. The two largest such suppliers operate as exclusive
suppliers to the Company and represent relationships which have been in
place for more than ten years. The Company believes that the quality and
prices of the products manufactured by these suppliers provide a
significant competitive advantage.
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The Company's business, however, is not dependent upon any single source
of supply for products manufactured for the Company by third parties.
- Sales and Distribution. Amscan's sales and distribution capabilities
are designed to provide a high level of customer service. A domestic
direct employee sales force of approximately 60 professionals services
over 5,000 retail accounts. In addition to this seasoned sales team, the
Company utilizes a select group of manufacturers' representatives to
handle specific account situations. International customers are generally
serviced by employees of the Company's foreign subsidiaries. To support
its marketing effort, the Company produces three catalogues annually, two
for seasonal products and one for everyday products. Products are shipped
from the Company's distribution centers using computer assisted systems
that permit the Company to receive and fill customer orders efficiently
and quickly.
COMPANY STRATEGY
Amscan seeks to become the primary source for consumers' party goods
requirements. The key elements of the Company's strategy are as follows:
- Strengthen Position as a Leading Provider to Party Superstores. The
Company offers convenient "one-stop shopping" for large superstore buyers
and seeks to increase its proportionate share of sales volume and shelf
space in the superstores.
- Offer the Broadest and Deepest Product Line in the Industry. The
Company strives to offer the broadest and deepest product line in the
industry. Amscan helps retailers boost average purchase volume per
consumer through coordinated ensembles that promote "add on" purchases.
- Diversify Distribution Channels, Product Offering and Geographic
Presence. Amscan will seek, through internal growth and acquisitions, to
expand its distribution capabilities internationally, increase its
presence in additional retail channels and further broaden and deepen its
product line.
- Provide Superior Customer Service. The Company strives to achieve high
average fill rates in excess of 95% and ensure short turnaround times.
- Maintain Product Design Leadership. Amscan will continue investing in
art and design to support a steady supply of fresh ideas and create
complex, unique ensembles that appeal to consumers and are difficult to
replicate.
- Maintain State-of-the-Art Manufacturing and Distribution
Technology. Amscan intends to maintain technologically advanced
production and distribution systems in order to enhance product quality,
manufacturing efficiency, cost control and customer satisfaction.
- Pursue Attractive Acquisitions. The Company believes that opportunities
exist to make acquisitions of complementary businesses to leverage the
Company's existing marketing, distribution and production capabilities,
expand its presence in the various retail channels, further broaden and
deepen its product line and penetrate international markets. The Company
receives inquiries from time to time with respect to the possible
acquisition by the Company of other entities and the Company intends to
pursue acquisition opportunities aggressively.
GS CAPITAL PARTNERS II, L.P.
GS Capital Partners II, L.P. ("GSCP II") and its affiliated investment
funds (together with GSCP II, "GSCP") are the primary vehicles of The Goldman
Sachs Group, L.P. ("The Goldman Sachs Group"), for making privately negotiated
equity and equity-related investments in non-real estate transactions. GSCP II
was formed in May 1995 with total committed capital of $1.75 billion,
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$300 million of which was committed by The Goldman Sachs Group, with the
remainder committed by institutional and individual investors.
Since 1982, The Goldman Sachs Group, directly or through investment
partnerships that it manages, has invested more than $3.7 billion in a
diversified portfolio of over 175 long-term principal investments.
GSCP has invested approximately $61.9 million in the Transaction,
representing approximately 82.5% of the total equity investment.
THE TRANSACTION
Pursuant to an Agreement and Plan of Merger (the "Transaction Agreement"),
dated as of August 10, 1997, by and between the Company and Confetti
Acquisition, Inc. ("MergerCo"), a Delaware corporation affiliated with GSCP, on
December 19, 1997 (the "Effective Time"), MergerCo was merged with and into the
Company (the "Transaction"), with the Company as the surviving corporation. At
the Effective Time, each share of the Common Stock, par value $0.10 per share,
of the Company (the "Company Common Stock"), issued and outstanding immediately
prior to the Effective Time (other than shares of Company Common Stock owned,
directly or indirectly, by the Company or by MergerCo) were converted, at the
election of each of the Company's stockholders, into the right to receive from
the Company either (A) $16.50 in cash (the "Cash Consideration") or (B) $9.33 in
cash plus a retained interest in the Company equal to one share of Company
Common Stock for every 150,000 shares held by such stockholder (the "Mixed
Consideration"), with fractional shares of Company Common Stock paid in cash.
(Together, the Cash Consideration and the Mixed Consideration comprised the
"Transaction Consideration".) The Estate of John A. Svenningsen (the "Estate"),
which owned approximately 72% of the outstanding Company Common Stock
immediately prior to the Effective Time, elected to retain almost 10% of the
outstanding shares of Company Common Stock. No stockholder other than the Estate
elected to retain shares. Also pursuant to the Transaction Agreement, at the
Effective Time each outstanding share of Common Stock, par value $0.10 per
share, of MergerCo ("MergerCo Common Stock"), was converted into an equal number
of shares of Company Common Stock as surviving corporation in the Transaction.
Pursuant to certain employment arrangements, certain employees of the Company
purchased an aggregate of 10 shares of Company Common Stock following the
Effective Time. Accordingly, in the Transaction the 825 shares of MergerCo
Common Stock owned by GSCP immediately prior to the Effective Time were
converted into 825 shares of Company Common Stock, representing approximately
81.7% of the 1,010 issued and outstanding shares of the Company immediately
following the Effective Time.
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The following table sets forth the sources and uses of cash related to the
Transaction:
(DOLLARS IN THOUSANDS)
SOURCES OF CASH
Term Loan............................................................. $117,000
Senior Subordinated Notes............................................. 110,000
--------
Total debt....................................................... 227,000
GSCP equity contribution(a)........................................... 61,875
--------
Total....................................................... $288,875
========
USES OF CASH
Purchase equity in the Transaction.................................... $235,916
Redeem Company Stock Options.......................................... 1,901
Repay certain existing debt(b)........................................ 23,908
Debt retirement costs................................................. 1,010
Transaction costs..................................................... 17,152
Cash for working capital purposes..................................... 8,988
--------
Total....................................................... $288,875
========
- ---------------
(a) In addition to the GSCP equity contribution, certain employees have made an
equity investment in the Company totaling $6.4 million (including
restricted stock grants and $0.8 million contributed by certain employees
immediately following consummation of the Transaction) and the Estate has
retained an interest in the Company of $7.5 million, together constituting
$13.9 million valued at the price per share paid by GSCP.
(b) Excludes existing mortgages on real property owned by Subsidiaries of the
Company in the amount of approximately $5.9 million, capital lease
obligations of approximately $4.6 million, and borrowings under a revolving
credit agreement of a Non-Guarantor Subsidiary of approximately $0.6
million each as of December 19, 1997. All other outstanding debt of the
Company was extinguished at or prior to the completion of the Transaction.
The senior debt portion of the financing for the Transaction was provided
pursuant to a credit agreement (the "Bank Credit Agreement") with Goldman Sachs
Credit Partners L.P. ("GS Credit Partners") and certain other lenders. In
connection with such financing, Goldman Sachs acted as Syndication Agent,
Documentation Agent and Arranger, and Fleet National Bank ("Fleet") is acting as
Administrative Agent. See "Description of Senior Debt" and "Certain
Transactions". The senior debt financing and the financing provided by the Note
Offering is referred to as the "Transaction Financings".
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CAPITALIZATION
The following table sets forth the historical consolidated capitalization
of the Company as of September 30, 1997, and on a pro forma basis to give effect
to the Transaction, including the Transaction Financings and the application of
the proceeds therefrom, as if they had occurred on September 30, 1997. See "Use
of Proceeds". The information set forth below should be read in conjunction with
the Company's Transaction Pro Forma Consolidated Financial Data, the Company's
Consolidated Financial Statements and the related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained elsewhere in this Prospectus.
AS OF SEPTEMBER 30, 1997
----------------------------
TRANSACTION
HISTORICAL PRO FORMA
---------- -----------
(DOLLARS IN THOUSANDS)
Cash and cash equivalents.......................................... $ 684 $ 3,975
Total debt (including current portion)
Revolving Credit Facility(1)..................................... $ -- $ --
Term Loan........................................................ -- 117,000
Existing revolving credit facility............................... 9,550 --
Senior Subordinated Notes........................................ -- 110,000
Mortgages........................................................ 6,072 6,072
Capital leases and other......................................... 24,782 4,727
--------- ---------
Total debt.................................................... 40,404 237,799
Stockholders' equity (deficit)(2).................................. 89,002 (95,288)
--------- ---------
Total capitalization............................................. $ 129,406 $ 142,511
========= =========
- ---------------
(1) The Company has the ability to borrow up to $50 million pursuant to its
Revolving Credit Facility. The Revolving Credit Facility is available to
the Company for working capital purposes and acquisitions, subject to
certain limitations and restrictions. See "Description of Senior Debt".
(2) Upon completion of the Transaction, the Company had a negative net worth for
accounting purposes. In the Transaction, GSCP paid $61.9 million for
approximately 82.5% of the Company Common Stock. In addition, certain
employees of the Company acquired and the Estate retained approximately
7.5% and almost 10%, respectively, of the Company Common Stock which, based
upon the price per share paid by GSCP, has an aggregate value of
approximately $13.1 million. Combined with GSCP's payment of $61.9 million,
these holdings have an aggregate value of approximately $75.0 million.
7
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THE NOTE OFFERING
THE NOTES.................. The Notes were sold by the Company on December 19,
1997, and were subsequently resold to qualified
institutional buyers pursuant to Rule 144A under
the Securities Act and to certain persons in
transactions outside the United States in reliance
on Regulation S under the Securities Act (the "Note
Offering").
REGISTRATION RIGHTS
AGREEMENT................ In connection with the Note Offering, the Company
entered into the Registration Rights Agreement,
which grants holders ("Holders") of the Notes
certain exchange and registration rights. The
Exchange Offer is intended to satisfy such exchange
and registration rights, which generally terminate
upon the consummation of the Exchange Offer.
THE EXCHANGE OFFER
SECURITIES OFFERED......... $110,000,000 aggregate principal amount of 9 7/8%
Senior Subordinated Notes due December 15, 2007.
THE EXCHANGE OFFER......... $1,000 principal amount of the Exchange Notes in
exchange for each $1,000 principal amount of Notes.
As of the date hereof, $110,000,000 principal
amount of Notes are outstanding. The Company will
issue the Exchange Notes to holders on or promptly
after the Expiration Date.
Based on an interpretation by the staff of the
Commission set forth in no-action letters issued to
third parties, the Company believes that Exchange
Notes issued pursuant to the Exchange Offer in
exchange for Notes may be offered for resale,
resold and otherwise transferred by any Holder
thereof (other than any such Holder which is an
"affiliate" of the Company within the meaning of
Rule 405 under the Securities Act) without
compliance with the registration and prospectus
delivery provisions of the Securities Act, provided
that such Exchange Notes are acquired in the
ordinary course of such holder's business and that
such holder does not intend to participate and has
no arrangement or understanding with any person to
participate in the distribution of such Exchange
Notes.
Each broker-dealer that receives Exchange Notes for
its own account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes.
The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be
amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales
of Exchange Notes received in exchange for Notes
where such Notes were acquired by such
broker-dealer as a result of market-making
activities or other trading activities. The Company
has agreed that for a period of 195 days after the
Registration Statement is declared effective,
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it will make this Prospectus available to any
broker-dealer for use in connection with any such
resale.
Any Holder who tenders in the Exchange Offer with
the intention to participate, or for the purpose of
participating, in a distribution of the Exchange
Notes could not rely on the position of the staff
of the Commission enunciated in Exxon Capital
Holdings Corporation (available April 13, 1989),
Morgan Stanley & Co., Inc. (available June 5, 1991)
or similar no-action letters and, in the absence of
an exemption therefrom, must comply with the
registration and prospectus delivery requirements
of the Securities Act in connection with the resale
of the Exchange Notes. Failure to comply with such
requirements in such instance may result in such
Holder incurring liability under the Securities Act
for which the Holder is not indemnified by the
Company.
In any state where the Exchange Offer does not fall
under a statutory exemption to the blue sky rules,
the Company has filed the appropriate registrations
and notices, and has made the appropriate requests,
to permit the Exchange Offer to be made in such
state.
EXPIRATION DATE............ 5:00 p.m., New York City time, on , 1998,
unless the Exchange Offer is extended, in which
case the term "Expiration Date" means the latest
date and time to which the Exchange Offer is
extended.
INTEREST ON THE EXCHANGE
NOTES AND THE NOTES...... The Exchange Notes will bear interest from December
19, 1997, the date of issuance of the Notes that
are tendered in exchange for the Exchange Notes (or
the most recent Interest Payment Date (as defined
below in the Summary of Terms of Exchange Notes) to
which interest on such Notes has been paid).
Accordingly, Holders of Notes that are accepted for
exchange will not receive interest on the Notes
that is accrued but unpaid at the time of tender,
but such interest will be payable on the first
Interest Payment Date after the Expiration Date.
CONDITIONS TO THE EXCHANGE
OFFER.................... Notwithstanding any other term of the Exchange
Offer, the Company shall not be required to accept
for exchange, or to exchange Exchange Notes for,
any Notes, and may terminate or amend the Exchange
Offer as provided herein before the acceptance of
such Notes, if: (a) any law, statute, rule,
regulation or interpretation by the staff of the
Commission is proposed, adopted or enacted, which,
in the reasonable judgment of the Company, might
materially impair the ability of the Company to
proceed with the Exchange Offer or materially
impair the contemplated benefits of the Exchange
Offer to the Company; or (b) any governmental
approval has not been obtained, which approval the
Company shall, in its reasonable judgment, deem
necessary for the consummation of the Exchange
Offer as contemplated hereby. See "The Exchange
Offer -- Conditions".
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PROCEDURES FOR TENDERING
NOTES.................... Each Holder of Notes wishing to accept the Exchange
Offer must complete, sign and date the accompanying
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein
and therein, and mail or otherwise deliver such
Letter of Transmittal, or such facsimile, together
with the Notes and any other required documentation
to the Exchange Agent at the address set forth in
the Letter of Transmittal. By executing the Letter
of Transmittal, each Holder will represent to the
Company that, among other things, the Holder or the
person receiving such Exchange Notes, whether or
not such person is the Holder, is acquiring the
Exchange Notes in the ordinary course of business
and that neither the Holder nor any such other
person has any arrangement or understanding with
any person to participate in the distribution of
such Exchange Notes. In lieu of physical delivery
of the certificates representing Notes, tendering
Holders may transfer Notes pursuant to the
procedure for book-entry transfer as set forth
under "The Exchange Offer -- Procedures for
Tendering".
SPECIAL PROCEDURES FOR
BENEFICIAL OWNERS........ Any beneficial owner whose Notes are registered in
the name of a broker, dealer, commercial bank,
trust company or other nominee and who wishes to
tender should contact such registered Holder
promptly and instruct such registered Holder to
tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such owner's
own behalf, such owner must, prior to completing
and executing the Letter of Transmittal and
delivering its Notes, either make appropriate
arrangements to register ownership of the Notes in
such owner's name or obtain a properly completed
bond power from the registered holder. The transfer
of registered ownership may take considerable time.
GUARANTEED DELIVERY
PROCEDURES............... Holders of Notes who wish to tender their Notes and
whose Notes are not immediately available or who
cannot deliver their Notes, the Letter of
Transmittal or any other documents required by the
Letter of Transmittal to the Exchange Agent (or
comply with the procedures for book-entry transfer)
prior to the Expiration Date must tender their
Notes according to the guaranteed delivery
procedures set forth in "The Exchange Offer --
Guaranteed Delivery Procedures".
WITHDRAWAL RIGHTS.......... Tenders may be withdrawn at any time prior to 5:00
p.m., New York City time, on the Expiration Date
pursuant to the procedures described under "The
Exchange Offer -- Withdrawals of Tenders".
ACCEPTANCE OF NOTES
AND DELIVERY OF
EXCHANGE NOTES........... The Company will accept for exchange any and all
Notes that are properly tendered in the Exchange
Offer prior to 5:00 p.m., New York City time, on
the Expiration Date. The Exchange Notes issued
pursuant to the Exchange Offer will be delivered
promptly
10
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following the Expiration Date. See "The Exchange
Offer -- Terms of the Exchange Offer".
FEDERAL INCOME TAX
CONSEQUENCES............. The issuance of the Exchange Notes to Holders of
the Notes pursuant to the terms set forth in this
Prospectus will not constitute an exchange for
federal income tax purposes. Consequently, no gain
or loss would be recognized by Holders of the Notes
upon receipt of the Exchange Notes. See "Certain
Federal Income Tax Consequences of the Exchange
Offer".
EFFECT ON HOLDERS OF
NOTES...................... As a result of the making of this Exchange Offer,
the Company will have fulfilled certain of its
obligations under the Registration Rights
Agreement, and Holders of Notes who do not tender
their Notes will generally not have any further
registration rights under the Registration Rights
Agreement or otherwise. Such Holders will continue
to hold the untendered Notes and will be entitled
to all the rights and will be subject to all the
limitations applicable thereto under the Indenture,
except to the extent such rights or limitations, by
their terms, terminate or cease to have further
effectiveness as a result of the Exchange Offer.
All untendered Notes will continue to be subject to
certain restrictions on transfer. Accordingly, if
any Notes are tendered and accepted in the Exchange
Offer, the trading market for the untendered Notes
could be adversely affected.
EXCHANGE AGENT............. IBJ Schroder Bank & Trust Company.
11
19
SUMMARY OF TERMS OF EXCHANGE NOTES
The form and terms of the Exchange Notes are the same as the form and terms
of the Notes (which they replace) except that (i) the Exchange Notes have been
registered under the Securities Act of 1933, as amended (the "Securities Act")
and, therefore, will not bear legends restricting the transfer thereof and (ii)
the Holders of Exchange Notes generally will not be entitled to further
registration rights under the Registration Rights Agreement, which rights
generally will be satisfied when the Exchange Offer is consummated. The Exchange
Notes will evidence the same debt as the Notes and will be entitled to the
benefits of the Indenture. See "Description of Exchange Notes".
ISSUER..................... Amscan Holdings, Inc.
SECURITIES OFFERED......... $110.0 million principal amount of 9 7/8% Senior
Subordinated Notes due December 15, 2007 (the
"Exchange Notes").
MATURITY DATE.............. December 15, 2007
GUARANTEES................. The Company's payment obligations under the
Exchange Notes will be jointly and severally
guaranteed on a senior subordinated basis (the
"Senior Subordinated Guarantees") by the current
domestic Subsidiaries of the Company and by each
other Subsidiary of the Company that acts as a
guarantor under the Bank Credit Agreement
(collectively, the "Guarantors"). The Senior
Subordinated Guarantees will be subordinated to the
guarantees of Senior Debt (as defined herein)
issued by the Guarantors under the Bank Credit
Agreement. See "Description of Notes -- Senior
Subordinated Guarantees".
INTEREST PAYMENT DATES..... Interest accrues from December 19, 1997 at an
annual rate of 9 7/8% and will be payable in cash
semi-annually in arrears on June 15 and December 15
of each year, commencing June 15, 1998.
OPTIONAL REDEMPTION........ Except as described below, the Exchange Notes are
not redeemable at the Company's option prior to
December 15, 2002. From and after December 15,
2002, the Exchange Notes will be subject to
redemption at the option of the Company, in whole
or in part, from time to time, at the redemption
prices set forth herein, together with accrued and
unpaid interest, if any, to the date of redemption.
In addition, at any time prior to December 15,
2000, up to an aggregate of 35% of the principal
amount of Notes and Exchange Notes will be
redeemable at the option of the Company, on one or
more occasions, from the net proceeds of public or
private sales of common stock of, or contributions
to the common equity capital of, the Company, at a
price of 109.875% of the principal amount of the
Notes and Exchange Notes, together with accrued and
unpaid interest, if any, to the date of redemption;
provided that at least $65.0 million in aggregate
principal amount of Notes and Exchange Notes
remains outstanding immediately after each such
redemption.
CHANGE OF CONTROL.......... At any time on or prior to December 15, 2002, the
Exchange Notes may also be redeemed as a whole but
not in part at the option of the Company upon the
occurrence of a Change of Control at a redemption
price equal to 100% of the principal amount thereof
12
20
plus the Applicable Premium, together with accrued
and unpaid interest, if any, to the date of
redemption.
If the Company does not redeem the Exchange Notes
upon a Change of Control, the Company will be
obligated to make an offer to purchase the Exchange
Notes, in whole or in part, at a price equal to
101% of the aggregate principal amount of the
Exchange Notes, plus accrued and unpaid interest,
if any, to the date of purchase. If a Change of
Control were to occur, the Company may not have the
financial resources to repay all of its obligations
under the Bank Credit Agreement, the Indenture and
the other indebtedness that would become payable
upon the occurrence of such Change of Control. See
"Risk Factors -- Payment Upon a Change Control" and
"Description of Exchange Notes".
RANKING.................... The Exchange Notes will be general, unsecured
obligations of the Company, will be subordinated in
right of payment to all Senior Debt of the Company,
will rank pari passu with all senior subordinated
debt of the Company and will be senior in right of
payment to all existing and future subordinated
debt of the Company. The claims of Holders of the
Exchange Notes will be subordinated to the Senior
Debt, which, as of September 30, 1997, on a pro
forma basis giving effect to the Transaction and
the Transaction Financings, would have been
approximately $128 million, $117 million of which
would have been fully secured borrowings under the
Bank Credit Agreement. The claims of Holders will
be effectively subordinated to indebtedness and
other liabilities of the Company's Non-Guarantor
Subsidiaries (as defined herein) through which the
Company conducts a portion of its operations which
indebtedness and other liabilities were
approximately $3 million as of September 30, 1997.
See "The Transaction", "Capitalization" and
"Description of Exchange Notes Subordination".
CERTAIN COVENANTS.......... The Indenture contains certain covenants that,
among other things, limit the ability of the
Company and its Restricted Subsidiaries (as defined
herein) to incur additional indebtedness and issue
Disqualified Stock (as defined herein), pay
dividends or distributions or make investments or
make certain other Restricted Payments (as defined
herein), enter into certain transactions with
affiliates, dispose of assets (including
limitations on the form of consideration to be
received and the use of proceeds therefrom), incur
liens securing pari passu and subordinated
indebtedness of the Company and engage in mergers
and consolidations. See "Description of Exchange
Notes".
EXCHANGE OFFER;
REGISTRATION RIGHTS........ If any Holder of Transfer Restricted Securities (as
defined in the Registration Rights Agreement)
notifies the Company on or prior to the 20th
Business Day following consummation of the Exchange
Offer that it alone or together with Holders who
hold in the aggregate at least $1.0 million in
principal amount of Notes (A) is prohibited by law
or Commission policy from participating in the
Exchange Offer or (B) may not resell the Exchange
Notes acquired by it in the Exchange Offer to the
public without delivering a prospectus and the
prospectus contained in the Exchange
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Offer Registration Statement is not appropriate or
available for such resales or (C) is a
broker-dealer and owns Notes acquired directly from
the Company or an affiliate of the Company, the
Company and the Guarantors will use their best
efforts to file with the Commission a shelf
registration statement (the "Shelf Registration
Statement") to cover resales of the Notes by the
Holders thereof who satisfy certain conditions
relating to the provision of information in
connection with the Shelf Registration Statement.
Notwithstanding the foregoing, at any time after
Consummation (as defined in the Registration Rights
Agreement) of the Exchange Offer, the Company and
the Guarantors may allow the Shelf Registration
Statement to cease to be effective and usable if
(i) the Board of Directors of the Company
determines in good faith that such action is in the
best interests of the Company, and the Company
notifies the Holders within a certain period of
time after the Board of Directors makes such
determination or (ii) the prospectus contained in
the Shelf Registration Statement or the Shelf
Registration Statement contains an untrue statement
of a material fact required to be stated therein or
omits to state a material fact necessary in order
to make the statements therein, in light of the
circumstances under which they were made, not
misleading; provided that the period referred to in
the Registration Rights Agreement during which the
Shelf Registration Statement is required to be
effective and usable will be extended by the number
of days during which such registration statement
was not effective or usable pursuant to the
foregoing provisions.
If (a) the Company and the Guarantors fail to file
either of the Registration Statements required by
the Registration Rights Agreement on or before the
date specified for such filing, (b) either of such
Registration Statements is not declared effective
by the Commission on or prior to the date specified
for such effectiveness (the "Effectiveness Target
Date"), (c) the Company and the Guarantors fail to
consummate the Exchange Offer within 45 days of the
Effectiveness Target Date with respect to the
Exchange Offer Registration Statement, or (d) the
Shelf Registration Statement or the Exchange Offer
Registration Statement is declared effective but
thereafter ceases to be effective or usable in
connection with resales of Transfer Restricted
Securities during the periods specified in the
Registration Rights Agreement (each such event
referred to in clauses (a) through (d) above a
"Registration Default"), then, subject to the last
sentence of the preceding paragraph, the Company
will pay Liquidated Damages to each Holder of
Transfer Restricted Securities, with respect to the
first 90-day period immediately following the
occurrence of such Registration Default in an
amount equal to $0.05 per week per $1,000 in
principal amount of Notes constituting Transfer
Restricted Securities held by such Holder. The
amount of the Liquidated Damages will increase by
an additional $0.05 per week per $1,000 in
principal amount of Notes constituting Transfer
Restricted Securities with respect to each
subsequent 90-day period until all Registration
Defaults have been cured, up to a maximum amount of
Liquidated
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Damages of $0.50 per week per $1,000 in principal
amount of Notes constituting Transfer Restricted
Securities. All accrued Liquidated Damages will be
paid by the Company in cash on each Damages Payment
Date (as defined in the Registration Rights
Agreement) to the Global Note Holder (and any
Holder of Certificated Securities who has given
wire transfer instructions to the Company at least
10 Business Days prior to the Damages Payment Date)
by wire transfer of immediately available funds and
to all other Holders of Certificated Securities by
mailing checks to their registered addresses.
Following the cure of all Registration Defaults,
the accrual of Liquidated Damages will cease.
RISK FACTORS
See "Risk Factors" beginning on page 20 for a discussion of certain factors
that should be considered in evaluating an investment in the Exchange Notes.
15
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SELECTED HISTORICAL AND TRANSACTION PRO FORMA
CONSOLIDATED AND COMBINED FINANCIAL AND OTHER DATA
The following table sets forth selected historical and Transaction pro
forma consolidated and combined financial and other data for the Company. The
historical consolidated and combined financial statements for the Company's four
most recent fiscal years have been audited. The selected historical income
statement data for the three years ended December 31, 1996 and balance sheet
data as of December 31, 1996 and 1995 have been derived from, and should be read
in conjunction with, the audited consolidated and combined financial statements
of the Company and the related notes thereto appearing elsewhere in this
Prospectus. The selected historical data presented below as of December 31,
1992, and for the year then ended, are derived from unaudited combined financial
statements of Amscan Inc. and certain affiliated companies. The selected
historical financial data for the nine month periods ended September 30, 1997
(unaudited) and 1996 (previously audited) have been derived from, and should be
read in conjunction with, the consolidated and combined financial statements of
the Company and the related notes thereto appearing elsewhere in this
Prospectus. In the opinion of management, all adjustments (consisting only of
normal recurring adjustments) considered necessary for a fair presentation have
been included in the unaudited consolidated and combined financial statements of
the Company. Results for the nine months ended September 30, 1997 are not
necessarily indicative of results that can be expected for the entire 1997
fiscal year. See "Index to Financial Statements".
The selected Transaction pro forma data is unaudited and intended to
present the effect of certain transactions that have occurred in connection with
the consummation of the Transaction. The selected Transaction pro forma
consolidated statement of income data for the periods presented give effect to
the Transaction as if it were consummated as of January 1, 1996. The selected
Transaction pro forma consolidated statement of income data for the year ended
December 31, 1996 and the twelve months ended September 30, 1997 also include
supplemental pro forma adjustments to give effect to certain events that
occurred in conjunction with the organization of the Company and its
subsidiaries (the "Organization") and the Company's initial public offering in
December 1996 (the "IPO") as if they had occurred as of January 1, 1996. The
selected Transaction pro forma consolidated balance sheet data gives effect to
the Transaction as though it had occurred on September 30, 1997. The historical
and the Transaction pro forma consolidated and combined data should be read in
conjunction with "Capitalization", "Unaudited Transaction Pro Forma Consolidated
Financial Data" and the notes thereto, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and other financial information
contained elsewhere in this Prospectus.
16
24
SELECTED HISTORICAL AND TRANSACTION PRO FORMA
CONSOLIDATED AND COMBINED FINANCIAL AND OTHER DATA
(DOLLARS IN MILLIONS)
NINE MONTHS TWELVE MONTHS
ENDED ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------------------------- ------------------------------ -------------
TRANSACTION TRANSACTION TRANSACTION
PRO FORMA PRO FORMA PRO FORMA
1992 1993 1994 1995 1996 1996 1996 1997 1997 1997
----- ------ ------ ------ ------- ----------- ------ ------- ----------- -------------
IN COME STATEMENT
DATA:
Net sales............. $86.9 $108.9 $132.0 $167.4 $ 192.7 $ 192.7 $147.0 $ 161.3 $ 161.3 $ 207.0
Cost of sales......... 56.5 72.6 86.7 108.7 123.9 123.9 92.9 103.5 103.5 134.5
----- ----- ----- ----- ----- ---------- ----- ----- ------- --- ------- ---
Gross profit.......... 30.4 36.3 45.3 58.7 68.8 68.8 54.1 57.8 57.8 72.5
Selling expenses...... 8.8 9.8 11.3 12.2 11.8 11.8 8.7 9.6 9.6 12.7
General and
administrative
costs................ 9.3 11.1 14.5 15.0 19.3 20.0 14.1 13.2 13.3 18.7
Art and development
costs................ 1.6 2.6 2.8 4.3 5.2 5.2 3.6 3.9 3.9 5.4
Nonrecurring
compensation in
connection with the
IPO(a)............... 15.5
Special bonuses(b).... 0.8 1.1 2.2 2.5 4.2 3.3
----- ----- ----- ----- ----- ---------- ----- ----- ------- --- ------- ---
Income from
operations........... 9.9 11.7 14.5 24.7 12.8 31.8 24.4 31.1 31.0 35.7
Interest expense,
net.................. 2.1 2.3 3.8 5.8 6.7 23.0 4.6 2.7 16.9 23.1
Other (income)
expense, net......... 0.0 0.3 0.1 (0.3) 0.4 0.4 (0.3) (0.2) (0.2) 0.4
----- ----- ----- ----- ----- ---------- ----- ----- ------- --- ------- ---
Income before income
taxes and minority
interests............ 7.8 9.1 10.6 19.2 5.7 8.4 20.1 28.6 14.3 12.2
Income taxes.......... 0.3 0.3 0.4 0.7 2.0 3.6 0.8 11.6 5.8 4.9
Minority interests.... 0.0 0.3 0.2 1.1 1.6 0.2 1.2 0.1 0.1 0.2
----- ----- ----- ----- ----- ---------- ----- ----- ------- --- ------- ---
Net income............ $ 7.5 $ 8.5 $ 10.0 $ 17.4 $ 2.1 $ 4.6 $ 18.1 $ 16.9 $ 8.4 $ 7.1
===== ===== ===== ===== ===== ========== ===== ===== ========== ==========
Pro forma net income
per share............ $ 4,556 $16,734 $ 8,284 $ 6,984
Pro forma weighted
average common shares
outstanding(e)....... 1,010 1,010 1,010 1,010
PRO FORMA DATA
(RELATING TO CHANGE
IN TAX STATUS PRIOR
TO ORGANIZATION AND
IPO:
Income before income
taxes................ $ 7.7 $ 8.8 $ 10.4 $ 18.2 $ 4.1 $ 18.9
Pro forma income
taxes(c)............. 3.2 3.6 4.2 7.4 1.8 7.9
----- ----- ----- ----- ----- -----
Pro forma net
income(c)............ $ 4.5 $ 5.2 $ 6.2 $ 10.8 $ 2.3 $ 11.0
===== ===== ===== ===== ===== =====
Pro forma net income
used for pro forma
net income per share
calculation(d)....... $12,010
Pro forma net income
per share............ $11,891
Pro forma weighted
average common shares
outstanding(e)....... 1,010
NON-GAAP FINANCIAL
DATA:
Adjusted EBITDA(f).... $12.6 $ 15.5 $ 20.4 $ 31.6 $ 37.7 $ 37.2 $ 31.3 $ 35.6 $ 35.5 $ 41.8
Adjusted EBITDA
margin............... 14.5% 14.2% 15.4% 18.9% 19.5% 19.3% 21.3% 22.1% 22.0% 20.2%
Adjusted EBITDA to
cash interest
expense.............. 1.9x
Adjusted EBITDA minus
cash capital
expenditures to cash
interest expense..... 1.5
Total debt to Adjusted
EBITDA(g)............ 5.7
OTHER FINANCIAL DATA:
Gross margin.......... 34.9% 33.3% 34.3% 35.1% 35.7% 35.7% 36.8% 35.9% 35.9% 35.0%
Depreciation and
amortization......... $ 1.8 $ 2.6 $ 3.7 $ 4.3 $ 5.1 $ 5.4 $ 3.6 $ 4.5 $ 4.5 $ 6.1
Cash capital
expenditures......... 3.1 4.7 7.4 4.5 7.6 7.6 5.6 6.9 6.9 8.9
Earnings to fixed
charges(h)........... 4.0x 3.7x 3.2x 3.8x 1.7x 1.3x 4.3x 7.7x 1.8x 1.5x
CASH FLOW STATEMENT
DATA:
Cash flow from
operations........... $ 5.3 $ 9.9 $ 5.1 $ 4.7 $ 12.3 $ 1.6 $ 8.5
Cash flows from
investing............ (3.1) (6.9) (7.3) (4.5) (7.6) (5.6) (6.8)
Cash flows from
financing............ (3.2) (1.9) 2.8 0.1 (6.0) 5.0 (2.5)
BALANCE SHEET DATA:
Working capital....... $ 7.8 $ 4.7 $ (0.4) $ 8.4 $ 45.4 $ 2.1 $ 74.9 $ 96.3
Total assets.......... 60.7 80.1 93.9 114.6 140.3 138.3 162.8 171.5
Total debt............ 37.1 49.1 59.7 70.8 48.3 98.6 40.4 237.8
Stockholders' equity
(deficit)............ 15.6 18.5 20.8 27.2 67.9 24.6 89.0 (95.3)
17
25
NOTES TO SELECTED HISTORICAL AND TRANSACTION PRO FORMA CONSOLIDATED
AND COMBINED FINANCIAL AND OTHER DATA
(DOLLARS IN MILLIONS)
(a) In conjunction with the IPO, the Company recorded non-recurring compensation
expense of $15.5 in 1996, including stock and cash payments of $12.5 to
certain executives in connection with the termination of prior employment
agreements and $3.0 for the establishment of an Employee Stock Ownership
Plan for the benefit of the employees of Amscan Holdings, Inc. and the
payment of stock bonuses to certain of such employees.
(b) In each of the five years ended December 31, 1996 and for the nine months
ended September 30, 1996, special bonus arrangements existed with certain
members of management. In connection with the IPO, such special bonus
arrangements were substantially modified and generally replaced by
incentives tied to the value of Company Common Stock.
(c) Prior to the consummation of the IPO, Amscan Inc., Am-Source, Inc. and
certain other subsidiaries of the Company elected to be taxed as S
corporations under the Internal Revenue Code of 1986, as amended. The pro
forma net income amounts give effect to pro forma income tax amounts for
each of the periods shown at statutory rates (40.5%) assuming these
subsidiaries had not elected S corporation status.
(d) Pro forma net income used for the pro forma net income per share calculation
for the year ended December 31, 1996 is higher than the pro forma net
income shown for such period due to adjustments described in Note (16) of
the Notes to Consolidated Financial Statements. See "Notes to Consolidated
Financial Statements -- December 31, 1996."
(e) Represents the number of common shares outstanding after the Effective Time
as described in Note (16) of the Notes to Consolidated Financial
Statements. See "Notes to Consolidated Financial Statements -- December 31,
1996."
(f) "EBITDA" represents earnings before interest, income taxes, depreciation and
amortization. "Adjusted EBITDA" represents EBITDA adjusted for certain
items reflected in the following table. Neither EBITDA nor Adjusted EBITDA
is intended to represent cash flow from operations as defined by generally
accepted accounting principles and should not be considered as an
alternative to net income as an indicator of the Company's operating
performance or to cash flows as a measure of liquidity. EBITDA and Adjusted
EBITDA are presented because they are widely accepted financial indicators
of a leveraged company's ability to service and/or incur indebtedness and
because management believes EBITDA and Adjusted EBITDA are relevant
measures of the Company's ability to generate cash without regard to the
Company's capital structure or working capital needs. EBITDA and Adjusted
EBITDA as presented may not be comparable to similarly titled measures used
by other companies, depending upon the non-cash charges included. When
evaluating EBITDA and Adjusted EBITDA, investors should consider that
EBITDA and Adjusted EBITDA (i) should not be considered in isolation but
together with other factors which may influence operating and investing
activities such as changes in operating assets and liabilities and
purchases of property and equipment, (ii) are not a measure of performance
calculated in accordance with generally accepted accounting principles,
(iii) should not be construed as an alternative or substitute for income
from operations, net income or cash flows from operating activities in
analyzing the Company's operating performance, financial position or cash
flows and (iv) should not be used as an indicator of the Company's
operating performance or as a measure of its liquidity.
18
26
TWELVE MONTHS
NINE MONTHS ENDED ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
------------------------------------------------------- ----------------------------- -------------
TRANSACTION TRANSACTION TRANSACTION
PRO FORMA PRO FORMA PRO FORMA
1992 1993 1994 1995 1996 1996 1996 1997 1997 1997
----- ------ ------ ------ ------ ----------- ------ ------ ----------- -------------
EBITDA.................. $11.8 $ 13.8 $ 17.9 $ 28.3 $ 15.9 $ 36.6 $ 27.1 $ 35.7 $ 35.6 $ 41.2
Adjustments-increase
(decrease):
Special bonuses and
non-recurring
compensation......... 0.8 1.1 2.2 2.5 19.8 3.3
Other (income) expense,
net.................. 0.3 0.1 (0.3) 0.4 0.4 (0.3) (0.2) (0.2) 0.4
Minority interests..... 0.3 0.2 1.1 1.6 0.2 1.2 0.1 0.1 0.2
----- ----- ----- ----- ----- ---------- ----- ----- ------- --- ------- ---
Adjusted EBITDA......... $12.6 $ 15.5 $ 20.4 $ 31.6 $ 37.7 $ 37.2 $ 31.3 $ 35.6 $ 35.5 $ 41.8
===== ===== ===== ===== ===== ========== ===== ===== ========== ==========
(g) For purposes of determining the ratio of total debt to Adjusted EBITDA for
the twelve months ended September 30, 1997, total debt on a pro forma basis
reflects $10.8 of aggregate principal indebtedness under existing mortgage
notes on real property owned by subsidiaries of the Company and capital
lease obligations, $117.0 in aggregate principal amount of indebtedness
under the Term Loan, and $110.0 in aggregate principal amount of the
Exchange Notes offered hereby.
(h) For purposes of determining the ratio of earnings to fixed charges, earnings
are defined as earnings before income taxes and minority interests plus
fixed charges. Fixed charges consist of interest expense on all
obligations, amortization of deferred financing costs and one-third of the
rental expense on operating leases representing that portion of rental
expense deemed by the Company to be attributable to interest.
19
27
RISK FACTORS
SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE INDEBTEDNESS
The Company is, and will continue to be, highly leveraged as a result of
the substantial indebtedness it has incurred in connection with the Transaction.
As of September 30, 1997, after giving pro forma effect to the Transaction and
the Transaction Financings and the application of the net proceeds therefrom,
the Company (i) would have had approximately $238 million of consolidated
indebtedness and (ii) because the distribution to stockholders and all of the
expenses relating to the Transaction will be charged to earnings and
stockholders' equity, would have had a deficit of approximately $95 million of
consolidated stockholders' equity. Of the total of approximately $289 million
used to consummate the Transaction, approximately $227 million (79%) was funded
with debt, and approximately $62 million (21%) was funded by new equity, with
current stockholders of the Company retaining almost 10% of the Company. After
giving pro forma effect to such transactions, the Company's ratio of earnings to
fixed charges would have been 1.5x for the twelve months ended September 30,
1997. Pro forma interest expense for the twelve months ended September 30, 1997
would have been approximately $23 million. The Company may incur additional
indebtedness in the future, subject to limitations imposed by the Indenture and
the Bank Credit Agreement. See "Capitalization" and "Transaction Pro Forma
Consolidated Financial Data".
The Company's ability to make scheduled payments of principal of, or to pay
interest on, or to refinance its indebtedness (including the Exchange Notes) and
to satisfy its other obligations will depend upon its future performance, which,
to a certain extent, will be subject to general economic, financial,
competitive, business and other factors beyond its control. Based upon the
current level of operations and anticipated growth, the Company believes that
available cash flow, together with available borrowings under the Bank Credit
Agreement, will be adequate to meet its anticipated future requirements for
working capital and operating expenses, to finance potential acquisitions and to
service its debt requirements as they become due. However, a portion of the
principal payments at maturity on the Exchange Notes may require refinancing.
There can be no assurance that the Company's business will generate sufficient
cash flow from operations or that future borrowings will be available in an
amount sufficient to enable the Company to service its indebtedness, including
the Exchange Notes, or make necessary or desirable capital expenditures or
acquisitions, or that any refinancing would be available on commercially
reasonable terms or at all. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources".
The degree to which the Company is now leveraged could have important
consequences to the Company, including the following: (a) the Company's ability
to obtain additional financing for acquisitions, working capital, capital
expenditures or other purposes may be impaired and any such financing, if
available, may not be on terms favorable to the Company; (b) any interest
expense or other debt service may reduce the funds that would otherwise be
available to the Company for its operations and future business opportunities;
(c) certain of the Company's borrowings are at variable rates of interest, which
could result in higher interest expense in the event of increases in interest
rates; (d) a substantial decrease in cash flows from operations or an increase
in expenses of the Company could make it difficult for the Company to meet its
debt service requirements or force it to modify its operations; and (e) high
leverage may place the Company at a competitive disadvantage and may make it
vulnerable to a downturn in its business or the economy generally.
In addition, the Bank Credit Agreement and the Indenture contain financial
and other restrictive covenants that limit the ability of the Company to, among
other things, borrow additional funds and dispose of assets, and require the
Company to maintain certain financial ratios. Failure by the Company to comply
with these covenants could result in an event of default which, if not cured or
waived, could have a material adverse effect on the Company. In addition, the
degree to which the Company is leveraged could prevent it from repurchasing all
of the Exchange Notes tendered to it
20
28
upon the occurrence of a Change of Control. See "Description of Senior Debt" and
"Description of Exchange Notes".
SUBORDINATION; ASSET ENCUMBRANCES
The Exchange Notes will be subordinated in right of payment to all existing
and future Senior Debt, including the principal of (and premium, if any) and
interest on and all other amounts due on or payable in connection with Senior
Debt. At September 30, 1997, on a pro forma basis after giving effect to the
Transaction and the Transaction Financings, there would have been outstanding
approximately $128 million of Senior Debt, $117 million of which would have been
fully secured borrowings under the Bank Credit Agreement. In addition, the
Exchange Notes will be effectively subordinated to indebtedness and other
liabilities of the Company's Non-Guarantor Subsidiaries through which the
Company conducts a portion of its operations, which indebtedness and other
liabilities were approximately $3 million as of September 30, 1998. By reason of
such subordination, in the event of the insolvency, liquidation, reorganization,
dissolution or other winding-up of the Company or upon a default in payment with
respect to, or the acceleration of, any Senior Debt, the holders of such
accelerated Senior Debt and any other creditors who are holders of Senior Debt
and creditors of Non-Guarantor Subsidiaries must be paid in full before Holders
of the Exchange Notes may be paid. In addition, no payments may be made with
respect to the principal of (and premium, if any) or interest on the Exchange
Notes if a payment default exists with respect to Senior Debt and, under certain
circumstances, no payments may be made with respect to the principal of (and
premium, if any) or interest on the Exchange Notes for a period of up to 179
days if a non-payment default exists with respect to Senior Debt. In addition,
the Indenture permits Subsidiaries of the Company to incur debt under certain
circumstances. Any debt incurred by a Non-Guarantor Subsidiary of the Company
will be structurally senior to the Exchange Notes. See "Description of Exchange
Notes".
The Company has granted to the lenders under the Bank Credit Agreement
security interests in substantially all of the current and future assets of the
Company, including a pledge of all of the issued and outstanding shares of
capital stock of certain of the Company's Subsidiaries. In addition, the
Guarantors have granted to such lenders security interests in substantially all
of the current and future assets of the Guarantors. In the event of a default on
secured indebtedness, including the Senior Subordinated Guarantees (whether as a
result of the failure to comply with a payment or other covenant, a
cross-default, or otherwise), the parties granted security interests will have a
prior secured claim on the assets of the Company and the Guarantors. If these
parties should attempt to foreclose on their collateral, the Company's financial
condition and the value of the Exchange Notes will be materially adversely
affected. See "Description of Senior Debt".
HOLDING COMPANY STRUCTURE
The Company conducts all of its business through Subsidiaries and has no
operations of its own. The Company is dependent on the cash flow of its
Subsidiaries and distributions thereof from its Subsidiaries to the Company in
order to meet its debt service obligations. It is not expected that the Company
will have any assets other than the common stock of its Subsidiaries.
As of September 30, 1997, on a pro forma basis after giving effect to the
Transaction and the Transaction Financings, the aggregate amount of indebtedness
and other obligations of the Non-Guarantor Subsidiaries would have been
approximately $3 million. As a result of the holding company structure of the
Company, Holders of the Exchange Notes will be structurally junior to all
creditors of the Non-Guarantor Subsidiaries, except to the extent that the
Company or a Guarantor is itself recognized as a creditor of such Non-Guarantor
Subsidiary, in which case the claims of the Company or such Guarantor would
still be subordinate to any security in the assets of such Non-Guarantor
Subsidiary and any indebtedness of such Non-Guarantor Subsidiary senior to that
held by the Company or a Guarantor. In the event of the insolvency, liquidation,
reorganization, dissolution or other winding-up of the Non-Guarantor
Subsidiaries, the Company will not receive
21
29
funds available to pay to Holders of the Exchange Notes in respect of the
Exchange Notes until after the payment in full of the claims of the creditors of
the Non-Guarantor Subsidiaries.
DEPENDENCE ON KEY PERSONNEL
The Company's success will continue to depend to a significant extent on
its executives, managers and other key personnel. Although the Company has
entered into employment agreements with certain employees, pursuant to which
such employees acquired an equity interest in the Company, there can be no
assurance that the Company will be able to retain these executives or other
managers and key personnel or to attract additional qualified management in the
future. The loss of the services of Gerald C. Rittenberg, Chief Executive
Officer, William S. Wilkey, Senior Vice President -- Sales and Marketing of the
Company or James M. Harrison, President, Chief Financial Officer and Treasurer
of the Company, could have an adverse effect on the Company's financial
condition or results of operations. The Company does not maintain key-man life
insurance on any of these executives.
CONTROL BY GSCP; CERTAIN PAYMENTS TO GOLDMAN, SACHS & CO.
Goldman Sachs and its affiliates have certain interests in the Transaction
and in the Company. Terence M. O'Toole and Sanjeev K. Mehra are Managing
Directors of Goldman Sachs, and Joseph P. DiSabato is an Associate of Goldman
Sachs, and each is a director of the Company. The general and managing partners
of each of the GSCP funds (the "GS Fund Partners"), which are affiliates of
Goldman Sachs and The Goldman Sachs Group, will each be deemed to be an
"affiliate" of GSCP, and therefore of the Company. See "Ownership of Capital
Stock". Goldman Sachs received an underwriting discount of approximately $3.3
million in connection with its purchase and resale of the Notes. Goldman Sachs
also served as financial advisor to MergerCo in connection with the Transaction
and received certain fees and had expenses reimbursed in connection therewith as
described herein. Moreover, GS Credit Partners acted as Syndication Agent,
Documentation Agent and Arranger in connection with the Bank Credit Agreement
and received certain fees and had expenses reimbursed in connection therewith.
Goldman Sachs received certain fees for other services rendered to the Company.
See "Certain Transactions".
In excess of 80% of the outstanding shares of Company Common Stock is held
by GSCP. As a result of such ownership, GSCP controls the Company and has the
ability to elect all of its directors, appoint new management and approve any
action requiring the approval of the holders of Company Common Stock, including
adopting amendments to the Company's certificate of incorporation and approving
mergers or sales of all or substantially all of the Company's assets, in each
case subject to whatever contractual restrictions, including pursuant to the
Indenture and the Bank Credit Agreement, apply to the Company. There can be no
assurance that the interests of GSCP will not conflict with the interests of
Holders of the Exchange Notes. See "Management", "Ownership of Capital Stock"
and "Certain Transactions".
PAYMENT UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of Exchange Notes
may require the Company to repurchase all or a portion of such Holder's Exchange
Notes at 101% of the principal amount of the Exchange Notes, together with
accrued and unpaid interest, if any, to the date of repurchase. If a Change of
Control were to occur, the Company may not have the financial resources to repay
all of its obligations under the Bank Credit Agreement, the Indenture and the
other indebtedness that would become payable upon the occurrence of such Change
of Control.
22
30
RISKS RELATING TO THE COMPANY'S BUSINESS
Concentration of Customer Sales and Credit Risk. The concentration of
sales by the Company to party goods superstore chains has resulted in a
significant concentration of sales and unsecured trade receivables with such
customers.
Combined sales to the Company's two largest customers, Party City, a public
company with stock listed on the Nasdaq National Market, and Party Stores
Holdings, an independent and privately held party goods superstore chain,
accounted in the aggregate for approximately 10%, 17% and 21% of the Company's
sales in 1994, 1995 and 1996, respectively. In addition, at September 30, 1997,
these two customers together accounted for approximately 14% of the Company's
accounts receivable.
Although the Company believes its relationships with these customers are
good, should either of them significantly reduce their volume of purchases from
the Company, the Company's financial condition and results of operations could
be adversely affected. Moreover, while the Company believes that adequate
provisions for bad debts have been made in its financial statements, should it
be unable to collect receivables from its party superstore customers to any
significant extent, the Company's financial condition and results of operations
could be adversely affected. In January 1998, Party Stores Holdings filed a
voluntary petition for relief under Chapter 11 of the United States Bankruptcy
Code. From time to time, the Company has provided additional reserves or
restructured accounts receivables because of the credit condition of certain
customers. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources".
Importance of Identifying Design Trends and Consumer Preferences. In
manufacturing and distributing party goods, the Company's success depends in
part on its ability to anticipate the tastes and preferences of party goods
retailers and consumers. The Company's strategy has depended to a significant
extent on the regular introduction of new designs which are attractive and
distinctive. The Company's failure to anticipate, identify or react
appropriately to changes in consumer tastes could, among other things, lead to
excess inventories and significant markdowns or a shortage of products and
foregone sales, any of which could have an adverse effect on the Company's
financial condition or results of operations.
Competition. The party goods industry is highly competitive. The Company
competes with many other companies, including smaller, independent specialty
manufacturers as well as divisions or subsidiaries of larger companies with
greater financial and other resources than those of the Company. Certain of
these competitors control licenses for widely recognized images, such as cartoon
or motion picture characters, which could provide them with a competitive
advantage. The Company has pursued a strategy of developing its own designs and
generally has not pursued licensing opportunities.
Impact of Changing Raw Material Costs. The principal raw material used by
the Company in its products is paper, which historically accounts for
approximately 35-40% of the annual cost of production of the Company's paper
plates, cups and napkins. The price of paper is subject to change due to
numerous factors beyond the control of the Company. Any significant increase in
the cost of paper would adversely affect the Company's raw material costs.
Competitive conditions will determine how much of any raw material cost increase
can be passed on to party goods retailers. While historically the Company has
been able to pass on raw material cost increases to its customers, if the
Company is unable to pass future raw materials cost increases to the party goods
retailers, the Company's financial condition and results of operations would be
adversely affected.
Risks Associated with Further Expansion Through Acquisitions. The Company
has from time to time expanded its product line and further vertically
integrated its operations, through strategic acquisitions. The Company believes
that opportunities exist to make acquisitions of complementary businesses to
leverage the Company's existing marketing, distribution and production
capabilities, expand its presence in the various retail channels, further
broaden and deepen its product line and penetrate international markets. The
Company receives inquiries from time to time with respect to
23
31
the possible acquisition by the Company of other entities and such inquiries
have been received since the announcement of the Transaction. As of the date of
this Prospectus, the Company has not entered into any agreements to acquire
other companies or businesses; however, the Company intends to pursue
acquisition opportunities aggressively. See "Business -- Company Strategy".
There are various risks associated with pursuing acquisitions. The risks
include problems inherent in integrating new businesses, including potential
loss of customers and key personnel and potential disruption of operations.
There can be no assurance that businesses acquired by the Company will generate
significant revenues or profits or satisfy the Company's strategic objectives.
Moreover, there can be no assurance that suitable acquisition candidates will be
available, that acquisitions can be completed on reasonable terms, that the
Company will successfully integrate the operations of any acquired entities or
that the Company will have access to adequate funds to effect any desired
acquisitions. The amount of debt financing available for future acquisitions
will be limited by restrictions contained in the Bank Credit Agreement and the
Indenture for the Exchange Notes.
SEASONALITY
Due to the number of holidays falling in the fourth quarter of the calendar
year, the Company's business is somewhat seasonal, and, as a result, the
quarterly results of operations may not be indicative of those for a full year.
Third quarter sales are generally the highest of the year due to a combination
of increased sales to consumers of the Company's products during summer months
as well as initial shipments of seasonal holiday merchandise as retailers build
inventory. Conversely, fourth quarter sales are generally lower as retailers
sell through inventories purchased during the third quarter. The overall growth
rate of the Company's sales in recent years has, in part, offset this sales
variability. Promotional activities, including special dating and pricing terms,
particularly with respect to Halloween and Christmas products, result in
generally lower margins and profitability in the fourth quarter, as well as
higher accounts receivable balances and associated higher interest costs to
support these balances. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Quarterly Results".
LACK OF PUBLIC MARKET FOR THE EXCHANGE NOTES
The Notes are currently owned by a relatively small number of beneficial
owners. The Notes have not been registered under the Securities Act and will be
subject to restrictions on transferability to the extent that they are not
exchanged for the Exchange Notes. The Exchange Notes will constitute a new issue
of securities with no established trading market. Although the Exchange Notes
will generally be permitted to be resold or otherwise transferred by Holders who
are not affiliates of the Company without compliance with the registration
requirements under the Securities Act, the Company does not intend to list the
Exchange Notes on any national securities exchange or to seek the admission
thereof to trading in any automated quotation system. The Company has been
advised by Goldman Sachs that it presently intends to make a market in the
Exchange Notes. However, Goldman Sachs is not obligated to do so and any
market-making activity with respect to the Exchange Notes may be discontinued at
any time without notice. In addition, such market-making activity will be
subject to the limits imposed by the Securities Act and the Exchange Act.
Accordingly, no assurance can be given that an active public or other market
will develop for the Exchange Notes or as to the liquidity of or the trading
market for the Exchange Notes.
If such a market were to develop, the Exchange Notes could trade at prices
that may be higher or lower than the initial offering price of the Notes
depending on many factors, including prevailing interest rates, the Company's
operating results and the market for similar securities.
Goldman Sachs may be deemed to be an affiliate of the Company and, as such,
may be required to deliver a "market-maker" prospectus in connection with its
market-making activities in the Exchange Notes. Pursuant to the Registration
Rights Agreement, the Company agreed to file and maintain a registration
statement that would allow Goldman Sachs to engage in market-making
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transactions in the Exchange Notes. The registration statement will remain
effective for as long as Goldman Sachs may be required to deliver a prospectus
in connection with secondary transactions in the Exchange Notes.
Notwithstanding the foregoing, at any time after consummation of the
Exchange Offer, the Company and the Guarantors may allow such "market-maker"
prospectus and the related registration statement to cease to be effective and
usable if (i) the Board of Directors of the Company determines in good faith
that such action is in the best interests of the Company, and the Company
notifies the Holders within a certain period of time after the Board of
Directors makes such determination or (ii) such prospectus or such related
registration statement contains an untrue statement of a material fact or omits
to state a material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading. The
Company has agreed to bear substantially all the costs and expenses related to
such registration statement.
FRAUDULENT CONVEYANCE
Management of the Company believes that the indebtedness represented by the
Notes and the Senior Subordinated Guarantees, and to the extent exchanged for
the Notes, the Exchange Notes, was incurred for proper purposes and in good
faith, and that as a result of, and after giving effect to, the Note Offering
and the Exchange Offer, based on forecasts, asset valuations and other financial
information, the Company was and will be solvent, had and will have sufficient
capital for carrying on its business and was and is able to pay its debts as
they mature. See "Risk Factors -- Substantial Leverage; Ability to Service
Indebtedness". Notwithstanding management's belief, however, if a court of
competent jurisdiction in a suit by an unpaid creditor or a representative of
creditors (such as a trustee in bankruptcy or a debtor-in-possession) were to
find that, at the time of the incurrence of such indebtedness, the Company or
the Guarantors were insolvent, were rendered insolvent by reason of such
incurrence, were engaged in a business or transaction for which its remaining
assets constituted unreasonably small capital, intended to incur, or believed
that they would incur, debts beyond their ability to pay such debts as they
matured, or intended to hinder, delay or defraud their creditors, and that the
indebtedness was incurred for less than reasonably equivalent value, then such
court could, among other things, (a) void all or a portion of the Company's or
the Guarantors' obligations to Holders of the Exchange Notes, the effect of
which would be that Holders of the Exchange Notes may not be repaid in full
and/or (b) subordinate the Company's or the Guarantors' obligations to Holders
of the Exchange Notes to other existing and future indebtedness of the Company
to a greater extent than would otherwise be the case, the effect of which would
be to entitle such other creditors to be paid in full before any payment could
be made on the Exchange Notes or the Senior Subordinated Guarantees.
EXCHANGE OFFER PROCEDURES
Issuance of the Exchange Notes in exchange for Notes pursuant to the
Exchange Offer will be made only after a timely receipt by the Exchange Agent of
such Notes, a properly completed and duly executed Letter of Transmittal and all
other required documents. Therefore, holders of the Notes desiring to tender
such Notes in exchange for Exchange Notes should allow sufficient time to ensure
timely delivery. The Company is under no duty to give notification of defects or
irregularities with respect to the tenders of Notes for exchange. Notes that are
not tendered or are tendered but not accepted will, following the consummation
of the Exchange Offer, continue to be subject to the existing restrictions upon
transfer thereof and, upon consummation of the Exchange Offer, the registration
rights under the Registration Rights Agreement generally will terminate. In
addition, any holder of Notes who tenders in the Exchange Offer for the purpose
of participating in a distribution of the Exchange Notes may be deemed to have
received restricted securities and, if so, will be required to comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale. Each broker-dealer that receives Exchange Notes for
its own account
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in exchange for Notes, where such Notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities, must acknowledge
that it will deliver a prospectus in connection with any resale of such Exchange
Notes. To the extent that Notes are tendered and accepted in the Exchange Offer,
the trading market for untendered and tendered but unaccepted Notes could be
adversely affected. See "The Exchange Offer".
RESTRICTIONS ON TRANSFER
The Notes were offered and sold by the Company in a private offering exempt
from registration pursuant to the Securities Act and have been resold pursuant
to Rule 144A and Regulation S under the Securities Act. As a result, the Notes
may not be reoffered or resold by purchasers except pursuant to an effective
registration statement under the Securities Act, or pursuant to an applicable
exemption from such registration, and the Notes are legended to restrict
transfer as aforesaid. Each Holder (other than any Holder who is an affiliate or
promoter of the Company) who duly exchanges Notes for Exchange Notes in the
Exchange Offer will receive Exchange Notes that are freely transferable under
the Securities Act. Holders of Notes who participate in the Exchange Offer
should be aware, however, that if they accept the Exchange Offer for the purpose
of engaging in a distribution, the Exchange Notes may not be publicly reoffered
or resold without complying with the registration and prospectus delivery
requirements of the Securities Act. As a result, each Holder of Notes accepting
the Exchange Offer will be deemed to have represented, by its acceptance of the
Exchange Offer, that it acquired the Exchange Notes in the ordinary course of
business and that it is not engaged in, and does not intend to engage in, a
distribution of the Exchange Notes. If existing Commission interpretations
permitting free transferability of the Exchange Notes following the Exchange
Offer are changed prior to consummation of the Exchange Offer, the Company will
use its best efforts to register the Notes for resale under the Securities Act.
See "Prospectus Summary -- The Exchange Offer" and "Description of Exchange
Notes -- Registration Rights".
The Notes currently may be sold pursuant to the restrictions set forth in
Rule 144A or Regulation S, or pursuant to another available exemption under the
Securities Act, without registration under the Securities Act. To the extent
that Notes are tendered and accepted in the Exchange Offer, the trading market
for the untendered and tendered but unaccepted Notes could be adversely
affected.
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THE EXCHANGE OFFER
The following discussion sets forth or summarizes what the Company believes
are the material terms of the Exchange Offer, including those set forth in the
Letter of Transmittal distributed with this Prospectus. This summary is
qualified in its entirety by reference to the full text of the documents
underlying the Exchange Offer, copies of which are filed as exhibits to the
Registration Statement of which this Prospectus is a part, and are incorporated
by reference herein.
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Notes were sold by the Company on December 19, 1997, and were
subsequently resold to qualified institutional buyers pursuant to Rule 144A
under the Securities Act and to certain persons in transactions outside the
United States in reliance on Regulation S under the Securities Act. In
connection with the Note Offering, the Company entered into the Registration
Rights Agreement, which requires, among other things, that promptly following
the completion of the Transaction, the Company and the Guarantors (i) file with
the Commission a registration statement under the Securities Act with respect to
an issue of new notes of the Company identical in all material respects to the
Notes, (ii) use their best efforts to cause such registration statement to
become effective under the Securities Act and (iii) upon the effectiveness of
that registration statement, offer to the Holders of the Notes the opportunity
to exchange their Notes for a like principal amount of Exchange Notes, which
would be issued without a restrictive legend and may be reoffered and resold by
the holder without restrictions or limitations under the Securities Act (other
than any such holder that is an "affiliate" of the Company within the meaning of
Rule 405 under the Securities Act). A copy of the Registration Rights Agreement
has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part. The term "Holder" with respect to the Exchange Offer means
any person in whose name the Notes are registered on the books of the Company or
any other person who has obtained a properly completed bond power from the
registered holder.
Because the Exchange Offer is for any and all Notes, the number of Notes
tendered and exchanged in the Exchange Offer will reduce the principal amount of
Notes outstanding. Following the consummation of the Exchange Offer, Holders of
the Notes who did not tender their Notes generally will not have any further
registration rights under the Registration Rights Agreement, and such Notes will
continue to be subject to certain restrictions on transfer. Accordingly, the
liquidity of the market for such Notes could be adversely affected. The Notes
are currently eligible for sale pursuant to Rule 144A through the PORTAL System
of the National Association of Securities Dealers, Inc. Because the Company
anticipates that most holders of Notes will elect to exchange such Notes for
Exchange Notes due to the absence of restrictions on the resale of Exchange
Notes under the Securities Act, the Company anticipates that the liquidity of
the market for any Notes remaining after the consummation of the Exchange Offer
may be substantially limited.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Notes
validly tendered and not withdrawn prior to 5:00 p.m. New York City time, on the
Expiration Date. The Company will issue $1,000 principal amount of Exchange
Notes in exchange for each $1,000 principal amount of outstanding Notes accepted
in the Exchange Offer. Holders may tender some or all of their Notes pursuant to
the Exchange Offer. However, Notes may be tendered only in integral multiples of
$1,000.
The form and terms of the Exchange Notes are the same as the form and terms
of the Notes except that (i) the Exchange Notes have been registered under the
Securities Act and hence will not bear legends restricting the transfer thereof
and (ii) the holders of the Exchange Notes generally will not be entitled to
certain rights under the Registration Rights Agreement, which rights generally
will terminate upon consummation of the Exchange Offer. The Exchange Notes will
evidence the same debt as the Notes and will be entitled to the benefits of the
Indenture.
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Holders of Notes do not have any appraisal or dissenters' rights under the
General Corporation Law of the State of Delaware or the Indenture in connection
with the Exchange Offer. The Company intends to conduct the Exchange Offer in
accordance with the applicable requirements of the Exchange Act and the rules
and regulations of the Commission thereunder, including Rule 14e-1 thereunder.
The Company shall be deemed to have accepted validly tendered Notes when,
as and if the Company has given oral or written notice thereof to the Exchange
Agent. The Exchange Agent will act as agent for the tendering Holders for the
purpose of receiving the Exchange Notes from the Company.
If any tendered Notes are not accepted for exchange because of an invalid
tender, the occurrence of certain other events set forth herein or otherwise,
the certificates for any such unaccepted Notes will be returned, without
expense, to the tendering Holder thereof as promptly as practicable after the
Expiration Date.
Holders who tender Notes in the Exchange Offer will not be required to pay
brokerage commissions or fees or, subject to the instructions in the Letter of
Transmittal, transfer taxes with respect to the exchange of Notes pursuant to
the Exchange Offer. The Company will pay all charges and expenses, other than
transfer taxes in certain circumstances, in connection with the Exchange Offer.
See "-- Fees and Expenses".
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
, 1998, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
To extend the Exchange Offer, the Company will notify the Exchange Agent of
any extension by oral or written notice, followed by a public announcement
thereof no later than 9:00 a.m., New York City time, on the next business day
after the previously scheduled expiration date.
The Company reserves the right, in its reasonable judgment, (i) to delay
accepting any Notes, to extend the Exchange Offer or to terminate the Exchange
Offer if any of the conditions set forth below under "-- Conditions" shall not
have been satisfied, by giving oral or written notice of such delay, extension
or termination to the Exchange Agent or (ii) to amend the terms of the Exchange
Offer in any manner. Any such delay in acceptance, extension, termination or
amendment will be followed as promptly as practicable by a public announcement
thereof. If the Exchange Offer is amended in a manner determined by the Company
to constitute a material change, the Company will promptly disclose such
amendment by means of a prospectus supplement that will be distributed to the
registered Holders, and, depending upon the significance of the amendment and
the manner of disclosure to the registered Holders, the Company will extend the
Exchange Offer for a period of five to ten business days if the Exchange Offer
would otherwise expire during such five to ten business-day period.
If the Company does not consummate the Exchange Offer, or, in lieu thereof,
the Company does not file and cause to become effective a resale shelf
registration for the Notes within the time periods set forth herein, liquidated
damages will accrue and be payable on the Notes either temporarily or
permanently. See "Description of Exchange Notes -- Registration Rights;
Liquidated Damages".
Without limiting the manner in which the Company may choose to make public
announcement of any delay, extension, amendment or termination of the Exchange
Offer, the Company shall have no obligation to publish, advertise or otherwise
communicate any such public announcement, other than by making a timely release
to the Dow Jones News Service.
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INTEREST ON EXCHANGE NOTES
The Exchange Notes will bear interest from December 19, 1997, the date of
issuance of the Notes that are tendered in exchange for the Exchange Notes (or
the most recent Interest Payment Date to which interest on such Notes has been
paid). Accordingly, holders of Notes that are accepted for exchange will not
receive interest that is accrued but unpaid on the Notes at the time of tender,
but such interest will be payable on the first Interest Payment Date after the
Expiration Date. Interest on the Exchange Notes will be payable semiannually on
each June 15 and December 15, commencing June 15, 1998.
PROCEDURES FOR TENDERING
Only a Holder of Notes may tender such Notes in the Exchange Offer. To
tender in the Exchange Offer, a Holder must complete, sign and date the Letter
of Transmittal, or a facsimile thereof, have the signatures thereon guaranteed
if required by the Letter of Transmittal and mail or otherwise deliver such
Letter of Transmittal or such facsimile, together with the Notes and any other
required documents, to the Exchange Agent so as to be received by the Exchange
Agent at the address set forth below prior to 5.00 p.m., New York City time, on
the Expiration Date. Delivery of the Notes may be made by book-entry transfer in
accordance with the procedures described below. Confirmation of such book-entry
transfer must be received by the Exchange Agent prior to the Expiration Date.
By executing the Letter of Transmittal, each Holder will make to the
Company the representation set forth below in the second paragraph under the
heading "-- Resale of Exchange Notes".
The tender by a Holder and the acceptance thereof by the Company will
constitute an agreement between such Holder and the Company in accordance with
the terms and subject to the conditions set forth herein and in the Letter of
Transmittal.
THE METHOD OF DELIVERY OF NOTES AND THE LETTER OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE
HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN
OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO
LETTER OF TRANSMITTAL OR NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY
REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR
NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to tender
should contact the registered Holder promptly and instruct such registered
Holder to tender on such beneficial owner's behalf.
Signatures on the Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Notes tendered pursuant thereto are tendered (i) by a registered
Holder who has not completed the box entitled "Special Registration
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or
(ii) for the account of an Eligible Institution. In the event that signatures on
a Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantee must be by a member firm of a
registered national securities exchange or of the National Association of
Securities Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States or an "eligible guarantor institution" within
the meaning of Rule 17Ad-15 under the Exchange Act (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered Holder of any Notes listed therein, such Notes must be endorsed or
accompanied by a properly completed bond power,
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signed by such registered Holder as such registered Holder's name appears on
such Notes with the signature thereon guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
The Company understands that the Exchange Agent will make a request
promptly after the date of this Prospectus to establish accounts with respect to
the Notes at the Depository for the purpose of facilitating the Exchange Offer,
and subject to the establishment thereof, any financial institution that is a
participant in the Depository's system may make book-entry delivery of the Notes
by causing the Depository to transfer such Notes into the Exchange Agent's
account with respect to the Notes in accordance with the Depository's procedures
for such transfer. Although delivery of the Notes may be effected through
book-entry transfer into the Exchange Agent's account at the Depository, an
appropriate Letter of Transmittal properly completed and duly executed with any
required signature guarantee and all other required documents must in each case
be transmitted to and received or confirmed by the Exchange Agent at its address
set forth below on or prior to the Expiration Date, or, if the guaranteed
delivery procedures described below are complied with, within the time period
provided under such procedures. Delivery of documents to the Depository does not
constitute delivery to the Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Notes and withdrawal of tendered Notes will be
determined by the Company in its sole discretion, which determination will be
final and binding. The Company reserves the absolute right to reject any and all
Notes not properly tendered or any Notes the Company's acceptance of which
would, in the opinion of counsel for the Company, be unlawful. The Company also
reserves the right to waive any defects, irregularities or conditions of tender
as to particular Notes. The Company's interpretation of the terms and conditions
of the Exchange Offer (including the instructions in the Letter of Transmittal)
will be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of Notes must be cured within such
time as the Company shall determine. Although the Company intends to notify
Holders of defects or irregularities with respect to tenders of Notes, none of
the Company, the Exchange Agent or any other person shall incur any liability
for failure to give such notification. Tenders of Notes will not be deemed to
have been made until such defects or irregularities have been cured or waived.
Any Notes received by the Exchange Agent that are not properly tendered and as
to which the defects or irregularities have not been cured or waived will be
returned by the Exchange Agent to the tendering Holders, unless otherwise
provided in the Letter of Transmittal, as soon as practicable following the
Expiration Date.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Notes and (i) whose Notes are not
immediately available, (ii) who cannot deliver their Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent or (iii) who
cannot complete the procedures for book-entry transfer, prior to the Expiration
Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed notice of
guaranteed delivery ("Notice of Guaranteed Delivery") (by facsimile
transmission, mail or hand delivery) setting forth the name and address of
the Holder, the certificate number(s) of such Notes and the principal
amount of Notes tendered, stating that the tender is being made thereby and
guaranteeing that, within three New York Stock Exchange trading days after
the Expiration Date, the Letter of Transmittal (or facsimile thereof),
together with the certificates(s) representing the Notes (or a confirma-
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tion of book-entry transfer of such Notes into the Exchange Agent's account
at the Depository) and any other documents required by the Letter of
Transmittal, will be deposited by the Eligible Institution with the
Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered
Notes in proper form for transfer (or a confirmation of book-entry transfer
of such Notes into the Exchange Agent's account at the Depository) and all
other documents required by the Letter of Transmittal, are received by the
Exchange Agent within three New York Stock Exchange trading days after the
Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to Holders who wish to tender their Notes according to the guaranteed
delivery procedures set forth above.
WITHDRAWALS OF TENDERS
Except as otherwise provided herein, tenders of Notes may be withdrawn at
any time prior to 5:00 p.m., New York City time, on the Expiration Date.
To withdraw a tender of Notes in the Exchange Offer, a written or facsimile
transmission notice of withdrawal must be received by the Exchange Agent at its
address set forth herein prior to 5:00 p.m., New York City time, on the
Expiration Date. Any such notice of withdrawal must (i) specify the name of the
person having deposited the Notes to be withdrawn (the "Depositor"), (ii)
identify the Notes to be withdrawn (including the certificate number(s) and
principal amount of such Notes, or, in the case of notes transferred by
book-entry transfer, the name and number of the account at the Depository to be
credited), (iii) be signed by the Holder in the same manner as the original
signature on the Letter of Transmittal by which such Notes were tendered
(including any required signature guarantees) or be accompanied by documents of
transfer sufficient to have the Trustee with respect to the Notes register the
transfer of such Notes into the name of the person withdrawing the tender and
(iv) specify the name in which any such Notes are to be registered, if different
from that of the Depositor. All questions as to the validity, form and
eligibility (including time of receipt) of such notices will be determined by
the Company, whose determination shall be final and binding on all parties. Any
Notes so withdrawn will be deemed not to have been validly tendered for purposes
of the Exchange Offer and no Exchange Notes will be issued with respect thereto
unless the Notes so withdrawn are validly retendered. Any Notes which have been
tendered but which are not accepted for exchange will be returned to the Holder
thereof without cost to such Holder as soon as practicable after withdrawal,
rejection of tender or termination of the Exchange Offer. Properly withdrawn
Notes may be retendered by following one of the procedures described above under
"-- Procedures for Tendering" at any time prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or to exchange Exchange Notes for, any
Notes, and may terminate or amend the Exchange Offer as provided herein before
the acceptance of such Notes, if:
(a) any law, statute, rule, regulation or interpretation by the staff
of the Commission is proposed, adopted or enacted, which, in the reasonable
judgment of the Company, might materially impair the ability of the Company
to proceed with the Exchange Offer or materially impair the contemplated
benefits of the Exchange Offer to the Company; or
(b) any governmental approval has not been obtained, which approval
the Company shall, in its reasonable judgment, deem necessary for the
consummation of the Exchange Offer as contemplated hereby.
If the Company determines in its reasonable judgment that any of the
conditions are not satisfied, the Company may (i) refuse to accept any Notes and
return all tendered Notes to the tendering Holders, (ii) extend the Exchange
Offer and retain all Notes tendered prior to the
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expiration of the Exchange Offer, subject, however, to the rights of Holders to
withdraw such Notes (see "-- Withdrawals of Tenders") or (iii) waive such
unsatisfied conditions with respect to the Exchange Offer and accept all
properly tendered Notes which have not been withdrawn. If such waiver
constitutes a material change to the Exchange Offer, the Company will promptly
disclose such waiver by means of a prospectus supplement that will be
distributed to the registered Holders, and, depending upon the significance of
the waiver and the manner of disclosure to the registered Holders, the Company
will extend the Exchange Offer for a period of five to ten business days if the
Exchange Offer would otherwise expire during such five to ten business-day
period.
EXCHANGE AGENT
IBJ Schroder Bank & Trust Company will act as Exchange Agent for the
Exchange Offer (the "Exchange Agent").
Questions and requests for assistance, requests for additional copies of
this Prospectus or of the Letter of Transmittal and requests for copies of the
Notice of Guaranteed Delivery should be directed to the Exchange Agent,
addressed as follows:
By Registered or Certified Mail:
IBJ Schroder Bank & Trust Company
P.O. Box 84
Bowling Green Station
New York, New York 10274-0084
Attention: Reorganization Operations Department
By Overnight Courier or By Hand:
IBJ Schroder Bank & Trust Company
One State Street
New York, New York 10004
Attention: Securities Processing Window, Subcellar One (SC-1)
By Facsimile:
(212) 858-2611
Confirm by Telephone:
(212) 858-2103
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telephone, facsimile or in person by officers and
regular employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers or other persons
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and reimburse it
for its reasonable out-of-pocket expenses in connection therewith and pay other
registration expenses, including fees and expenses of the Trustee, filing fees,
blue sky fees and printing and distribution expenses.
The Company will pay all transfer taxes, if any, applicable to the exchange
of the Notes pursuant to the Exchange Offer. If, however, certificates
representing the Exchange Notes or the Notes for principal amounts not tendered
or accepted for exchange are to be delivered to, or are to be issued in the name
of, any person other than the registered Holder of the Notes tendered, or if
tendered Notes are registered in the name of any person other than the person
signing the Letter of Transmittal, or if a transfer tax is imposed for any
reason other than the exchange of the Notes
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pursuant to the Exchange Offer, then the amount of any such transfer taxes
(whether imposed on the registered Holder or any other person) will be payable
by the tendering Holder.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the
Notes, which is the aggregate principal amount of the Notes, as reflected in the
Company's accounting records on the date of exchange. Accordingly, no gain or
loss for accounting purposes will be recognized in connection with the Exchange
Offer. The expenses of the Exchange Offer will be amortized over the term of the
Exchange Notes.
RESALE OF EXCHANGE NOTES
Based on an interpretation by the staff of the Commission set forth in
no-action letters issued to third parties, the Company believes that Exchange
Notes issued pursuant to the Exchange Offer in exchange for Notes may be offered
for resale, resold and otherwise transferred by any Holder of such Exchange
Notes (other than any such Holder which is an "affiliate" of the Company within
the meaning of Rule 405 under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that such Exchange Notes are acquired in the ordinary course of such Holder's
business and such Holder does not intend to participate, and has no arrangement
or understanding with any person to participate, in the distribution of such
Exchange Notes. Any Holder who tenders in the Exchange Offer with the intention
to participate, or for the purpose of participating, in a distribution of the
Exchange Notes may not rely on the position of the staff of the Commission
enunciated in Exxon Capital Holdings Corporation (available April 13, 1989) and
Morgan Stanley & Co., Incorporated (available June 5, 1991), or similar
no-action letters, but rather must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction. In addition, any such resale transaction should be covered by an
effective registration statement containing the selling security holders
information required by Item 507 of Regulation S-K of the Securities Act. Each
broker-dealer that receives Exchange Notes for its own account in exchange for
Notes, where such Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities, may be a statutory
underwriter and must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes.
By tendering in the Exchange Offer, each Holder will represent to the
Company that, among other things, (i) the Exchange Notes acquired pursuant to
the Exchange Offer are being obtained in the ordinary course of business of the
person receiving such Exchange Notes, whether or not such person is a Holder,
(ii) neither the Holder nor any such other person has an arrangement or
understanding with any person to participate in the distribution of such
Exchange Notes and (iii) the Holder and such other person acknowledge that if
they participate in the Exchange Offer for the purpose of distributing the
Exchange Notes (a) they must, in the absence of an exemption therefrom, comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any resale of the Exchange Notes and cannot rely on the
no-action letters referenced above and (b) failure to comply with such
requirements in such instance could result in such Holder incurring liability
under the Securities Act for which such Holder is not indemnified by the
Company. Further, by tendering in the Exchange Offer, each Holder that may be
deemed an "affiliate" (as defined under Rule 405 of the Securities Act) of the
Company will represent to the Company that such Holder understands and
acknowledges that the Exchange Notes may not be offered for resale, resold or
otherwise transferred by that Holder without registration under the Securities
Act or an exemption therefrom.
As set forth above, affiliates of the Company are not entitled to rely on
the foregoing interpretations of the staff of the Commission with respect to
resales of the Exchange Notes without compliance with the registration and
prospectus delivery requirements of the Securities Act. In connection with the
Note Offering, the Company entered into the Registration Rights Agreement
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pursuant to which the Company agreed to file and maintain, subject to certain
limitations, a registration statement that would allow Goldman Sachs to engage
in market-making transactions with respect to the Notes or the Exchange Notes.
The Company has agreed to bear all registration expenses incurred under such
agreement, including printing and distribution expenses, reasonable fees of
counsel, blue sky fees and expenses, reasonable fees of independent accountants
in connection with the preparation of comfort letters, and Commission and the
National Association of Securities Dealers, Inc. filing fees and expenses.
CONSEQUENCES OF FAILURE TO EXCHANGE
As a result of the making of this Exchange Offer, the Company will have
fulfilled one of its obligations under the Registration Rights Agreement, and
Holders of Notes who do not tender their Notes generally will not have any
further registration rights under the Registration Rights Agreement or
otherwise. Accordingly, any Holder of Notes that does not exchange that Holder's
Notes for Exchange Notes will continue to hold the untendered Notes and will be
entitled to all the rights and limitations applicable thereto under the
Indenture, except to the extent that such rights or limitations, by their terms,
terminate or cease to have further effectiveness as a result of the Exchange
Offer.
The Notes that are not exchanged for Exchange Notes pursuant to the
Exchange Offer will remain restricted securities. Accordingly, such Notes may be
resold only (i) to the Company (upon redemption thereof or otherwise), (ii)
pursuant to an effective registration statement under the Securities Act, (iii)
so long as the Notes are eligible for resale pursuant to Rule 144A, to a
qualified institutional buyer within the meaning of Rule 144A under the
Securities Act in a transaction meeting the requirements of Rule 144A, (iv)
outside the United States to a foreign person pursuant to the exemption from the
registration requirements of the Securities Act provided by Regulation S
thereunder, (v) pursuant to an exemption from registration under the Securities
Act provided by Rule 144 thereunder (if available) or (vi) to an institutional
accredited investor in a transaction exempt from the registration requirements
of the Securities Act, in each case in accordance with any applicable securities
laws of any state of the United States. See "Risk Factors -- Restrictions on
Transfer".
OTHER
Participation in the Exchange Offer is voluntary and holders should
carefully consider whether to accept. Holders of the Notes are urged to consult
their financial and tax advisors in making their own decision on what action to
take.
The Company may in the future seek to acquire untendered Notes in open
market or privately negotiated transactions, through subsequent exchange offers
or otherwise. The Company has no present plans to acquire any Notes that are not
tendered in the Exchange Offer or to file a registration statement to permit
resales of any untendered Notes.
In any state where the Exchange Offer does not fall under a statutory
exemption to the blue sky rules, the Company has filed the appropriate
registrations and notices, and has made the appropriate requests, to permit the
Exchange Offer to be made in such state.
34
42
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
OF THE EXCHANGE OFFER
The following discussion is based upon current provisions of the Internal
Revenue Code of 1986, as amended, (the "Code"), applicable Treasury regulations,
judicial authority and administrative rulings and practice. There can be no
assurance that the Internal Revenue Service (the "IRS") will not take a contrary
view, and no ruling from the IRS has been or will be sought. Legislative,
judicial or administrative changes or interpretations may be forthcoming that
could alter or modify the statements and conditions set forth herein. Any such
changes or interpretations may or may not be retroactive and could affect the
tax consequences to Holders. Certain Holders of the Notes (including insurance
companies, tax-exempt organizations, financial institutions, broker-dealers,
foreign corporations and persons who are not citizens or residents of the United
States) may be subject to special rules not discussed below. Each Holder of a
Note should consult his, her or its own tax advisor as to the particular tax
consequences of exchanging such Holder's Notes for Exchange Notes, including the
applicability and effect of any state, local or foreign tax laws.
The issuance of the Exchange Notes to Holders of the Notes pursuant to the
terms set forth in this Prospectus will not constitute an exchange for federal
income tax purposes. Consequently, no gain or loss would be recognized by
Holders of the Notes upon receipt of the Exchange Notes, and ownership of the
Exchange Notes will be considered a continuation of ownership of the Notes. For
purposes of determining gain or loss upon the subsequent sale or exchange of the
Exchange Notes, a Holder's basis in the Exchange Notes should be the same as
such Holder's basis in the Notes exchanged therefor. A Holder's holding period
for the Exchange Notes should include the Holder's holding period for the Notes
exchanged therefor. The issue price and other tax characteristics of the
Exchange Notes should be identical to the issue price and other tax
characteristics of the Notes exchanged therefor.
See also "Description of Certain Federal Income Tax Consequences of an
Investment in the Exchange Notes".
35
43
THE TRANSACTION
CERTAIN AGREEMENTS
Pursuant to the Transaction Agreement, and following the approval and
adoption of the Transaction Agreement by the vote of a majority of the shares of
Company Common Stock entitled to vote thereon and the satisfaction or waiver of
the other conditions to the Transaction, on December 19, 1997, MergerCo was
merged with and into the Company with the Company as the surviving corporation.
Concurrent with entering into the Transaction Agreement, the Company
entered into the Tax Indemnification Agreement, dated as of August 10, 1997,
with the Estate and Christine Svenningsen (together, the "Svenningsen
Stockholders") (the "Tax Indemnification Agreement"), pursuant to which the
parties agreed to indemnify one another with respect to certain tax liabilities
that may arise in connection with the election by certain Subsidiaries of the
Company to have been treated and operated under the Code as S corporations (as
"S corporation" is defined in the Code). The Tax Indemnification Agreement
provides that the Company will indemnify the Svenningsen Stockholders for any
increase in certain tax liabilities attributable to an understatement of income
previously reported by such Subsidiaries to the extent of any actual reduction
in taxes on the Company or its Subsidiaries for a taxable year after December
18, 1996, the date of the Company's initial public offering. The Tax
Indemnification Agreement also provides that the Svenningsen Stockholders will
indemnify the Company for certain tax liabilities arising out of or resulting
from a claim by any taxing authority that any such Subsidiary was not an S
corporation under the Code at a time when it took such a position. Any payments
made under the Tax Indemnification Agreement will be reduced by any payments
made pursuant to the Tax Indemnification Agreement (the "Prior Tax
Indemnification Agreement"), by and between John A. Svenningsen and the Company,
dated as of December 18, 1996, regarding certain similar matters, which Prior
Tax Indemnification Agreement remains a separate valid and binding agreement.
See "Management -- Certain Relationships and Related Transactions".
Concurrent with the execution of the Transaction Agreement, MergerCo
entered into agreements with certain employees of the Company relating, for
certain of such employees, to their employment with the Company following the
Effective Time and relating to their ownership of Company Common Stock and
options to purchase shares of Company Common Stock following the Transaction
(collectively, the "New Employment Arrangements"). At the Effective Time,
certain of the New Employment Arrangements replaced and superseded prior
employment agreements for such employees. See "Management -- New Employment
Arrangements".
In addition, upon consummation of the Transaction, the Company entered into
a Stockholders' Agreement (the "Stockholders' Agreement") with GSCP and the
Estate and certain employees of the Company listed as parties thereto (including
the Estate, the "Non-GSCP Investors"). See "Ownership of Capital Stock".
36
44
The following table sets forth the sources and uses of cash related to the
Transaction:
(DOLLARS IN
THOUSANDS)
-----------
SOURCES OF CASH
Term Loan...................................................................... $ 117,000
Senior Subordinated Notes...................................................... 110,000
--------
Total debt................................................................... 227,000
GSCP equity contribution(a).................................................... 61,875
--------
Total..................................................................... $ 288,875
========
USES OF CASH
Purchase equity in the Transaction............................................. $ 235,916
Redeem Company Stock Options................................................... 1,901
Repay certain existing debt(b)................................................. 23,908
Debt retirement costs.......................................................... 1,010
Transaction costs.............................................................. 17,152
Cash for working capital purposes.............................................. 8,988
--------
Total..................................................................... $ 288,875
========
- ---------------
(a) In addition to the equity contribution, certain employees have made an
equity investment in the Company totaling $6.4 million (including
restricted stock grants and $0.8 million contributed by certain employees
immediately following consummation of the Transaction) and the Estate has
retained an interest in the Company of $7.5 million, together constituting
$13.9 million valued at the price per share paid by GSCP.
(b) Excludes existing mortgages on real property owned by Subsidiaries of the
Company in the amount of approximately $5.9 million, capital lease
obligations of approximately $4.6 million, and borrowings under a revolving
credit agreement of a Non-Guarantor Subsidiary of approximately $0.6
million each as of December 19, 1997. All other outstanding debt of the
Company was extinguished at or prior to the completion of the Transaction.
37
45
CAPITALIZATION
The following table sets forth the historical consolidated capitalization
of the Company as of September 30, 1997, and on a pro forma basis to give effect
to the Transaction, including the Transaction Financings and the application of
the proceeds therefrom, as if they had occurred on September 30, 1997. See "The
Transaction". The information set forth below should be read in conjunction with
the Company's Transaction Pro Forma Consolidated Financial Data, the Company's
Consolidated Financial Statements and the related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained elsewhere in this Prospectus.
AS OF SEPTEMBER 30, 1997
---------------------------
TRANSACTION
HISTORICAL PRO FORMA
---------- -----------
(DOLLARS IN THOUSANDS)
Cash and cash equivalents........................................... $ 684 $ 3,975
======== ========
Total debt (including current portion)
Revolving Credit Facility(1)...................................... $ -- $ --
Term Loan......................................................... -- 117,000
Existing revolving credit facility................................ 9,550 --
Senior Subordinated Notes......................................... -- 110,000
Mortgages......................................................... 6,072 6,072
Capital leases and other.......................................... 24,782 4,727
-------- --------
Total debt..................................................... 40,404 237,799
Stockholders' equity (deficit)(2)................................... 89,002 (95,288)
-------- --------
Total capitalization........................................... $ 129,406 $ 142,511
======== ========
- ------------------
(1) The Company has the ability to borrow up to $50 million pursuant to its
Revolving Credit Facility. The Revolving Credit Facility is available to
the Company for working capital purposes and acquisitions, subject to
certain limitations and restrictions. See "Description of Senior Debt".
(2) Upon completion of the Transaction, the Company had a negative net worth for
accounting purposes. In the Transaction, GSCP paid $61.9 million for
approximately 82.5% of the Company Common Stock. In addition, certain
employees of the Company acquired and the Estate retained approximately
7.5% and almost 10%, respectively, of the Company Common Stock which, based
upon the price per share paid by GSCP, has an aggregate value of
approximately $13.1 million. Combined with GSCP's payment of $61.9 million,
these holdings have an aggregate value of approximately $75.0 million.
38
46
TRANSACTION PRO FORMA CONSOLIDATED FINANCIAL DATA
(UNAUDITED)
The following unaudited Transaction Pro Forma Consolidated Financial Data
have been derived by the application of pro forma adjustments to the Company's
historical consolidated financial statements appearing elsewhere in this
Prospectus giving effect to the merger of MergerCo with and into the Company.
The Transaction Pro Forma Consolidated Statements of Income for the year ended
December 31, 1996 and the nine and twelve month periods ended September 30, 1997
give effect to the Transaction as if it was consummated as of January 1, 1996.
The Transaction Pro Forma Consolidated Statements of Income for the year ended
December 31, 1996 and the twelve months ended September 30, 1997 include
supplemental pro forma adjustments to give effect to certain events that
occurred in conjunction with the Organization and the IPO as if such events had
occurred as of January 1, 1996. The Transaction Pro Forma Consolidated Balance
Sheet gives effect to the Transaction as if it had occurred as of September 30,
1997. The adjustments are described in the accompanying notes. The Transaction
Pro Forma Consolidated Financial Statements should not be considered indicative
of actual results that would have been achieved had the Transaction been
consummated on the date or for the periods indicated and do not purport to
indicate balance sheet data or results of operations as of any future date or
for any future period. The Transaction Pro Forma Consolidated Financial
Statements should be read in conjunction with the Company's historical
consolidated financial statements and the related notes thereto appearing
elsewhere in this Prospectus. See "Index to Financial Statements" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
As a result of the Transaction, the Company incurred various costs of
approximately $27.6 million (pre-tax) in connection with consummation of the
Transaction and the transactions contemplated by the Transaction Agreement.
These costs consist primarily of professional, advisory and investment banking
fees, registration costs, compensation costs and other expenses of approximately
$22.1 million and deferred financing costs of approximately $5.5 million. The
Company has recorded a one-time pre-tax charge of approximately $22.1 million
($17.7 million after tax) in the fourth quarter of 1997 and, as a result, the
Company incurred a significant net loss in that quarter. Because this loss
resulted directly from the one-time charge incurred in connection with the
Transaction, and this charge was funded entirely through the proceeds of the
Transaction Financings, the Company does not expect this loss to materially
impact its liquidity, ongoing operations or market position. See "Risk Factors
- -- Substantial Leverage; Ability to Service Indebtedness" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources".
The pro forma adjustments giving effect to the Transaction were applied to
the respective historical consolidated financial statements to reflect and
account for the Transaction as a recapitalization. Accordingly, the historical
basis of the Company's assets and liabilities has not been impacted by the
Transaction.
39
47
TRANSACTION PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
(UNAUDITED)
PRO FORMA
AND
SUPPLEMENTAL
PRO FORMA SUPPLEMENTAL
ADJUSTMENTS PRO FORMA
TO GIVE TO GIVE PRO FORMA
EFFECT TO EFFECT ADJUSTMENTS TO
THE TO THE GIVE EFFECT TO
ORGANIZATION ORGANIZATION THE TRANSACTION
HISTORICAL AND THE IPO AND THE IPO TRANSACTION(F) PRO FORMA
---------- ------------ ------------ -------------- -----------
Net sales...................... $ 192,705 $192,705 $ 192,705
Cost of sales.................. 123,913 123,913 123,913
------- ------- -------
Gross profit................. 68,792 68,792 68,792
OPERATING EXPENSES:
Selling expenses............. 11,838 11,838 11,838
General and administrative
expenses.................. 19,266 $ 250(a) 19,516 $ 435(g) 19,951
Art and development costs.... 5,173 5,173 5,173
Non-recurring compensation in
connection with the IPO... 15,535 (15,535)(b) -- --
Special bonuses.............. 4,222 (4,222)(c) -- --
------- ------- -------
Income from operations....... 12,758 32,265 31,830
Interest expense, net.......... 6,691 (2,228)(d) 4,463 18,583(h) 23,046
Other expense, net............. 335 335 335
------- ------- -------
Income before income taxes
and minority interests.... 5,732 27,467 8,449
Income taxes................... 1,952 9,347(e) 11,299 (7,702)(i) 3,597
Minority interests............. 1,653 (1,403)(a) 250 250
------- ------- -------
Net income..................... $ 2,127 $ 15,918 $ 4,602
======= ======= =======
Pro forma net income per
share........................ $ 4,556
Pro forma weighted average
common shares
outstanding(j)............... 1,010
NON-GAAP FINANCIAL DATA:
Adjusted EBITDA(k)............. $ 37,652 $ 37,217
Adjusted EBITDA margin......... 19.5% 19.3%
OTHER FINANCIAL DATA:
Gross margin................... 35.7% 35.7%
Depreciation and
amortization................. $ 5,137 $ 5,387
Cash capital expenditures...... 7,613 7,613
Earnings to fixed charges(l)... 1.7x 1.3x
See Notes to Transaction Pro Forma Consolidated Statement of Income.
40
48
NOTES TO TRANSACTION PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
(UNAUDITED)
The pro forma financial data giving effect to the Transaction have been derived
by the application of pro forma, supplemental pro forma and Transaction pro
forma adjustments to the Company's historical consolidated financial statements
for the period noted. The adjustments give effect to certain events that
occurred in conjunction with the Organization and the IPO and to certain events
that occurred in connection with the Transaction, as if those events had
occurred as of January 1, 1996, including pro forma adjustments intended to
present the historical results as if certain subsidiaries had terminated their
treatment as S corporations for tax purposes. The Transaction has been accounted
for as a recapitalization, which will have no impact on the historical basis of
the Company's assets and liabilities.
(a) To reflect $250 amortization of goodwill per annum over thirty years and the
elimination of $1,403 for minority interest related to the acquisition of
an additional 50% of Am-Source, Inc. as if it were acquired at the
beginning of the period.
(b) To reflect reductions in compensation expense of $15,535, including stock
and cash of $12,535 for payments to certain executives in connection with
the termination of prior employment agreements and $3,000 for the
establishment of an ESOP for the benefit of the employees of Amscan Inc.
and the payment of stock bonuses to certain of such employees.
(c) To reflect the elimination of special bonuses that will not be recurring due
to the termination of certain employment agreements in connection with the
IPO. No adjustments are reflected or are necessary with respect to
performance-based compensation as the provisions in the employment
agreements entered into in connection with the IPO would have resulted in
performance-based compensation materially equivalent to that reflected in
the historical accounts under the prior employment agreements.
(d) To reflect the reduction of actual interest expense assuming a repayment of
$8,100 of bank loans at the actual rate in effect and an average balance of
$20,000 of loans from Mr. Svenningsen at the actual rate in effect.
(e) To provide for income taxes at a statutory rate of 40.5% on earnings as if
Amscan Inc., Am-Source, Inc. and certain other subsidiaries of the Company
had not been treated as S corporations during the period presented and to
give effect to the tax effect of these adjustments.
(f) The pro forma adjustments to the historical Consolidated Statement of Income
exclude the following items, as described in the notes to the Transaction
Pro Forma Consolidated Balance Sheet, (i) the write-off of $20 of deferred
financing costs associated with the debt being repaid, (ii) $1,010 of debt
retirement costs, (iii) $7,500 of non-recurring compensation expense to be
paid by the Estate and the Svenningsen Trusts, (iv) $1,901 of non-recurring
compensation expense for the redemption of Company Stock Options, and (v)
$11,652 of transaction fees and expenses incurred in connection with the
Transaction. Such amounts represent non-recurring expenses which will be
reflected in the Consolidated Statement of Income for the period in which
the Transaction is included.
(g) To reflect the amortization over a ten-year period of $1,125 of restricted
shares of Company Common Stock issued to an officer of the Company in
connection with the Transaction. See "The Transaction -- Interests of
Certain Persons in the Transaction".
41
49
(h) To adjust interest expense to reflect the following:
Interest on historical debt repaid in Transaction...................... $(2,869)
Interest expense on the Term Loan (8.5% rate).......................... 9,945
Interest expense on the Senior Subordinated Notes (9.875% rate)........ 10,863
Amortization of deferred financing costs (7-10 years) on new
indebtedness......................................................... 644
-------
Total adjustment..................................................... $18,583
=======
For the year ended December 31, 1996, a 0.125% increase or decrease in the
interest rate on the Term Loan would change the Transaction pro forma
interest expense and net income by $146 and $87, respectively.
(i) To reflect the tax effects of the Transaction pro forma adjustments at a
40.5% statutory income tax rate.
(j) Pro forma weighted average common shares outstanding represents the shares
outstanding after the Effective Time (see Notes to the Consolidated
Financial Statements -- December 31, 1996, note (18)).
(k) "Adjusted EBITDA" represents earnings before interest, income taxes,
depreciation and amortization adjusted for special bonuses, non-recurring
compensation, other expenses (income), net and minority interests. Adjusted
EBITDA is presented because it is a widely accepted financial indicator of
a leveraged company's ability to service and/or incur indebtedness and
because management believes Adjusted EBITDA is a relevant measure of the
Company's ability to generate cash without regard to the Company's capital
structure or working capital needs. Adjusted EBITDA as presented may not be
comparable to similarly titled measures used by other companies, depending
upon the non-cash charges included. When evaluating Adjusted EBITDA,
investors should consider that Adjusted EBITDA (i) should not be considered
in isolation but together with other factors which may influence operating
and investing activities such as changes in operating assets and
liabilities and purchases of property and equipment, (ii) is not a measure
of performance calculated in accordance with generally accepted accounting
principles, (iii) should not be construed as an alternative or substitute
for income from operations, net income or cash flows from operating
activities in analyzing the Company's operating performance, financial
position or cash flows and (iv) should not be used as an indicator of the
Company's operating performance or as a measure of its liquidity.
(l) For purposes of determining the ratio of earnings to fixed charges, earnings
are defined as earnings before income taxes and minority interests plus
fixed charges. Fixed charges consist of interest expense on all
obligations, amortization of deferred financing costs and one-third of
rental expense on operating leases representing that portion of rental
expense deemed by the Company to be attributable to interest.
42
50
TRANSACTION PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
PRO FORMA
ADJUSTMENTS TO
GIVE EFFECT TO
THE TRANSACTION
HISTORICAL TRANSACTION(A) PRO FORMA
---------- -------------- -----------
Net sales............................................ $ 161,286 $ 161,286
Cost of sales........................................ 103,460 103,460
-------- --------
Gross profit....................................... 57,826 57,826
Operating expenses:
Selling expenses................................... 9,598 9,598
General and administrative expenses................ 13,225 $ 104(b) 13,329
Art and development costs.......................... 3,891 3,891
-------- --------
Income from operations.......................... 31,112 31,008
Interest expense, net................................ 2,654 14,238(c) 16,892
Other income, net.................................... (219) (219)
-------- --------
Income before income taxes and minority
interests....................................... 28,677 14,335
Income taxes......................................... 11,627 (5,808)(d) 5,819
Minority interests................................... 149 149
-------- --------
Net income......................................... $ 16,901 $ 8,367
======== ========
Pro forma net income per share....................... $ 8,284
Pro forma weighted average common shares
outstanding(e)..................................... 1,010
NON-GAAP FINANCIAL DATA:
Adjusted EBITDA(f)................................... $ 35,617 $ 35,513
Adjusted EBITDA margin............................... 22.1% 22.0%
OTHER FINANCIAL DATA:
Gross margin......................................... 35.9% 35.9%
Depreciation and amortization........................ $ 4,505 $ 4,505
Cash capital expenditures............................ 6,895 6,895
Earnings to fixed charges(g)......................... 7.7x 1.8x
See Notes to Transaction Pro Forma Consolidated Statement of Income.
43
51
NOTES TO TRANSACTION PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
The pro forma financial data giving effect to the Transaction have been derived
by the application of pro forma adjustments to the Company's historical
consolidated financial statements for the period noted. The adjustments give
effect to certain events that occurred in connection with the Transaction, as if
those events had occurred as of January 1, 1996. The Transaction has been
accounted for as a recapitalization, which will have no impact on the historical
basis of the Company's assets and liabilities.
(a) The pro forma adjustments to the historical Consolidated Statement of Income
exclude the following items, as described in the notes to the Transaction
Pro Forma Consolidated Balance Sheet, (i) the write-off of $20 of deferred
financing costs associated with the debt being repaid, (ii) $1,010 of debt
breakage costs, (iii) $7,500 of non-recurring compensation expense to be
paid by the Estate and the Svenningsen Trusts, (iv) $1,901 of non-recurring
compensation expense for the redemption of Company Stock Options, and (v)
$11,652 of the transaction fees and expenses incurred in connection with
the Transaction. Such amounts represent non-recurring expenses which the
Company anticipates will be reflected in the Consolidated Statement of
Income for the period in which the Transaction is included.
(b) To reflect the amortization over a ten-year period of $1,125 of restricted
shares of Company Common Stock issued to an officer of the Company in
connection with the Transaction. See "The Transaction -- Interests of
Certain Persons in the Transaction".
(c) To adjust interest expense, net to reflect the following:
Interest on historical debt repaid in Transaction................. $(1,852)
Interest expense on the Term Loan (8.5% rate)..................... 7,459
Interest expense on the Senior Subordinated Notes (9.875% rate)... 8,147
Amortization of deferred financing costs (7-10 years) on new
indebtedness.................................................... 484
-------
Total adjustment............................................. $14,238
=======
For the nine months ended September 30, 1997, a 0.125% increase or decrease
in the interest rate on the Term Loan would change the Transaction pro
forma interest expense and net income by $110 and $65, respectively.
(d) To reflect the tax effects of the Transaction pro forma adjustments at a
40.5% statutory income tax rate.
(e) Pro forma weighted average common shares outstanding represents the shares
outstanding following the Effective Time (see Notes to Consolidated
Financial Statements -- September 30, 1997, note (7)).
(f) "Adjusted EBITDA" represents earnings before interest, income taxes,
depreciation and amortization adjusted for special bonuses, non-recurring
compensation, other expenses (income), net and minority interests. Adjusted
EBITDA is presented because it is a widely accepted financial indicator of
a leveraged company's ability to service and/or incur indebtedness and
because management believes Adjusted EBITDA is a relevant measure of the
Company's ability to generate cash without regard to the Company's capital
structure or working capital needs. Adjusted EBITDA as presented may not be
comparable to similarly titled measures used by other companies, depending
upon the non-cash charges included. When evaluating Adjusted EBITDA,
investors should consider that Adjusted EBITDA (i) should not be considered
in isolation but together with other factors which may influence operating
and
44
52
investing activities such as changes in operating assets and liabilities
and purchases of property and equipment, (ii) is not a measure of
performance calculated in accordance with generally accepted accounting
principles, (iii) should not be construed as an alternative or substitute
for income from operations, net income or cash flows from operating
activities in analyzing the Company's operating performance, financial
position or cash flows and (iv) should not be used as an indicator of the
Company's operating performance or as a measure of its liquidity.
(g) For purposes of determining the ratio of earnings to fixed charges, earnings
are defined as earnings before income taxes and minority interests plus
fixed charges. Fixed charges consist of interest expense on all
obligations, amortization of deferred financing costs and one-third of the
rental expense on operating leases representing that portion of rental
expense deemed by the Company to be attributable to interest.
45
53
TRANSACTION PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
PRO FORMA
ADJUSTMENTS TO
GIVE EFFECT TO
THE TRANSACTION
HISTORICAL TRANSACTION PRO FORMA
---------- -------------- -----------
ASSETS
Current assets:
Cash and cash equivalents............................. $ 684 $ 3,291(a) $ 3,975
Accounts receivable, net.............................. 56,276 56,276
Inventories........................................... 48,736 48,736
Deposits and other.................................... 9,680 9,680
-------- --------
Total current assets................................ 115,376 118,667
Property, plant and equipment, net.................... 37,157 37,157
Intangible assets, net................................ 7,540 7,540
Deferred financing costs.............................. -- 5,500(b) 5,500
Other assets, net..................................... 2,687 (20)(c) 2,667
-------- --------
Total assets........................................ $ 162,760 $ 171,531
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY(DEFICIT)
Current liabilities:
Loans and notes payable............................... $ 10,020 (10,020)(d) $ --
Accounts payable...................................... 11,153 11,153
Accrued expenses...................................... 7,317 7,317
Income taxes payable.................................. 6,458 (4,334)(e) 2,124
Current portions of long-term obligations............. 5,556 (3,771)(d) 1,785
-------- --------
Total current liabilities........................... 40,504 22,379
Long-term obligations, excluding current portion...... 24,828 211,186(d) 236,014
Deferred tax liabilities.............................. 5,585 5,585
Other................................................. 2,841 2,841
-------- --------
Total liabilities................................... 73,758 266,819
Stockholders' Equity (deficit):
Common Stock(f)....................................... 2,112 (2,112)(g) --
Additional paid-in capital............................ 65,985 63,000(h)
.................................................... 7,500(i)
.................................................... (136,485)(g) --
Unamortized restricted Common Stock award............. (1,125)(h) (1,125)
Retained earnings (deficit)........................... 21,649 (97,609)(g)
.................................................... (17,749)(e) (93,709)
Foreign currency translation adjustment............... (454) (454)
Treasury stock, at cost............................... (290) 290(g) --
-------- --------
Total stockholders' equity (deficit)................ 89,002 (95,288)
-------- --------
Total liabilities and stockholders' equity
(deficit)........................................ $ 162,760 $ 171,531
======== ========
See Notes to Transaction Pro Forma Consolidated Balance Sheet.
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54
NOTES TO TRANSACTION PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
The pro forma financial data giving effect to the Transaction have been derived
by the application of pro forma adjustments to the historical consolidated
balance sheet as of September 30, 1997. The Transaction has been accounted for
as a recapitalization, which will have no impact on the Company's historical
basis of assets and liabilities.
(a) To increase cash by $3,291 to reflect the following:
USES OF CASH:
Purchase equity.................................................. $235,916
Redeem Company Stock Options(1).................................. 1,901
Repay historical debt............................................ 29,605
Debt retirement costs(2)......................................... 1,010
--------
Transaction fees and expenses, including deferred financing
costs(3)....................................................... 17,152
--------
Total uses....................................................... 285,584
--------
SOURCES OF CASH:
New debt......................................................... 227,000
New equity....................................................... 61,875
--------
Total sources.................................................... 288,875
--------
Net.............................................................. $ 3,291
========
(b) To reflect the portion of transaction fees which will be recorded as
deferred financing costs and will be amortized over the life of the debt to
be issued.
(c) To reflect the write-off of deferred financing costs associated with the
historical debt being repaid and the termination of the Company's existing
term loan agreement.
(d) To adjust indebtedness to reflect the following:
Repayment of loans and notes payable............................. $(10,020)
Repayment of current portion of long-term obligations............ (3,771)
Adjustments to long-term obligations:
Repayment of long-term obligations (excluding current portion
of $3,771).................................................. (15,814)
Term Loan...................................................... 117,000
Senior Subordinated Notes...................................... 110,000
--------
Net adjustments to long-term obligations....................... 211,186
--------
Total.......................................................... $197,395
========
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55
(e) To adjust retained earnings to reflect the following items as a result of
the Transaction and the related events:
Transaction fees and expenses(3)................................. $(11,652)
Redemption of Company Stock Options(1)........................... (1,901)
Debt retirement costs(2)......................................... (1,010)
One-time compensation charge payable by the Estate (see (i)
below)......................................................... (7,500)
Write-off of deferred financing costs(2)......................... (20)
--------
Total expenses(3).............................................. (22,083)
Income tax benefit attributable to deductible costs and
expenses....................................................... 4,334
--------
Total.......................................................... $(17,749)
========
(f) At September 30, 1997, the Company's authorized capital stock consisted of
5,000,000 shares of Preferred Stock, at $0.10 par value, of which no shares
were issued or outstanding, and 50,000,000 shares of Company Common Stock,
$0.10 par value, of which 21,120,476 shares were issued and 21,098,785
shares were outstanding. Immediately following the Transaction, 1,000
shares of Company Common Stock were outstanding.
(g) To reflect the purchase of 5,801,441 shares of Company Common Stock for the
Cash Consideration of $16.50 per share ($95,724), the cash portion of the
Mixed Consideration paid for the 15,024,616 shares of Company Common Stock
held by the Estate ($140,192) and the retirement of 21,691 shares of
treasury stock ($290).
(h) To reflect the equity contribution of GSCP of $61,875 and the issuance of
$1,125 of restricted stock to an officer of the Company.
(i) To reflect a one-time compensation charge of $7,500 paid by the Estate and
the Svenningsen Trusts to Mr. Rittenberg under the terms of the Stock
Agreement. Such amount is reflected as compensation expense in the
Company's financial statements for the fourth quarter of 1997. The income
tax benefit attributable to the compensation expense is included in the
income tax adjustment of $4,334 in (e) above.
- ---------------
(1) The cost to redeem Company Stock Options is calculated based on the number
of options outstanding and the difference between the weighted average
exercise price of the options and the Cash Consideration of $16.50 per
share.
(2) The costs associated with the early extinguishment of historical debt will
be recognized as an extraordinary loss, net of the related tax benefit, in
the Company's financial statements for the period in which the Transaction
is included.
(3) Total expenses of $22,083 included $11,652 of (i) professional, advisory and
investment banking fees and expenses, (ii) compensation costs and (iii)
miscellaneous fees and expenses, such as printing and filing fees which
were paid, together with $5,500 of deferred financing costs from the
proceeds from the Transaction Financings.
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56
TRANSACTION PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE TWELVE MONTHS ENDED SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
PRO FORMA
AND
SUPPLEMENTAL
PRO FORMA SUPPLEMENTAL
ADJUSTMENTS PRO FORMA
TO GIVE TO GIVE PRO FORMA
EFFECT TO EFFECT TO ADJUSTMENTS TO
THE THE GIVE EFFECT
ORGANIZATION ORGANIZATION TO THE TRANSACTION
HISTORICAL AND THE IPO AND THE IPO TRANSACTION(F) PRO FORMA
---------- ------------ ------------ -------------- -----------
Net sales........................ $ 206,983 $206,983 $ 206,983
Cost of sales.................... 134,512 134,512 134,512
-------- -------- --------
Gross profit................... 72,471 72,471 72,471
Operating expenses:
Selling expenses............... 12,745 12,745 12,745
General and administrative
expenses..................... 18,378 $ 62(a) 18,440 $ 213(g) 18,653
Art and development costs........ 5,393 5,393 5,393
Non-recurring compensation in
connection with the IPO...... 15,535 (15,535)(b) -- --
Special bonuses................ 922 (922)(c) -- --
-------- -------- --------
Income from operations......... 19,498 35,893 35,680
Interest expense, net............ 4,775 (557)(d) 4,218 18,884(h) 23,102
Other expense, net............... 417 417 417
Income before income taxes and
minority interests............. 14,306 31,258 12,161
Income taxes..................... 12,812 (180)(e) 12,632 (7,734)(i) 4,898
Minority interests............... 560 (351)(a) 209 209
-------- -------- --------
Net income..................... $ 934 $ 18,417 $ 7,054
======== ======== ========
Pro forma net income per share... $ 6,984
Pro forma weighted average common
shares outstanding(j).......... 1,010
NON-GAAP FINANCIAL DATA:
Adjusted EBITDA(k)............... $ 42,018
Adjusted EBITDA margin........... 20.3% 20.2%
OTHER FINANCIAL DATA:
Gross margin..................... 35.0% 35.0%
Depreciation and amortization.... $ 6,063 $ 6,125
Cash capital expenditures........ 8,934 8,934
Earnings to fixed charges(l)..... 2.8x 1.5x
See Notes to Transaction Pro Forma Consolidated Statement of Income.
49
57
NOTES TO TRANSACTION PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE TWELVE MONTHS ENDED SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
The pro forma financial data giving effect to the Transaction have been derived
by the application of pro forma, supplemental pro forma and Transaction pro
forma adjustments to the Company's historical consolidated financial statements
for the period noted. The adjustments give effect to certain events that
occurred in conjunction with the Organization and the IPO and to certain events
that occurred in connection with the Transaction, as if those events had
occurred as of January 1, 1996, including pro forma adjustments intended to
present the historical results as if certain subsidiaries had terminated their
treatment as S corporations for tax purposes. The Transaction has been accounted
for as a recapitalization, which will have no impact on the historical basis of
the Company's assets and liabilities.
(a) To reflect $62 amortization of goodwill and the elimination of $351 for
minority interest for the quarter ended December 31, 1996, related to the
acquisition of an additional 50% of Am-Source, Inc. as if it were acquired
as of January 1, 1996.
(b) To reflect reductions in compensation expense of $15,535, including stock
and cash of $12,535 for payments to certain executives in connection with
the termination of prior employment agreements and $3,000 for the
establishment of an ESOP for the benefit of the employees of Amscan Inc.
and the payment of stock bonuses to certain of such employees.
(c) To reflect the elimination of special bonuses that will not be recurring due
to the termination of certain employment agreements in connection with the
IPO. No adjustments are reflected or are necessary with respect to
performance-based compensation as the provisions in the employment
agreements entered into in connection with the IPO would have resulted in
performance-based compensation materially equivalent to that reflected in
the historical accounts under the prior employment agreements.
(d) To reflect the reduction of interest expense during the quarter ended
December 31, 1996, assuming the repayment of bank loans and loans from Mr.
Svenningsen from net proceeds of the IPO, as if the IPO occurred at January
1, 1996.
(e) To provide for income taxes at a statutory rate of 40.5% on earnings during
the quarter ended December 31, 1996 as if Amscan Inc., Am-Source, Inc. and
certain other subsidiaries of the Company had not been treated as S
corporations during the period and to give effect to the tax effect of
these adjustments.
(f) The pro forma adjustments to the historical Consolidated Statement of Income
exclude the following items, as described in the notes to the Transaction
Pro Forma Consolidated Balance Sheet, (i) the write-off of $20 of deferred
financing costs associated with the debt being repaid, (ii) $1,010 of debt
retirement costs, (iii) $7,500 of non-recurring compensation expense to be
paid by the Estate and the Svenningsen Trusts, (iv) $1,901 of non-recurring
compensation expense for the redemption of Company Stock Options, and (v)
$11,652 of transaction fees and expenses incurred in connection with the
Transaction. Such amounts represent non-recurring expenses which the
Company anticipates will be reflected in the Consolidated Statement of
Income for the period in which the Transaction is included.
(g) To reflect the amortization over a ten-year period of $1,125 of restricted
shares of Company Common Stock issued to an officer of the Company in
connection with the Transaction. See "The Transaction -- Interests of
Certain Persons in the Transaction".
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58
(h) To adjust interest expense to reflect the following:
Interest on historical debt repaid in Transaction................. $(2,568)
Interest expense on the Term Loan (8.5% rate)..................... 9,945
Interest expense on the Senior Subordinated Notes (9.875% rate)... 10,863
Amortization of deferred financing costs (7-10 years) on new
indebtedness.................................................... 644
-------
Total adjustment............................................. $18,884
=======
For the twelve months ended September 30, 1997, a 0.125% increase or
decrease in the interest rate on the Term Loan would change the Transaction
pro forma interest expense and net income by $146 and $87, respectively.
(i) To reflect the tax effects of the Transaction pro forma adjustments at a
40.5% statutory income tax rate.
(j) Pro forma weighted average common shares outstanding represents the shares
outstanding following the Effective Time (see Notes to Consolidated
Financial Statements -- September 30, 1997, note (7)).
(k) "Adjusted EBITDA" represents earnings before interest, income taxes,
depreciation and amortization adjusted for special bonuses, non-recurring
compensation, other expenses (income), net and minority interests. Adjusted
EBITDA is presented because it is a widely accepted financial indicator of
a leveraged company's ability to service and/or incur indebtedness and
because management believes Adjusted EBITDA is a relevant measure of the
Company's ability to generate cash without regard to the Company's capital
structure or working capital needs. Adjusted EBITDA as presented may not be
comparable to similarly titled measures used by other companies, depending
upon the non-cash charges included. When evaluating Adjusted EBITDA,
Investors should consider that Adjusted EBITDA (i) should not be considered
in isolation but together with other factors which may influence operating
and investing activities such as changes in operating assets and
liabilities and purchases of property and equipment, (ii) is not a measure
of performance calculated in accordance with generally accepted accounting
principles, (iii) should not be construed as an alternative or substitute
for income from operations, net income or cash flows from operating
activities in analyzing the Company's operating performance, financial
position or cash flows and (iv) should not be used as an indicator of the
Company's operating performance or as a measure of its liquidity.
(l) For purposes of determining the ratio of earnings to fixed charges, earnings
are defined as earnings before income taxes and minority interests plus
fixed charges. Fixed charges consist of interest expense on all
obligations, amortization of deferred financing costs and one-third of
rental expense on operating leases representing that portion of rental
expense deemed by the Company to be attributable to interest.
51
59
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The party goods industry has experienced significant changes in both
distribution channels and product offerings over the last several years. The
retail distribution of party goods has begun to shift from smaller independent
stores and designated departments within drug, discount or department store
chains to superstores dedicated to retailing party goods. In part due to the
success of the superstore channel, party goods manufacturers broadened their
product lines to support the celebration of a greater number of occasions. The
industry's growth has been directly affected by these changes.
The Company's revenues have increased from $132.0 million in 1994 to $192.7
million in 1996, a compound annual growth rate of approximately 21%. The Company
attributes this growth to its ability to create a broad range of unique and
innovative designs for its products and to work closely with its customers to
market and merchandise its products to consumers. In particular, the Company
experienced significant growth with its party superstore customers. Between 1993
and 1996, sales to party superstore customers increased from $26.8 million to
$85.1 million, a 47% compound annual growth rate.
Revenues are generated from sales of approximately 14,000 SKUs consisting
of paper and plastic tableware, accessories and novelties for all occasions.
Tableware (plates, cups, cutlery, napkins and tablecovers) is the Company's core
product category, generating approximately 59% of revenues in 1996. Coordinated
accessories (e.g., balloons and banners) and novelties (e.g., party favors) are
offered to complement the Company's tableware products. To serve its customers
better, the Company has made significant additions to its product line. Through
increased spending on internal product development as well as through
acquisitions, the Company has had a net increase of approximately 6,300 SKUs
since 1991. Revenue growth primarily has been the result of increased orders
from its party superstore customers (new stores and increased same-store sales),
increased international sales and price increases.
The Company's gross profit is influenced by its product mix and paper
costs. Products manufactured by the Company, primarily tableware, represented
approximately 50% of the Company's 1996 sales. The Company has made significant
additions to its manufacturing capacity which have allowed it to improve gross
margins. The Company believes that its manufacturing capabilities enable it to
lower product cost, ensure product quality and be more responsive to customer
demands. Paper and pulp related products are the Company's principal raw
materials. The Company has historically been able to adjust its prices in
response to changes in paper prices.
FINANCIAL IMPACT OF ORGANIZATION OF THE COMPANY
In connection with the IPO in December 1996 and the Organization, certain
events occurred which affected the financial position and results of the
Company. The following is a discussion of these events and the related financial
impact.
ORGANIZATION OF FOUNDER'S INTERESTS
The Company was formed for the purpose of becoming the holding company for
the businesses previously conducted by Amscan Inc., certain affiliated companies
individually owned and independently controlled by Mr. Svenningsen, and certain
affiliated companies less than 100% owned by Mr. Svenningsen, including
Am-Source, Inc., the Company's supplier of plastic plates, cups and bowls. The
transfer of Mr. Svenningsen's ownership in these companies in exchange for
shares of Common Stock of the Company was accounted for in a manner similar to a
pooling of interests and, as such, the historical cost basis of the accounts was
carried over thereby not giving rise to any goodwill.
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60
ACQUISITION OF AM-SOURCE, INC.
The Company and the stockholders of Am-Source, Inc., other than Mr.
Svenningsen, entered into an agreement pursuant to which such stockholders
transferred their ownership in Am-Source, Inc. in exchange for shares of Company
Common Stock. The transaction was accounted for as the purchase of the 50%
ownership of Am-Source, Inc. not owned and gave rise to $7.4 million of
goodwill, which is being amortized over 30 years.
TERMINATION OF PRIOR EMPLOYMENT AGREEMENTS
Pursuant to an agreement between Amscan Inc. and Mr. Rittenberg, the
Company's President, Mr. Rittenberg entered into a new employment agreement,
effective upon consummation of the IPO for a period of three years at a base
compensation of approximately $220,000 per year to be increased annually by 5%.
Mr. Rittenberg agreed to the termination of his prior employment agreement upon
consummation of the IPO. The agreement which was terminated provided for Mr.
Rittenberg to receive bonuses equal to approximately 10% of the aggregate net
profits of Amscan Inc. and certain affiliates (as defined in the agreement) in
each of the next three years and an amount equal to 5% of the value of Amscan
Inc. in the event of a change in control or an initial public offering. In
exchange for relinquishing these rights, Mr. Rittenberg received a special
one-time payment of $3.5 million in cash and shares of Company Common Stock
equal to approximately 3% of the total shares outstanding (excluding shares
issued upon exercise of the underwriters' over-allotment option) immediately
following the IPO. The aggregate value paid to Mr. Rittenberg in cash and stock
was $11.5 million.
During the periods presented, certain other executives also had employment
agreements which entitled them to receive a percentage of the pre-tax profits.
These arrangements for Mr. Rittenberg and such other executives between 1994 and
1996 ranged from 18% to 20% of pre-tax profits in the aggregate. In conjunction
with the IPO, these agreements were substantially modified and these bonus
arrangements replaced by a combination of specific incentive plans and/or cash
payments and stock option grants. The aggregate of the special bonuses to Mr.
Rittenberg and the other executives and senior managers were $2.2 million, $2.6
million and $4.2 million for the years ended December 31, 1994, 1995 and 1996,
respectively.
ESTABLISHMENT OF AN EMPLOYEE STOCK OWNERSHIP PLAN AND PAYMENT OF STOCK BONUSES
In conjunction with the IPO, the Company incurred a compensation expense of
$3.0 million for the establishment of the Company's Employee Stock Ownership
Plan (the "ESOP") for the benefit of the employees of Amscan Inc. and the
payment of stock bonuses to certain of such employees. At the time of the IPO,
there was a special one-time contribution of 250,000 shares of Company Common
Stock to the ESOP, subject to reduction as described in the next sentence,
allocated to participant accounts based upon a formula which was weighted based
upon both years of service and compensation. To the extent that application of
this formula resulted in a contribution to the ESOP on behalf of a participant
which exceeded the maximum contribution permitted under applicable law, the
contribution to the ESOP for such participant was reduced to the maximum
permitted and the balance determined under the formula was paid to such
participant in the form of a stock bonus. The ESOP will be amended in certain
respects in connection with the Transaction.
CHANGE IN TAX STATUS OF CORPORATIONS
Prior to the IPO, Amscan Inc., Am-Source, Inc. and certain other
subsidiaries of the Company were operated as S corporations for federal income
and, where available, for state income tax purposes. As a result, these
corporations did not record or pay any federal or state income tax except in
states which do not recognize S corporation status. Following the IPO, the
Company has been taxed as a C corporation under the Code (as "C corporation" is
defined therein) and it is anticipated that the Company will have an effective
income tax rate of approximately 40.5%.
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61
The Company has presented pro forma tax provisions and pro forma net income and
per share data. These pro forma amounts represent the income tax provision and
the net income of the Company had it been a C corporation and thus subject to
income tax for all periods. See the consolidated financial statements included
elsewhere in this Prospectus.
STOCKHOLDER DISTRIBUTIONS
As S corporations, the accumulated profits of Amscan Inc., Am-Source, Inc.
and certain other subsidiaries of the Company were distributed to the
stockholders through December 18, 1996, the effective date of the IPO. Net
profits after the consummation of the IPO are added to the retained earnings of
the Company and used to fund the capital requirements of the business.
Additionally, prior to the IPO, Amscan Inc. and certain affiliates declared
dividends representing distributions of accumulated profits and a return of
capital. These amounts were reflected as subordinated debt and nearly all of the
previous balances of subordinated debt were repaid from the net proceeds of the
IPO.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996
Percentage of Net Sales
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
1997 1996
----- ------
Net Sales............................................................. 100.0% 100.0%
Cost of sales......................................................... 64.1 63.2
------ ------
Gross profit........................................................ 35.9 36.8
Operating expenses:
Selling expenses.................................................... 6.0 5.9
General and administrative expenses................................. 8.2 9.6
Art and development costs........................................... 2.4 2.5
Special bonuses..................................................... -- 2.2
------ ------
Total operating expenses.............................................. 16.6 20.2
------ ------
Income from operations.............................................. 19.3 16.6
Interest expense, net................................................. 1.6 3.1
Other income, net..................................................... (0.1) (0.2)
------ ------
Income before income taxes and minority interests................... 17.8 13.7
Income tax expense.................................................... 7.2 0.5
Minority interests.................................................... 0.1 0.9
------ ------
Net income.......................................................... 10.5% 12.3%
====== ======
NET SALES
Net sales for the nine months ended September 30, 1997 were $161.3 million,
an increase of 9.7% over the nine months ended September 30, 1996. Sales to
national accounts totaled $84.2 million, or 22.1% higher than in the
corresponding period in 1996, principally as a result of sales to the party
goods superstore channel. Sales to international customers increased $1.6
million, contributing 11% to sales growth. Also contributing to the increase in
sales was the Company's marketing strategy of continually offering new products,
as well as new designs and themes for existing products. During the twelve month
period ended September 30, 1997, the Company added approximately 600 SKUs to its
product line.
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62
GROSS PROFIT
Gross profit for the nine months ended September 30, 1997 was $57.8
million, an increase of $3.7 million over the same period in 1996. As a percent
of sales, gross profit decreased for the first nine months of 1997 to 35.9% from
36.8% over the corresponding period in 1996 as a result of an increase in
manufacturing capacity and the addition of a new distribution facility, which
created near-term excess capacity.
SELLING EXPENSES
Selling expenses of $9.6 million for the nine months ended September 30,
1997 increased by $0.9 million and as a percentage of net sales to 6.0% as
compared to 5.9% in the corresponding time period in 1996, primarily due to the
expansion of foreign operations.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses of $13.2 million for the nine months
ended September 30, 1997 decreased $0.9 million as compared to the corresponding
period in 1996. As a percentage of net sales, general and administrative
expenses decreased to 8.2% from 9.6%. The decrease is primarily attributable to
non-recurring costs incurred in the second quarter of 1996 associated with the
move to new corporate offices and additional personnel costs, including
relocation and recruitment. General cost reduction efforts in 1997 were offset
by increases in bad debt expense.
ART AND DEVELOPMENT COSTS
Art and development costs of $3.9 million for the nine months ended
September 30, 1997 decreased slightly to 2.4% of net sales during the nine
months ended September 30, 1997 from 2.5% for the corresponding period of 1996.
In 1996, the Company significantly expanded its creative and new product
development staff and internal development capabilities. The continued
investment in art and development expenditures in 1997 reflects the Company's
strategy to remain a leader in product quality and development.
SPECIAL BONUSES
The employment agreements which gave rise to special bonuses during the
first months of 1996 were substantially modified at the time of the IPO in
December 1996 to eliminate future special bonus payments. Such bonuses, which
were based entirely upon the pre-tax income of Amscan Inc. and certain
affiliates, were $3.3 million or 2.2% of net sales for the nine months ended
September 30, 1996.
INTEREST EXPENSE, NET
Interest expense, net, decreased by $1.9 million to $2.7 million for the
nine months ended September 30, 1997 over the corresponding period in 1996, as
the net proceeds received from the issuance of Common Stock in December 1996 and
January 1997 in connection with the IPO were used to reduce indebtedness under
the Company's line of credit and to repay subordinated debt.
INCOME TAXES
Income tax expense was $11.6 million for the nine months ended September
30, 1997 determined based upon an estimated consolidated effective income tax
rate of 40.5% for the year ending December 31, 1997. Prior to the IPO, Amscan
Inc., Am-Source, Inc., and certain other subsidiaries of the Company were taxed
as Subchapter S corporations for federal income tax and, where available, for
state income tax purposes. Accordingly, these entities were not subject to
federal and state income taxes, except in states which do no recognize
Subchapter S corporation status. In connection with the IPO, these subsidiaries
became subject to federal and state income
55
63
taxes. The amounts shown as income taxes for the nine months ended September 30,
1996 consisted principally of foreign taxes.
MINORITY INTERESTS
Minority interests of $0.1 million and $1.2 million for the nine months
ended September 30, 1997 and 1996, respectively, represent the portion of income
of the Company's subsidiaries attributable to equity ownership not held by the
Company. In addition to the minority interests of certain foreign entities, the
minority interests for the nine months ended September 30, 1996 included a 50%
minority interest in Am-Source, Inc. On December 18, 1996, the Company acquired
the remaining minority interest in Am-Source, Inc.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
PERCENTAGE OF NET SALES
YEARS ENDED
DECEMBER 31,
---------------
1996 1995
----- -----
Net Sales.................................................................. 100.0% 100.0%
Cost of sales.............................................................. 64.3 64.9
------ ------
Gross profit............................................................. 35.7 35.1
Operating expenses:
Selling expenses......................................................... 6.1 7.4
General and administrative expenses...................................... 10.0 9.1
Art and development costs................................................ 2.7 2.5
Non-recurring compensation in connection with the IPO.................... 8.1
Special bonuses.......................................................... 2.2 1.5
------ ------
Total operating expenses................................................... 29.1 20.5
------ ------
Income from operations................................................... 6.6 14.6
Interest expense, net...................................................... 3.4 3.4
Other expense (income), net................................................ 0.2 (0.2)
------ ------
Income before income taxes and minority interests........................ 3.0 11.4
Income taxes............................................................... 1.0 0.4
Minority interests......................................................... 0.9 0.6
------ ------
Net income............................................................... 1.1% 10.4%
====== ======
NET SALES
Net sales for the year ended December 31, 1996 were $192.7 million, an
increase of 15.1% over the year ended December 31, 1995 in which net sales were
$167.4 million. Increased sales to national accounts, principally party
superstores, accounted for $21.9 million or 87% of this increase. Also
contributing to this sales increase was the impact of the Company's marketing
strategy of continually offering new products as well as new designs and themes
for existing products. In 1996, the Company's product line included
approximately 14,000 SKUs compared with approximately 13,400 SKUs in 1995.
Selling price increases related to core products (paper plates, cups, cutlery,
napkins and tablecovers) in response to higher paper costs accounted for
approximately 6 percentage points of the 15.1% increase in net sales between the
periods. Increased sales to international customers accounted for $3.3 million
of the increase in net sales.
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GROSS PROFIT
Gross profit increased $10.0 million for the year ended December 31, 1996
compared to 1995, and improved as a percentage of sales from 35.1% to 35.7%.
Higher selling prices in response to prior period increases in paper costs as
well as lower product costs resulting from the Company's continued vertical
integration of manufacturing operations, offset in part by the cost of added
distribution facilities, were the primary reasons for this improvement in
margins.
SELLING EXPENSES
Selling expenses were lower by $0.4 million for the year ended December 31,
1996 compared to 1995, and declined as a percentage of net sales from 7.4% to
6.1%. The primary reason for the percentage decline was the Company's ability to
increase sales to its party superstore customers while not significantly
increasing its sales costs associated with those accounts.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased $4.3 million for the year
ended December 31, 1996 compared to 1995. As a percentage of net sales, general
and administrative expenses increased from 9.1% to 10.0%. This increase is
principally attributable to an increase in the provision for bad debts of $1.7
million or 0.9% of net sales related to a significant increase in the Company's
accounts receivable and increased occupancy costs of $0.5 million or 0.3% of net
sales related to the Company's new corporate offices. Also contributing to this
increase are non-recurring costs related to the development of a new business
management computer system of $1.2 million or 0.6% of net sales as well as
one-time costs associated with the move to the new corporate offices of $0.3
million or 0.2% of net sales and additional personnel costs including relocation
and recruitment costs of $0.3 million or 0.2% of net sales.
ART AND DEVELOPMENT COSTS
Art and development costs increased $0.9 million for the year ended
December 31, 1996 compared to 1995. As a percentage of net sales, art and
development costs increased from 2.5% to 2.7%. The Company significantly
expanded its creative and new product development staff and internal development
capabilities in the middle of 1995 which resulted in a substantial increase in
art and development costs which were incurred during all of 1996. The increase
in art and development expenditures reflects the Company's strategy to remain a
leader in product quality and development.
NON-RECURRING COMPENSATION
In conjunction with the IPO, the Company recorded non-recurring
compensation of $15.5 million in 1996 related to stock and cash payments of
$12.5 million to certain executives in connection with the termination or
modification of employment agreements and $3.0 million for the establishment of
an ESOP for the benefit of the employees of Amscan Inc. and the payment of stock
bonuses to certain of such employees.
SPECIAL BONUSES
Special bonuses, which were based entirely upon the Company's pre-tax
income, increased by $1.6 million for the year ended December 31, 1996 compared
to 1995. The employment agreements which gave rise to these bonuses were
substantially modified to eliminate these special bonus payments in the future.
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INCOME FROM OPERATIONS
Due to the non-recurring compensation of $15.5 million and the other
factors discussed above, income from operations decreased $11.9 million to $12.8
million in 1996 from $24.7 million in 1995. As a percentage of net sales, income
from operations decreased from 14.6% in 1995 to 6.6% in 1996.
INTEREST EXPENSE, NET
Interest expense, net increased by $0.9 million to $6.7 million in 1996,
reflecting slightly higher borrowings associated with increased working capital
(primarily inventory and accounts receivable) needed to support the increased
volume of sales, offset in part by a lower effective interest cost associated
with the Company's revised revolving credit agreement, which was entered into in
September 1995.
INCOME TAXES
Prior to the IPO, Amscan Inc., Am-Source, Inc. and certain other
subsidiaries of the Company were taxed as S corporations for federal income tax
and, where available, for state income tax purposes. Accordingly, these entities
were not subject to federal and state income taxes except in states which do not
recognize S corporation status. In connection with the IPO, these subsidiaries
became subject to federal and state income taxes. The amounts shown as income
taxes in 1996 consist principally of foreign taxes and a one-time charge of $0.8
million related to the establishment of deferred taxes in connection with the
change in tax status.
MINORITY INTERESTS
Minority interests represent the portion of income of the Company's
Subsidiaries attributable to equity ownership not held by Amscan Holdings, Inc.
In addition to the minority interests of certain foreign entities, these amounts
include the minority interest of Am-Source, Inc. through December 18, 1996, the
date the Company acquired the 50% not owned by Mr. Svenningsen.
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YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
PERCENTAGE OF NET SALES
YEARS ENDED
DECEMBER 31,
----------------
1995 1994
----- -----
Net Sales................................................................ 100.0% 100.0%
Cost of sales............................................................ 64.9 65.7
----- -----
Gross profit........................................................... 35.1 34.3
Operating expenses:
Selling expenses....................................................... 7.4 8.5
General and administrative expenses.................................... 9.1 11.0
Art and development costs.............................................. 2.5 2.1
Special bonuses........................................................ 1.5 1.7
----- -----
Total operating expenses................................................. 20.5 23.3
----- -----
Income from operations................................................. 14.6 11.0
Interest expense, net.................................................... 3.4 2.9
Other (income) expense, net.............................................. (0.2) 0.1
----- -----
Income before income taxes and minority interests...................... 11.4 8.0
Income taxes............................................................. 0.4 0.4
Minority interests....................................................... 0.6 0.1
----- -----
Net income............................................................. 10.4% 7.5%
===== =====
NET SALES
Net sales for the year ended December 31, 1995 were $167.4 million, an
increase of 26.8% over 1994 when net sales were $132.0 million. Increased sales
to party superstores accounted for $23.3 million or 66% of this increase. The
number of retail outlets represented by these accounts increased to 886 in 1995
from 720 in 1994. Also contributing to this net sales increase was the impact of
the Company's marketing strategy of continually offering new products as well as
new designs and themes for existing products. In 1995, the Company's product
line included over 13,400 SKUs compared to approximately 11,000 SKUs in 1994.
Selling price increases related to core products (paper plates, cups, napkins
and tablecovers) in response to higher paper costs, accounted for approximately
5 percentage points of the 26.8% of the year-over-year increase in net sales.
Increased sales to international customers accounted for $4.3 million of the
increase in net sales in 1995 compared to 1994.
GROSS PROFIT
Gross profit increased by $13.5 million from 1994 to 1995, and improved as
a percentage of net sales from 34.3% to 35.1%. The gross profit margin
improvement resulted primarily from the increased vertical integration of the
Company's tableware manufacturing operations. During 1995, the Company added
several new pieces of equipment including two printing presses which enabled it
to expand its manufacturing capacity. In addition, gross profit improved as a
result of increased leveraging of existing distribution facilities and improved
purchasing of nonmanufactured products.
SELLING EXPENSES
Selling expenses increased by $0.9 million from 1994 to 1995, but declined
as a percentage of net sales from 8.5% to 7.4%. The primary reason for the
percentage decline was the Company's
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ability to increase sales to its party superstore customers, while not
significantly increasing its sales costs associated with these accounts.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased by $0.5 million from 1994 to
1995, primarily as a result of modest wage increases partially offset by
decreased provisions for bad debts. During 1994, the Company sustained a larger
amount of write-offs due to two large accounts which filed for bankruptcy. As a
percentage of net sales, general and administrative expenses declined from 11.0%
in 1994 to 9.1% in 1995. The Company was able to leverage its administrative
resources while supporting the increased sales.
ART AND DEVELOPMENT COSTS
Art and development costs increased $1.5 million from 1994 to 1995. As a
percentage of net sales, art and development costs increased from 2.1% in 1994
to 2.5% in 1995. The Company significantly expanded its creative and new product
development staff and internal development capabilities in 1995, which resulted
in a substantial increase in art and development costs in the second half of
1995. The increase in such expenses reflects the Company's strategy of remaining
a leader in product quality and development.
SPECIAL BONUSES
Special bonuses, which were based upon the Company's pre-tax income,
increased in 1995 over 1994. The special bonus in 1994 included special one-time
bonuses of approximately $0.8 million associated with the partial acquisition of
Am-Source, Inc. In connection with the IPO, the employment agreements which gave
rise to these bonuses were substantially modified to eliminate the special bonus
payments.
INCOME FROM OPERATIONS
The factors discussed above contributed to the increase in income from
operations of 69.9% to $24.7 million in 1995 from $14.5 million in 1994. As a
percentage of net sales, income from operations increased from 11.0% in 1994 to
14.6% in 1995.
INTEREST EXPENSE, NET
Interest expense, net increased by $1.9 million to $5.8 million from 1994
to 1995, reflecting higher borrowings associated with increased working capital
(primarily from inventory and accounts receivable) needed to support the
increased volume of sales, as well as an increase in the Company's average
effective rate for borrowed money from 7.5% to 8.3%.
INCOME TAXES
Amscan Inc., Am-Source, Inc. and certain other subsidiaries of the Company
elected to be taxed as S corporations for federal income and, where available,
for state income tax purposes. Accordingly, these entities were not subject to
federal income taxes prior to the IPO except in states which do not recognize S
corporation status. In connection with the IPO, these subsidiaries terminated
their S corporation status and, accordingly, are subject to federal and state
income taxes. The amounts shown as income taxes consist principally of foreign
taxes.
MINORITY INTERESTS
Minority interests represent the portion of income attributable to equity
ownership not held by Mr. Svenningsen. In addition to the minority interests of
certain foreign entities, these amounts include the minority interest of
Am-Source, Inc. prior to its acquisition by the Company.
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LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its growth since 1994 principally through cash
flow generated from operations, the use of operating leases, increases in its
revolving line of credit borrowings and increases in long-term debt, including
debt owed to Mr. Svenningsen. The net proceeds from the IPO were used to reduce
indebtedness under the Company's line of credit and to repay subordinated debt.
Upon consummation of the Transaction, the Company's existing loan
arrangements terminated and the Company entered into the Transaction Financings.
As of September 30, 1997, after giving pro forma effect to the Transaction and
the Transaction Financings and the application of the net proceeds therefrom,
the Company would have had (i) $237.8 million of consolidated indebtedness and
(ii) $95.3 million of consolidated stockholders' deficiency. The Company's
significant debt service obligations following the Transaction could, under
certain circumstances, have material consequences to security holders of the
Company. See "Description of Senior Debt" and "Risk Factors -- Substantial
Leverage; Ability to Service Indebtedness".
In order to fund the payment of the cash portion of the Transaction
Consideration, to refinance certain existing outstanding indebtedness of the
Company, to pay transaction costs incurred in connection with the Transaction,
and for general corporate purposes, the Company issued the Notes and entered
into the Bank Credit Agreement providing for borrowings in the aggregate
principal amount of approximately $117 million under the Term Loan and revolving
loan borrowings of up to $50 million under the Revolving Credit Facility. The
Revolving Credit Facility is, subject to a borrowing base, available to fund the
working capital requirements of the Company.
Based upon the current level of operations and anticipated growth, the
Company anticipates that its operating cash flow, together with available
borrowings under the Revolving Credit Facility, will be adequate to meet its
anticipated future requirements for working capital and operating expenses, to
permit potential acquisitions and to service its debt requirements as they
become due. However, the Company's ability to make scheduled payments of
principal of, or to pay interest on, or to refinance its indebtedness (including
the Exchange Notes) and to satisfy its other obligations will depend upon its
future performance, which, to a certain extent, will be subject to general
economic, financial, competitive, business and other factors beyond its control.
Management believes that additions to plant and equipment during the past
three years provide adequate capacity to support its operations for at least the
next 12 months. As of September 30, 1997, the Company did not have material
commitments for capital expenditures. The Transaction Financings entered into in
connection with the Transaction may affect the Company's ability to make capital
expenditures. See "Risk Factors -- Substantial Leverage; Ability to Service
Indebtedness"; "Description of Senior Debt" and "Description of Exchange Notes".
CASH FLOW DATA -- NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO
NINE MONTHS ENDED SEPTEMBER 30, 1996
Net cash provided by operating activities increased by $6.9 million to $8.5
million for the nine months ended September 30, 1997 as compared to the same
period in 1996, primarily as a result of decreased working capital levels. Net
cash used in investing activities increased by $1.2 million to $6.8 million for
the nine months ended September 30, 1997 over the comparable period in 1996, and
consisted primarily of capital expenditures. Net cash used in financing
activities totaled $2.5 million for the nine months ended September 30, 1997 as
repayments of bank and other indebtedness exceeded net proceeds of $4.5 million
received from the sale of the Company's Common Stock to cover the exercise of
the underwriters' over-allotment option and proceeds under the Company's
existing loan arrangements.
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BALANCE SHEET DATA -- SEPTEMBER 30, 1997 COMPARED TO DECEMBER 31, 1996
Accounts receivable, net, increased $18.9 million to $56.3 million at
September 30, 1997 from $37.4 million at December 31, 1996. This increase is
principally due to the increased sales and customary extended payment terms
offered on seasonal sales during the third quarter. Third quarter sales are
generally the highest of the year primarily due to the shipment of certain
seasonal holiday merchandise. During September 1997, the Company entered into an
agreement to convert $4.0 million of trade accounts receivable from one of its
two largest customers into an equity interest. The Company subsequently
transferred 50% of this interest to the Estate in full satisfaction of $2.0
million of obligations. The remaining equity interest is included in other
assets at September 30, 1997. Subsequently, the Company transferred the
remaining interest to the Estate for $1.0 million in cash and in full
satisfaction of $1.0 million of future obligations to the Estate.
Inventories increased $3.0 million to $48.7 million at September 30, 1997
from $45.7 million at December 31, 1996 due to seasonality of inventory levels.
Deposits and other current assets decreased $1.7 million to $9.7 million at
September 30, 1997 from December 31, 1996, principally due to a reduction in
deposits for the manufacture of equipment to be leased.
Property, plant and equipment, net, increased $2.5 million to $37.2 million
at September 30, 1997 from $34.7 million at December 31, 1996. The increase
represents the acquisition of certain domestic manufacturing and warehouse
equipment, partially offset by depreciation.
Loans and notes payable decreased $19.3 million to $10.0 million at
September 30, 1997 from December 31, 1996, reflecting the repayment of
borrowings under the Company's previous revolving credit line, which was
financed by advances under the Company's then-existing loan facilities and term
loans.
Income taxes payable increased $5.6 million to $6.5 million at September
30, 1997 from December 31, 1996. This increase is primarily due to the change in
tax status. In connection with the IPO on December 18, 1996, Amscan Inc.,
AmSource, Inc., and other subsidiaries of the Company terminated their S
corporation status, and accordingly became subject to federal and state income
taxes.
Third-party long-term financings for the nine months ended September 30,
1997 consisted primarily of borrowings under the previously mentioned term loan
and long-term loans secured by real property, machinery and equipment.
Common Stock and additional paid-in capital increased by $4.5 million as a
result of the exercise of the underwriters' over-allotment option.
CASH FLOW DATA -- YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER
31, 1995
Net cash provided by operating activities increased by $7.6 million to
$12.3 million in the year ended December 31, 1996 from $4.7 million in the year
ended December 31, 1995 as a result of the decreased rate of growth in
inventories and other assets, partially offset by increases in deposits paid on
purchased equipment and a decrease in net income before depreciation and
amortization. Net cash used in investing activities of $7.6 million increased by
$3.1 million from 1995 because of increased capital expenditures. Net cash used
in financing activities increased by $6.1 million to $6.0 million in 1996 due to
increases in stockholder distributions, repayment of bank debt and subordinated
debt partially offset by net proceeds from the IPO.
Third party financings for 1996 consisted primarily of borrowings under
credit and long-term loans secured by machinery and equipment. The Company used
net proceeds from the IPO to repay debt owed to the banks and to Mr. Svenningsen
in 1996. The Company used $8.9 million of the cash in 1996 to fund its working
capital needs, which consisted primarily of increases in accounts receivable and
deposits on machinery and equipment.
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In 1996, the Company distributed $23.4 million, compared to $11.0 million
in 1995, to stockholders, of which $1.4 million in 1996 and $4.0 million in 1995
was reinvested in the Company as debt payable to stockholders. The distributions
in 1996 were funded by net proceeds from the IPO and represented accumulated
earnings and the return of previously provided capital.
In 1996 and 1995, the Company acquired $11.0 million and $4.5 million,
respectively, of machinery and equipment, which was financed by long-term debt
and borrowings under the Company's revolving credit facility, and entered into
operating leases for additional machinery and equipment totaling $10.8 million
in 1996 and $7.4 million in 1995.
BALANCE SHEET DATA -- DECEMBER 31, 1996 COMPARED TO DECEMBER 31, 1995
Accounts receivable, net increased $5.5 million to $37.4 million at
December 31, 1996 from $31.9 million at December 31, 1995. This increase is due
principally to increased sales.
Deposits and other assets increased $8.4 million to $11.4 million at
December 31, 1996 from December 31, 1995. This increase is due principally to
deposits placed, offset by the related advances received, in connection with
various operating leases for manufacturing and warehouse equipment as well as
office equipment and computer software and to the establishment of a deferred
tax asset resulting from the change in tax status.
Property, plant and equipment, net increased $5.5 million to $34.7 million
at December 31, 1996 from $29.2 million at December 31, 1995. This increase is
primarily due to manufacturing and warehouse equipment acquired, partially
offset by depreciation.
Intangible assets, net increased $7.1 million on December 31, 1996 from
December 31, 1995 primarily due to goodwill recorded in connection with the
acquisition of the remaining 50% of Am-Source, Inc.
Loans and notes payable decreased $8.5 million to $29.3 million at December
31, 1996. Subordinated and other debt due to stockholders decreased $17.1
million to $1.4 million at December 31, 1996. The decreases resulted from the
repayment of bank debt and subordinated debt funded by net proceeds from the
IPO.
Long-term debt, including current installments, increased $3.1 million to
$17.6 million at December 31, 1996 primarily because of loans used to acquire
machinery and equipment.
Common stock increased $1.7 million to $2.1 million at December 31, 1996
due to the exchange of shares issued in 1996. These shares include the shares
issued to Mr. Svenningsen and others in connection with the Organization, the
shares issued in the IPO and the shares issued in connection with the
establishment of the ESOP, the payment of stock bonuses and the acquisition of
the remaining 50% of Am-Source, Inc.
Additional paid-in capital increased $52.4 million to $61.5 million as of
December 31, 1996 primarily due to the net proceeds from the IPO, and other
shares issued in connection with the IPO, partially offset by the return of
previously provided capital and a reduction in additional paid-in capital
resulting from the exchange of shares in the Organization.
CASH FLOW DATA -- YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER
31, 1994
Net cash provided by operating activities decreased by $0.4 million to $4.7
million in 1995 from $5.1 million in 1994. This slight decrease was primarily
attributable to increases in accounts receivable and inventories, offset by
increases in accounts payable and accrued expenses and net income before
depreciation and amortization. Net cash used in investing activities decreased
$2.8 million from $7.3 million to $4.5 million due to reduced capital
expenditures. Net cash provided by financing activities decreased $2.6 million
from $2.7 million to $0.1 million due to an increase in stockholder
distributions partially offset by an increase in loans, notes payable and
long-term indebtedness.
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The Company generated $10.0 million and $3.9 million from third-party
financings and $1.2 million and $6.3 million from financings with Mr.
Svenningsen in 1995 and 1994, respectively. Financings in 1995 consisted
primarily of long-term loans secured by machinery and equipment and borrowings
under revolving credit facilities, while financings in 1994 consisted primarily
of bankers acceptances and borrowings under revolving credit facilities. The
Company used $18.6 million of cash in 1995 and $11.2 million of cash in 1994 to
fund its working capital needs, which consisted primarily of increases in
accounts receivable and inventory.
In 1995, the Company distributed $11.0 million, compared to $7.5 million in
1994, to stockholders, of which $4.0 million in 1995 and $6.3 million in 1994
was reinvested in the Company as debt payable to stockholders. The remainder of
these distributions was used principally for the payment of the stockholders'
taxes. The increase from 1994 to 1995 was due to increased earnings of those
corporations, taxable to the stockholders.
In 1994, the Company acquired $8.0 million of machinery and equipment which
was financed primarily by borrowings under the Company's revolving credit
facilities and $4.0 million of which was refinanced through long-term loans
early in 1995.
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128--Earnings
per Share, effective for interim and annual periods ending after December 15,
1997. The Company does not believe that the impact of SFAS No. 128 will have a
significant impact on its earnings per share calculation.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
SFAS No. 170 establishes requirements for disclosure of comprehensive income.
The new standard becomes effective for the Company's fiscal year 1998 and
requires reclassification of earlier financial statements for comparative
purposes.
In June 1997, the FASB issued SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information. SFAS No. 131 establishes standards for
disclosure about operating segments in annual financial statements and requires
disclosure of selected information about operating segments in interim financial
reports. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. This statement supersedes
SFAS No. 14, Financial Reporting for Segments of a Business Enterprise. The new
standard becomes effective for the Company's fiscal year 1998 and requires that
comparative information from earlier years be restated to conform to the
requirements of this standard. The Company does not believe any substantial
changes to its disclosures will be made at the time SFAS No. 131 is adopted.
In November 1997, the Emerging Issues Task Force reached a consensus on
Issue 97-13, Accounting for Costs Incurred in Connection with a Consulting
Contract or an Internal Project That Combines Business Process Reengineering and
Information Technology Transformation. The consensus generally requires third
party consulting costs and internally generated costs associated with business
process reengineering projects to be expensed as incurred. The consensus became
effective for the Company's fiscal year ended December 31, 1997 and will not
have a significant impact on its financial position or results of operations.
Other pronouncements issued by the FASB or other authoritative accounting
standards groups with future effective dates are either not applicable or not
significant to the financial statements of the Company.
QUARTERLY RESULTS
As a result of the seasonal nature of certain of the Company's products,
the quarterly results of operations may not be indicative of those for a full
year. Third quarter sales are generally the highest
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of the year due to a combination of increased sales to consumers of the
Company's products during summer months as well as initial shipments of seasonal
holiday merchandise as retailers build inventory. Conversely, fourth quarter
sales are generally lower as retailers sell through inventories purchased during
the third quarter. The overall growth rate of the Company's sales in recent
years has offset, in part, this sales variability. Promotional activities,
including special dating and pricing terms, particularly with respect to
Halloween and Christmas products, result in generally lower margins and
profitability in the fourth quarter, as well as higher accounts receivables
balances and associated higher interest costs to support these balances. The
following table sets forth the historical net sales and income (loss) from
operations of the Company for 1997, 1996 and 1995 by quarter.
QUARTER ENDED
--------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
1995
Net sales...................................... $ 39,376 $41,046 $ 47,892 $ 39,089
Income from operations......................... 6,492 6,350 9,120 2,707(a)
1996
Net sales...................................... $ 47,258 $45,714 $ 54,036 $ 45,697
Income (loss) from operations.................. 7,586 7,563 9,223 (11,614)(b)
1997
Net sales...................................... $ 53,176 $49,225 $ 58,885
Income from operations......................... 10,029 9,306 11,777
- ---------------
(a) In addition to the seasonal variability described above, income from
operations for the fourth quarter of 1995 was adversely affected by the
impact of higher paper costs for which selling price adjustments were
implemented in the first quarter of 1996. Income from operations for this
quarter were also adversely affected by additional bad debt reserves
(approximately $0.5 million, representing approximately one-third of the
provision for doubtful accounts recognized for the full year 1995) and
additional computer system expenses (approximately $0.5 million).
(b) Included in fourth quarter results in 1996 are non-recurring compensation
expenses of $15.5 million, including stock and cash payments of $12.5
million to certain executives in connection with the termination or
modification of prior employment agreements and $3.0 million for the
establishment of an ESOP for the benefit of the employees of Amscan Inc.
and the payment of stock bonuses to certain of such employees.
FORWARD-LOOKING STATEMENTS
This Prospectus includes "forward-looking statements" within the meaning of
various provisions of the Private Securities Litigation Reform Act of 1995. All
statements, other than statements of historical facts, included in this
Prospectus that address activities, events or developments that the Company
expects or anticipates will or may occur in the future, including financial
projections, future capital expenditures (including the amount and nature
thereof), business strategy and measures to implement strategy, including any
changes to operations, competitive strengths, goals, expansion and growth of the
Company's and its Subsidiaries' business and operations, plans, references to
future success and other such matters are forward-looking statements. These
statements are based on certain assumptions and analyses made by the Company in
light of its experience and its perception of historical trends, current
conditions and expected future developments as well as other factors it believes
are appropriate in the circumstances. However, whether actual results and
developments will conform with the Company's expectations and predictions is
subject to a number of risks and uncertainties, including, but not limited to,
(1) the significant considerations discussed in this Prospectus, (2) the
concentration of sales by the Company to
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party goods superstores where the reduction of purchases by a small number of
customers could materially reduce the Company's sales and profitability, (3) the
concentration of the Company's credit risk in party goods superstores, many of
which are privately held and have expanded rapidly in recent years, (4) the
failure by the Company to anticipate changes in tastes and preferences of party
goods retailers and consumers, (5) the introduction of new products by the
Company's competitors, (6) the inability of the Company to increase prices to
recover fully future increases in raw material prices, especially increases in
paper prices, (7) the loss of key employees, (8) changes in general business
conditions, (9) other factors which might be described from time to time in the
Company's filings with the Commission, and (10) other factors which are beyond
the control of the Company and its Subsidiaries. Consequently, all of the
forward-looking statements made in this Prospectus are qualified by these
cautionary statements, and there can be no assurance that the actual results or
developments anticipated by the Company will be realized or, even if
substantially realized, that they will have the expected consequences to or
effects on the Company and its Subsidiaries or their business or operations. In
addition, although the Company believes that it has the product offerings and
resources needed for continued growth in revenues and margins, future revenue
and margin trends cannot be reliably predicted. Changes in such trends may cause
the Company to adjust its operations in the future. Because of the foregoing and
other factors, recent trends should not be considered reliable indicators of
future financial results.
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BUSINESS
THE COMPANY
Amscan designs, manufactures and distributes decorative party goods,
offering one of the broadest and deepest product lines in the industry. The
Company's products include paper and plastic tableware (such as plates, napkins,
tablecovers, cups and cutlery), accessories (such as invitations, thank-you
cards, table and wall decorations and balloons) and novelties (such as games and
party favors). The Company's products are sold to party goods superstores,
independent card and gift retailers, mass merchandisers and other distributors
which sell Amscan products in more than 20,000 retail outlets throughout the
world, including North America, Australia, the United Kingdom, Germany and
Sweden.
The Company currently offers over 250 product ensembles, generally
containing 30 to 150 coordinated items. These ensembles comprise a wide variety
of products to accessorize a party including matching invitations, tableware,
decorations, party favors and thank-you cards. The Company designs, manufactures
and markets party goods for a wide variety of occasions including seasonal
holidays, special events and theme celebrations. The Company's seasonal
ensembles enliven holiday parties throughout the year including New Year's,
Valentine's Day, St. Patrick's Day, Easter, Passover, Fourth of July, Halloween,
Thanksgiving, Hanukkah and Christmas. The Company's special event ensembles
include birthdays, christenings, first communions, bar mitzvahs, confirmations,
graduations, baby and bridal showers and anniversaries, while its theme-oriented
ensembles include Hawaiian luaus, Mardi Gras and '50s rock-and-roll parties.
In addition to its long-standing relationships with independent card and
gift retailers, the Company is a leading supplier to the party superstore
distribution channel. Party goods superstores are growing rapidly by providing
consumers with a one-stop source for all of their party needs, generally at
discounted prices. The retail party goods business has historically been
fragmented among independent stores and drug, discount or department store
chains. However, according to industry analysts, there has been a significant
shift of sales since 1990 to the party goods superstores channel.
Company sales to superstores represented approximately 44% of total sales
in 1996. While the number of party superstores that Amscan supplies has grown at
a CAGR in excess of 20% from 1993 to 1996, the Company's sales to superstores
have grown by a 47% CAGR during the same period. With Amscan products occupying
an increasing share of superstore shelf space in many product categories, Amscan
believes it is well positioned to take advantage of continued growth in the
party superstore channel.
Amscan's sales and cash flows have grown substantially over the past five
years. From 1991 to 1996, sales and Adjusted EBITDA (adjusted for non-recurring
items, other income or expenses, and minority interests) have grown at compound
annual rates of 20% and 28%, respectively. During the same period, Adjusted
EBITDA margins increased from approximately 14% to 20% due in part to the
Company achieving greater economies of scale in manufacturing and distribution,
and significantly reducing selling expenses as a percentage of sales. Sales and
Adjusted EBITDA for the twelve months ended September 30, 1997 were
approximately $207 million and $42 million, respectively, representing an
Adjusted EBITDA margin of approximately 20%.
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REVENUE AND ADJUSTED EBITDA GROWTH
[STRONG REVENUE AND EBITDA GROWTH BAR GRAPHS]
PARTY GOODS INDUSTRY OVERVIEW
According to industry analyst reports, the U.S. decorative party goods
industry (including tableware, accessories and novelties) generated
approximately $3.5 billion in retail sales in 1996 and has grown approximately
10% annually over the past several years. The Company believes this growth is
driven by several factors including favorable demographics and consumer spending
patterns, the emergence of the party superstore channel and growth in the number
of party events celebrated and party products available to consumers.
The Company believes that demographic trends favor continued growth in
decorative party goods sales. According to the United States Bureau of the
Census ("The Census Bureau"), between 1997 and 2005, population in the 10-19
year old age bracket is expected to increase by approximately 10%, and
population in the 20-24 year old age bracket is expected to increase by
approximately 15%. This suggests an increase in celebrations revolving around
teenagers and young adults including confirmations, bar mitzvahs, graduations
and bridal and baby showers. In addition, the 45-54 year old age bracket is
expected to increase by over 20% by 2005. According to The Census Bureau and the
United States Bureau of Labor Statistics, this population segment enjoyed the
highest median household income and spent the most money on entertainment in
1995. The Company believes that this population segment is a key buying group of
party goods for children and grandchildren, as well as products for adult
milestone events including birthdays, anniversaries and retirements.
Another factor contributing to growth in the decorative party goods
industry has been the emergence of party goods superstores which, according to
industry analysts, are poised for expansion as national penetration continues.
The Company believes that superstores are popular among consumers because of the
large variety of merchandise and substantial discounts they offer. Industry
analysts report that, over the past several years, the marketplace has begun to
accept a move toward the party goods superstore merchandising concept, similar
to earlier merchandising shifts in such product categories as toys, office
supplies, home furnishings and home improvements.
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The Company believes that party goods sales volumes have also increased, in
part, as a result of:
- the creation of new product ensembles both in response to consumer
demand and as a means of stimulating customer purchases;
- the broadening of product lines through the addition of new items and
new accessories within ensembles;
- larger retail environments allowing retailers to employ marketing
techniques which result in increased average sales per customer; and
- the celebration of an increased number of party themes and events, such
as Hawaiian luaus, Mardi Gras and '50s rock-and-roll parties.
The Company believes that by introducing products for new types of
celebrations, offering multiple product ensembles for individual celebrations
(such as multiple Halloween or birthday ensembles) and increasing the number of
"add-on" accessories, party goods suppliers have increased the frequency and
volume of consumer purchases of decorative party goods.
COMPETITIVE STRENGTHS
- Leading Supplier to the High Growth and High Volume Party Goods
Superstore Channel. In addition to its long-standing base of business
with independent card and party retailers, the Company believes that its
products account for an increasing portion of the retail sales by major
superstore chains, including Party City, Party Stores Holdings, Big Party
Corporation, The Paper Factory, The Half-Off Card Shop, Paper Warehouse
Inc. and Factory Card Outlet Corp. Approximately 44% of the Company's
sales were generated from superstores last year, and based on indications
from these chains that they intend to continue to expand nationwide, the
Company expects that sales to this segment will continue to grow
significantly.
- Single Source Supplier of Decorative Party Goods. The Company provides
one of the most extensive product lines of decorative party goods in the
industry, serving a wide variety of occasions. Amscan produces over 250
different ensembles, generally containing 30 to 150 coordinated SKUs
within each ensemble. With 14,000 SKUs, the Company is a one-stop
shopping, single-source supplier to retailers of decorative party goods.
The Company believes this breadth of product line provides enough variety
that competing retailers can each purchase Amscan products and still
differentiate themselves by the product they market to the end consumer.
- Strong Customer Relationships. The Company has built strong
relationships with its customer base which operates more than 20,000
retail outlets. The Company strives to provide superior service and, by
involving retailers in product development and marketing, seeks to become
a strategic partner to its customers.
- Product Design Leadership. The Company believes one of its strengths is
its leadership in creating innovative designs and party items. The
Company believes its product designs have a level of color, complexity
and style that are attractive to consumers and difficult to replicate.
The Company offers coordinated accessories and novelties which, the
Company believes, complement its tableware designs, enhancing the appeal
of its tableware products and encouraging "add on" impulse purchases.
- Strong and Committed Management Team. The Company's management team has
built the business into an industry leader with integrated design,
manufacturing, and distribution capabilities. Current management has been
instrumental in building the Company's strong industry position and in
the Company's achieving a 28% CAGR in Adjusted EBITDA since
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1991. The management team and other key employees have committed $6.4
million (including restricted stock grants) to the Transaction.
COMPANY STRATEGY
The Company seeks to become the primary source for consumers' party goods
requirements. The key elements of the Company's strategy are as follows:
- Strengthen Position as a Leading Provider to Party Superstores. The
Company offers convenient "one-stop shopping" for large superstore buyers
and seeks to increase its proportionate share of sales volume and shelf
space in the superstores.
- Offer the Broadest and Deepest Product Line in the Industry. The
Company strives to offer the broadest and deepest product line in the
industry. The Company helps retailers boost average purchase volume per
consumer through coordinated ensembles that promote "add on" purchases.
- Diversify Distribution Channels, Product Offering and Geographic
Presence. The Company will seek, through internal growth and
acquisitions, to expand its distribution capabilities internationally,
increase its presence in additional retail channels and further broaden
and deepen its product line.
- Provide Superior Customer Service. The Company strives to achieve high
average fill rates in excess of 95% and ensure short turnaround times.
- Maintain Product Design Leadership. The Company will continue investing
in art and design to support a steady supply of fresh ideas and create
complex, unique ensembles that appeal to consumers and are difficult to
replicate.
- Maintain State-of-the-Art Manufacturing and Distribution
Technology. The Company intends to maintain technologically advanced
production and distribution systems in order to enhance product quality,
manufacturing efficiency, cost control and customer satisfaction.
- Pursue Attractive Acquisitions. The Company believes that opportunities
exist to make acquisitions of complementary businesses to leverage the
Company's existing marketing, distribution and production capabilities,
expand its presence in the various retail channels, further broaden and
deepen its product line and penetrate international markets. The Company
receives inquiries from time to time with respect to the possible
acquisition by the Company of other entities and the Company intends to
pursue acquisition opportunities aggressively.
BUSINESS OPERATIONS
PRODUCT DESIGN
The Company's 70-person in-house design staff produces and manages the
Company's party goods. From the designs and concepts developed by the Company's
artists, the Company selects those it believes best to replace approximately
one-third of its designed product ensembles each year. For 1997, the Company
introduced approximately 50 new ensembles.
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PRODUCT LINE
The categories of products which the Company offers are tableware,
accessories and novelties. The percentages of sales for each product category
for 1994, 1995 and 1996 are set forth in the following table:
1994 1995 1996
---- ---- ----
Tableware........................................................... 58% 60% 59%
Accessories......................................................... 26 24 25
Novelties........................................................... 16 16 16
---- ---- ----
100% 100% 100%
==== ==== ====
Products. The following table sets forth the principal products in each of
the three categories:
TABLEWARE ACCESSORIES NOVELTIES
- ----------------------------- ----------------------------- -----------------------------
Decorated Balloons Buttons
Paper Plates Cascades Cocktail Picks
Paper Napkins Confetti Games
Paper Tablecovers Banners Candles
Paper Cups Crepe Mugs
Solid Color Cutouts Noise Makers
Paper and Plastic Plates Decorative Tissues Party Favors
Paper Napkins Flags Party Hats
Paper and Plastic
Tablecovers Gift Bags Pom Poms
Paper and Plastic Cups Gift Wrap T-shirts
Plastic Cutlery Guest Towels
Honeycomb Centerpieces
Invitations and Notes
Ribbons and Bows
Signs
Occasions. The Company supplies party goods for the following types of
occasions:
SEASONAL EVERYDAY THEMES
- ----------------------------- ----------------------------- -----------------------------
New Year's Anniversaries Fall
Valentine's Day Birthdays Fiesta
St. Patrick's Day Graduations Fifties Rock-and-Roll
Easter Retirements Hawaiian Luau
Passover Showers Mardi Gras
Fourth of July Weddings Patriotic
Halloween Bar Mitzvahs Religious
Thanksgiving Christenings Sports
Hanukkah First Communions Summer Fun
Christmas Confirmations
Tableware. The Company believes that tableware products are the initial
focus of consumers in planning a party, since these items are necessary in
connection with the consumption of food and beverages. To distinguish its
tableware from that of its competitors, the Company seeks to create a broad
range of unique designs for its products. In addition, the Company's tableware
products are priced competitively and affordably, having suggested retail prices
(based upon quantity and product) ranging between $1.70 and $10.00.
Accessories and Novelty Items. The Company believes that consumers are
attracted to Amscan tableware due to the breadth and array of accessory and
novelty items. Unified displays of complete ensembles in retail stores are
designed to enhance the appeal of the Company's
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tableware and encourage the impulse buying of accessories and novelties. The
Company believes that by offering a broad product line, it increases the number
of products sold per customer transaction.
MANUFACTURED PRODUCTS
Items manufactured by the Company accounted for approximately 50% of the
Company's sales in 1996. State-of-the-art printing, forming, folding and
packaging equipment support the Company's manufacturing operations. Company
facilities in Kentucky, New York, Rhode Island and California produce paper and
plastic plates, napkins, cups and other party and novelty items. This vertically
integrated manufacturing capability for many of its key products allows the
Company the opportunity to better control costs and monitor product quality,
manage inventory investment and provide efficiency in order fulfillment.
Given its size and sales volume, the Company is generally able to operate
its manufacturing equipment on the basis of at least two shifts per day thus
lowering its production costs. In addition, the Company manufactures products
for third parties allowing the Company to maintain a satisfactory level of
equipment utilization.
PURCHASED PRODUCTS
The Company sources the remainder of its products from independently-owned
manufacturers, many of whom are located in the Far East and with whom the
Company has long-standing relationships. The two largest such suppliers operate
as exclusive suppliers to the Company and represent relationships which have
been in place for more than ten years. The Company believes that the quality and
price of the products manufactured by these suppliers provide a significant
competitive advantage. The Company's business, however, is not dependent upon
any single source of supply for products manufactured for the Company by third
parties.
RAW MATERIALS
The principal raw material used by the Company in its products is paper.
The Company has historically been able to change its product prices in response
to changes in raw material costs. While the Company currently purchases such raw
material from a relatively small number of sources, paper is available from a
number of sources. The Company believes its current suppliers could be replaced
by the Company without adversely affecting its operations in any material
respect.
SALES AND MARKETING
The Company's principal sales and marketing efforts are conducted through a
domestic direct employee sales force of approximately 60 professionals servicing
over 5,000 retail accounts. These professionals have, on average, been
affiliated with the Company for approximately five years. In addition to this
seasoned sales team, the Company utilizes a select group of manufacturers'
representatives to handle specific account situations. International customers
are generally serviced by employees of the Company's foreign subsidiaries. To
support its marketing effort, the Company produces three separate product
catalogues annually, two for seasonal products and one for everyday products.
From 1991 to 1996, the Company significantly reduced selling, general and
administrative expenses as a percentage of sales, largely because of a
proportionate decrease in selling expenses.
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SG&A AND ADJUSTED EBITDA AS % OF REVENUES
The Company's practice of including party goods retailers in all facets of
the Company's product development is a key element of the Company's sales and
marketing efforts. The Company targets important consumer preferences by
integrating its own market research with the input of party goods retailers in
the creation of its designs and products. In addition, the sales organization
assists customers in the actual set-up and layout of displays of the Company's
products, and, from time to time, the Company also provides customers with
promotional displays.
DISTRIBUTION AND SYSTEMS
The Company ships its products from distribution warehouses which employ
computer assisted systems. Nonseasonal products are shipped either from
California or New York to provide fast delivery of goods to party goods
retailers at economical freight costs. In order to better control inventory
investment, seasonal products are shipped out of a central warehouse located in
New York. Products for foreign markets are shipped from the Company's
distribution warehouses in Canada, Mexico, England and Australia.
Many of the Company's sales orders are generated electronically through
hand-held units with which the sales force and many customers are equipped.
Specifically, orders are entered into the hand-held units and then transmitted
over telephone lines to the Company's mainframe computer, where they are
processed for shipment. This electronic order entry expedites the order
processing which in turn improves the Company's ability to fill customer
merchandise needs accurately and quickly.
CUSTOMERS
The Company's customers are principally party goods superstores,
independent card and party retailers, mass merchandisers and other distributors.
In the aggregate, Amscan supplies more than 20,000 retail outlets both
domestically and internationally. The Company is a leading supplier to the party
superstore channel, which has been experiencing significant growth.
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REVENUE BREAKDOWN BY RETAIL CHANNEL
1996 REVENUE OF $192.7 MILLION
[REVENUE BREAKDOWN PIE CHARTS]
The Company has a diverse customer base. Only one customer, Party City,
accounted for more than 10% of the Company's sales in 1996. Sales to Party City
accounted for 11% and 15% of the Company's sales in 1995 and 1996, respectively.
Although the Company believes its relationship with Party City is good, if it
were to significantly reduce its volume of purchases from the Company, the
Company's financial condition and results of operations could be adversely
affected.
FUTURE ACQUISITIONS
The Company believes that opportunities exist to make acquisitions of
complementary businesses to leverage the Company's existing marketing,
distribution and production capabilities, expand its presence in various retail
channels, further broaden and deepen its product line and penetrate
international markets. The Company receives inquiries from time to time with
respect to the possible acquisition by the Company of other entities. As of the
date of this Prospectus, the Company has not entered into any agreements to
acquire other companies or businesses; however, the Company intends to pursue
acquisition opportunities aggressively.
COMPETITION
The Company competes on the basis of diversity and quality of its product
designs, breadth of product line, product availability, price, reputation and
customer service. The Company has many competitors with respect to one or more
of its products but believes that there are few competitors which manufacture
and distribute products with the complexity of design and breadth of product
offerings that the Company does. Furthermore, the Company believes that its
design and manufacturing processes create an efficiency in manufacturing that
few of its competitors achieve in the production of numerous coordinated
products in multiple design types.
Competitors include smaller independent specialty manufacturers, as well as
divisions or subsidiaries of large companies with greater financial and other
resources than those of the Company. Certain of these competitors control
licenses for widely recognized images, such as cartoon or motion picture
characters, which could provide them with a competitive advantage. The Company
has pursued a strategy of developing its own designs and generally has not
pursued licensing opportunities.
EMPLOYEES
As of September 30, 1997, the Company had approximately 1,100 employees,
none of whom is represented by a labor union. The Company considers its
relationship with its employees to be good.
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FACILITIES
The Company maintains its corporate headquarters in Elmsford, New York and
conducts its principal design, manufacturing and distribution operations at the
following facilities:
OWNED OR LEASED
LOCATION PRINCIPAL ACTIVITY SQUARE FEET (WITH EXPIRATION DATE)
- ------------------------- ----------------------------- --------------------- -----------------------------
Elmsford, New York(1) Executive Offices; design and 50,000 square feet Leased (expiration date:
art production of paper party December 16, 2007)
products and decorations
Harriman, New York Manufacture of paper napkins 75,000 square feet Leased (expiration date:
and cups March 31, 1999)
Providence, Rhode Island Manufacture and distribution 51,000 square feet Leased (expiration date: June
of plastic plates, cups and 30, 2008)
bowls
Louisville, Kentucky Manufacture and distribution 183,000 square feet Leased (expiration date:
of paper plates March 31, 1999)
Anaheim, California Manufacture of novelty items 25,000 square feet Leased (expiration date:
February 28, 1999)
Newburgh, New York Manufacture and distribution 167,000 square feet Leased (expiration date:
of party products November 30, 1999)
Temecula, California(2) Distribution of party 212,000 square feet Leased (expiration date:
products and decorations February 28, 2000)
Goshen, New York Distribution of party 130,000 square feet Leased (expiration date:
products and decorations December 31, 1998)
Chester, New York(3) Distribution of party 287,000 square feet Owned
products and decorations
Montreal, Canada(4) Distribution of party 124,000 square feet Owned
products and decorations
Milton Keynes, England Distribution of party 110,000 square feet Leased (expiration date: June
products and decorations 30, 2017)
throughout United Kingdom and
Europe
Melbourne, Australia Distribution of party 10,000 square feet Owned
products and decorations in
Australia and Asia
- ------------------
(1) Prior to December 16, 1997, this property was leased by the Company from a
limited liability company which is 79%-owned by a trust established for
benefit of Mr. Svenningsen's children, 20%-owned by a trust established for
the benefit of Mr. Svenningsen's sister's children and 1%-owned by a
corporation owned by the Estate. In July 1997, such limited liability
company entered into a purchase and sale agreement pursuant to which the
Elmsford property was sold on December 16, 1997. See "Management -- Certain
Relationships and Related Transactions".
(2) Property leased by the Company from the Estate. See "Management -- Certain
Relationships and Related Transactions".
(3) Property subject to a ten-year mortgage securing a loan in the original
principal amount of $5,925,000 bearing interest at a rate of 8.51%. Such
loan matures in September 2004. The principal amount outstanding as of
September 30, 1997 was approximately $4,147,500.
(4) Property subject to a mortgage securing a loan in the original principal
amount of $2,088,000 bearing interest at a rate of the lower of Hong Kong
Bank of Canada's Cost of Funds plus 1.6% or Canadian Prime plus 0.5%. The
principal amount outstanding as of September 30, 1997 was approximately
$1,924,000.
The Company believes that its properties have been adequately maintained,
are in generally good condition and are suitable for the Company's business as
presently conducted. The Company believes its existing facilities provide
sufficient production capacity for its present needs and for its anticipated
needs in the foreseeable future. To the extent such capacity is not needed for
the manufacture of the Company's products, the Company generally uses such
capacity for the manufacture of products for others pursuant to terminable
contracts. All properties generally are used on a basis of two shifts per day.
The Company also believes that upon the expiration of its
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current leases, it either will be able to secure renewal terms or enter into
leases for alternative locations at market terms.
COMPANY ORGANIZATION
The business of Amscan Inc. was founded by John Svenningsen and his family
in 1947, and in December 1996, the Company completed its initial public
offering. Amscan Holdings, Inc. was organized on October 3, 1996 to become the
holding company for the businesses previously conducted by the Company's
principal subsidiary, Amscan Inc. and certain affiliated companies. These
affiliated companies include Trisar, Inc., which manufactures and distributes
certain of the Company's products, Amscan Distributors (Canada) Ltd. and Amscan
Svenska AB, each of which distributes the Company's products, JCS Realty Corp.
and SSY Realty Corp., each of which owns certain real estate leased to the
Company, Am-Source, Inc., the Company's supplier of plastic plates, cups and
bowls, and certain companies located in Great Britain, Australia, Germany and
Mexico which distribute the Company's products. The Company operates in a single
industry segment.
The principal executive offices of the Company are located at 80 Grasslands
Road, Elmsford, New York 10523 and the telephone number at such address is (914)
345-2020.
INTELLECTUAL PROPERTY AND LICENSES
The Company owns copyrights on the designs created by the Company and used
on its products. The Company owns trademarks in the words and designs used on or
in connection with its products. It is the practice of the Company to register
its copyrights with the United States Copyright Office to the extent it deems
reasonable. The Company does not believe that the loss of copyrights or
trademarks with respect to any particular product or products would have a
material adverse effect on the business of the Company.
The Company does not depend on licenses to any material degree in its
business and, therefore, does not incur any material licensing expenses.
LEGAL PROCEEDINGS
Neither the Company nor any of its Subsidiaries is a party to any material
pending legal proceedings. A lawsuit relating to the Transaction filed against
the Company, MergerCo, GSCP II and certain of the Company's then-directors was
voluntarily withdrawn on December 15, 1997.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below are the names, ages and positions with the Company of the
persons who are currently serving as directors and executive officers of the
Company.
NAME AGE POSITION
- --------------------- ---- -----------------------------------------------------
Terence M. O'Toole 39 Director, Chairman of the Board
Sanjeev K. Mehra 38 Director
Joseph P. DiSabato 31 Director
Gerald C. Rittenberg 45 Chief Executive Officer
James M. Harrison 46 President, Chief Financial Officer and Treasurer
William S. Wilkey 41 Senior Vice President -- Sales and Marketing
Terence M. O'Toole is a Managing Director of Goldman, Sachs & Co. in the
Principal Investment Area. He joined Goldman Sachs in 1983. He is a member of
Goldman Sachs' Investment Committee. Mr. O'Toole serves on the Board of
Directors of AMF Bowling, Inc., Insilco Corporation, 21st Century Newspapers,
Inc., Western Wireless Corporation and several other privately held companies on
behalf of Goldman Sachs. He holds a B.S. degree from Villanova University and an
M.B.A. from the Stanford Graduate School of Business.
Sanjeev K. Mehra is a Managing Director of Goldman, Sachs & Co. in the
Principal Investment Area. He joined Goldman Sachs in 1986. He is a Director of
the Stone Street and Bridge Street Funds, private equity funds affiliated with
Goldman Sachs for the benefit of its employees. Mr. Mehra serves on the Board of
Directors of Great Plains Software, Inc. and several other privately held
companies on behalf of Goldman Sachs. He holds an A.B. from Harvard University
and an M.B.A. from the Harvard Graduate School of Business Administration.
Joseph P. DiSabato is an Associate of Goldman, Sachs & Co. in the Principal
Investment Area. He joined Goldman Sachs in 1988, worked as a Financial Analyst
until 1991, and returned in 1994 as an Associate. He holds a B.S. from the
Massachusetts Institute of Technology and an M.B.A. from the Anderson Graduate
School of Management.
Gerald C. Rittenberg became Chief Executive Officer upon consummation of
the Transaction. Prior to that time, Mr. Rittenberg served as the President of
the predecessor to the Company, Amscan Inc., since April 1996, and served as
President of the Company from the time of its formation in October 1996. From
May 1997 until December 1997, Mr. Rittenberg served as Acting Chairman of the
Board. From 1991 to April 1996, he was Executive Vice President -- Product
Development of Amscan Inc. and from 1990 to 1991 he was Vice President --
Product Development of Amscan Inc. Prior to joining Amscan Inc., Mr. Rittenberg
was Senior Vice President of Different Looks, a division of Berwick Industries,
Incorporated which manufactures and distributes gift wrap and related products.
Previously, Mr. Rittenberg was Director of Operations for the packaging division
of Philip Morris Companies Inc.
James M. Harrison became President, Chief Financial Officer and Treasurer
upon consummation of the Transaction. Prior to that time, Mr. Harrison served as
the Chief Financial Officer of the predecessor to the Company, Amscan Inc.,
since August 1996 and served as Chief Financial Officer and Secretary of the
Company since February 1997. From 1993 to 1995, Mr. Harrison was the Executive
Vice President, Chief Operating Officer, Secretary, Treasurer and a member of
the Board of Directors of The C.R. Gibson Company, a manufacturer and
distributor of paper gift products. From 1988 to 1993, Mr. Harrison was the
Chief Financial Officer of The C.R. Gibson Company.
William S. Wilkey has served as the Senior Vice President -- Sales and
Marketing of Amscan Inc. since 1992 and as Vice President -- Marketing and Field
Sales from 1990 to 1992. From 1988 to
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1990, Mr. Wilkey was employed by Paper Art, a manufacturer and distributor of
party goods (currently called Creative Expressions Group, Inc.), where he served
as National Sales Manager.
EXECUTIVE COMPENSATION AND RELATED INFORMATION
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning the compensation
earned for the past two years for the Company's former and current Chief
Executive Officer and each other executive officer of the Company as of December
31, 1996 whose aggregate salary and bonus for 1996 exceeded $100,000. The
amounts shown include compensation for services in all capacities that were
provided to the Company or its Subsidiaries. Unless otherwise indicated, amounts
shown were paid by the Company's principal Subsidiary, Amscan Inc. Information
with respect to Company Common Stock relates to the Company Common Stock prior
to the consummation of the Transaction.
LONG TERM
COMPENSATION
------------
ANNUAL COMPENSATION SECURITIES
------------------------ UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(A) OPTIONS(B) COMPENSATION(C)
- ----------------------------- ---- -------- ---------- ------------ ---------------
John A. Svenningsen 1996 $315,609 $ 0(d) $ 5,939
Former CEO and Chairman 1995 289,399 0(d) 10,614
Gerald C. Rittenberg 1996 211,000 2,800,000(e) 1,895
Chief Executive Officer 1995 200,269 1,682,000(e) 4,317
William S. Wilkey 1996 181,000 1,036,000(f) 100,000 21,679
Senior Vice President -- 1995 172,500 757,000(f) 4,317
Sales and Marketing
James M. Harrison 1996(g) 62,500 50,000 50,000 0
President, Chief Financial
Officer and Treasurer
- ---------------
(a) Represents amounts earned with respect to the years indicated, whether paid
or accrued.
(b) Reflects stock options on shares of Company Common Stock ("Company Stock
Options") granted pursuant to the 1996 Stock Option Plan for Key Employees
(the "Prior Stock Plan") at an exercise price equal to the fair market
value on the date of grant.
(c) Represents contributions by the Company under the Profit Sharing & Savings
Plan maintained by the Company's principal Subsidiary, Amscan Inc., and
under the ESOP, as well as insurance premiums paid by the Company with
respect to term life insurance for the benefit of the named executive
officer.
(d) Prior to the IPO, which was consummated in December 1996, certain entities
which are now Subsidiaries of the Company elected to be taxed as S
corporations under the Code. Mr. Svenningsen received $11,009,000 and
$15,841,000 from such entities in 1995 and 1996, respectively. Such amounts
represented distributions to him as an S corporation shareholder and, with
respect to 1996, additional distributions of accumulated capital and
previously-taxed earnings in conjunction with the IPO.
(e) Represents bonuses earned by Mr. Rittenberg pursuant to his prior employment
agreement with Amscan Inc. which terminated in December 1996 in connection
with the IPO.
(f) Represents bonuses earned by Mr. Wilkey pursuant to an employment agreement
with Amscan Inc. which expired on December 31, 1996.
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(g) Mr. Harrison became an employee and Chief Financial Officer of Amscan Inc.
on August 1, 1996.
OPTION GRANTS TABLE
The following table sets forth information concerning stock options which
were granted during 1996 to the executive officers named in the Summary
Compensation Table. The options were granted pursuant to the Prior Stock Plan.
Information with respect to options relates to options on the Company Common
Stock prior to the consummation of the Transaction.
OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL
REALIZABLE
% OF VALUE AT ASSUMED
TOTAL OPTIONS ANNUAL RATES OF
GRANTED TO STOCK PRICE
EMPLOYEES APPRECIATION
IN EXPIRATION FOR OPTION TERM
OPTIONS FISCAL EXERCISE DATE ----------------------
NAME GRANTED(1) YEAR PRICE OF OPTIONS 5% 10%
- ---------------- ---------- ------------- -------- ----------------- -------- ----------
William S.
Wilkey........ 100,000 23.5% $ 12 December 19, 2006 $754,673 $1,912,491
James W.
Harrison...... 50,000 11.8 12 December 19, 2006 377,337 956,245
(1) All Company Stock Options listed in this column were exercisable ratably
over four years beginning one year from the date of grant, and were
scheduled to expire ten years after the date of grant. To the extent
permitted under the Code, such options were incentive stock options.
FISCAL 1996 YEAR END OPTION VALUES
NUMBER OF
UNEXERCISED
OPTIONS AT
FISCAL 1996
YEAR END
(EXERCISABLE/
NON-EXERCISABLE)
----------------
William S. Wilkey........................................................ 100,000
James M. Harrison........................................................ 50,000
At December 31, 1996, the market price of the Company Common Stock was $12
per share, an amount equal to the exercise price of each of the Company Stock
Options granted to Mr. Wilkey and Mr. Harrison. As a result, none of such
Company Stock Options was "in the money" at December 31, 1996. No Company Stock
Options were exercised in the most recent fiscal year.
At the Effective Time, the Company Stock Options listed in the foregoing
table were converted pursuant to the New Employment Arrangements into options on
the common stock of the Company following the Transaction and a cash bonus
payment. For a description of such conversion and a description of additional
options granted to certain employees of the Company in connection with the
Transaction, see "-- New Employment Arrangements".
NEW EMPLOYMENT ARRANGEMENTS
Concurrent with the execution of the Transaction Agreement, MergerCo
entered into the New Employment Arrangements with certain employees of the
Company relating, for certain of such employees, to their employment with the
Company following the Effective Time and relating to their ownership of Company
Common Stock and options to purchase shares of Company Common Stock following
the Transaction, as more fully described below. At the Effective Time, certain
of the
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New Employment Arrangements replaced and superseded former employment agreements
for such employees and became obligations of the Company, as the surviving
company in the Transaction.
Employment Agreement with Gerald C. Rittenberg. Under the Employment
Agreement between the Company and Gerald C. Rittenberg, dated as of August 10,
1997 (the "Rittenberg Employment Agreement"), Mr. Rittenberg serves as Chief
Executive Officer of the Company for a three-year period commencing at the
Effective Time (an "Initial Term"), which term will be extended automatically
for successive additional one-year periods (each an "Additional Term"), unless
either the Company gives Mr. Rittenberg, or Mr. Rittenberg gives the Company,
written notice of the intention not to extend the term no less than twelve
months prior to the end of the Initial Term or Additional Term, whichever is
then in effect. Mr. Rittenberg will receive during the Initial Term an annual
base salary of $295,000 which will be increased by 5% at the beginning of each
Additional Term. During Mr. Rittenberg's Initial Term and any Additional Term,
Mr. Rittenberg will be eligible for an annual bonus for each calendar year
comprised of (i) a non-discretionary bonus equal to 50% of his annual base
salary if certain operational and financial targets determined by the Board of
Directors in consultation with Mr. Rittenberg are attained, and (ii) a
discretionary bonus awarded in the sole discretion of the Board of Directors.
The Rittenberg Employment Agreement also provides for other customary benefits
including incentive, savings and retirement plans, paid vacation, health care
and life insurance plans, and expense reimbursement.
Under the Rittenberg Employment Agreement, if Mr. Rittenberg's employment
were to be terminated by the Company other than for Cause (as defined below),
death or Disability (as defined below), the Company would be obligated to pay
Mr. Rittenberg a lump sum cash payment in an amount equal to the sum of (1)
accrued unpaid salary, earned but unpaid bonus for any prior year, any deferred
compensation and accrued but unpaid vacation pay (collectively, "Accrued
Obligations") plus (2) severance pay equal to his annual base salary, provided,
however, that in connection with a termination by the Company other than for
Cause following a Sale Event (as defined below), such severance pay will be
equal to Mr. Rittenberg's annual base salary multiplied by the number of years
the Company elects as the Restriction Period (as defined below) in connection
with the non-competition provisions. Upon termination of Mr. Rittenberg's
employment by the Company for Cause, death, Disability or if he terminates his
employment, Mr. Rittenberg will be entitled to his unpaid Accrued Obligations.
Additionally, upon termination of Mr. Rittenberg's employment during his Initial
Term or any Additional Term (1) by the Company other than for Cause or (2) by
reason of his death or Disability, or if the Initial Term or any Additional Term
is not renewed at its expiration (other than for Cause), the Rittenberg
Employment Agreement provides for payment of a prorated portion of the bonus to
which Mr. Rittenberg would otherwise have been entitled.
As used in the Rittenberg Employment Agreement: (a) "Cause" means (1)
conviction of a felony (excluding felonies under the Motor Vehicle Code referred
to therein); (2) any act of intentional fraud against the Company; (3) any act
of gross negligence or willful misconduct with respect to Mr. Rittenberg's
duties under the Rittenberg Employment Agreement; and (4) any act of willful
disobedience in violation of specific reasonable directions of the Board of
Directors consistent with Mr. Rittenberg's duties, and (b) "Disability" means
that Mr. Rittenberg has been unable, for a period of (i) 180 consecutive days or
(ii) an aggregate of 210 days in a period of 365 consecutive days, to perform
his duties under the Rittenberg Employment Agreement, as a result of physical or
mental illness or injury.
The Rittenberg Employment Agreement also provides that during his Initial
Term, any Additional Term and during the three-year period following any
termination of his employment (the "Restriction Period"), Mr. Rittenberg shall
not participate in or permit his name to be used or become associated with any
person or entity that is or intends to be engaged in any business which is in
competition with the business of the Company, or any of its Subsidiaries or
controlled affiliates, in any country in which the Company or any of its
Subsidiaries or controlled affiliates operate, compete or are engaged in such
business or at such time intend to so operate, compete or become engaged
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in such business (a "Competitor"), provided, however, that if Mr. Rittenberg's
employment is terminated by the Company other than for Cause following a Sale
Event, the Restriction Period will be instead a one, two or three-year period at
the election of the Company. For purposes of the Rittenberg Employment
Agreement, "Sale Event" means either (1) the acquisition by any individual,
entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the
Exchange Act) that is a Competitor (as defined in the Rittenberg Employment
Agreement), other than GSCP and its affiliates, of a majority of the outstanding
voting stock of the Company or (2) the sale or other disposition (other than by
way of merger or consolidation) of all or substantially all of the assets of the
Company and its Subsidiaries taken as a whole to any person or group of persons
that is a Competitor, provided, however, that an underwritten initial public
offering of shares of Company Common Stock pursuant to a registration statement
under the Securities Act will not constitute a Sale Event. The Rittenberg
Employment Agreement also provides for certain other restrictions during the
Restriction Period in connection with (a) the solicitation of persons or
entities with business relationships with the Company and (b) inducing any
employee of the Company to terminate their employment or offering employment to
such persons, in each case subject to certain conditions.
Pursuant to the Rittenberg Employment Agreement, Mr. Rittenberg contributed
to MergerCo immediately prior to the Effective Time, 272,728 shares of Company
Common Stock in exchange for 60.0 shares of MergerCo Common Stock, having an
aggregate value equal to 272,728 times the Cash Consideration of $16.50 per
share, or approximately $4.5 million, which shares of MergerCo Common Stock were
valued at the purchase price for which GSCP purchased common shares of MergerCo
immediately prior to the Effective Time (the "New Purchase Price"). At the
Effective Time, such shares of MergerCo Common Stock were converted into 60.0
shares of Company Common Stock as the surviving company in the Transaction (as
converted, the "Rollover Stock").
Also pursuant to the Rittenberg Employment Agreement, following the
Effective Time, Mr. Rittenberg was granted options ("New Options") to purchase
16.648 shares of Company Common Stock. The New Options were granted pursuant to
a new stock incentive plan and related option agreement (together, the "Option
Documents"), which were adopted by the Company following the Effective Time and
are more fully described below. Such New Options vest in equal annual
installments over a five-year period and are subject to forfeiture upon
termination of Mr. Rittenberg's employment if not vested and exercised within
certain time periods specified in the Option Documents. Unless sooner exercised
or forfeited as provided in the Option Documents, the New Options will expire on
the tenth anniversary of the Effective Time.
Mr. Rittenberg is not permitted to sell, assign, transfer, pledge or
otherwise encumber any New Options, shares of Rollover Stock or shares of
Company Common Stock acquired upon exercise of the New Options, except as
provided in the Stockholders' Agreement and the Option Documents, and the shares
of Rollover Stock and shares of Company Common Stock acquired upon exercise of
the New Options are subject to the terms of the Stockholders' Agreement.
At the Effective Time, the Rittenberg Employment Agreement replaced and
superseded Mr. Rittenberg's former employment agreement with the Company.
Employment Agreement with James M. Harrison. Under the Employment
Agreement, dated August 10, 1997, by and between the Company and James M.
Harrison (the "Harrison Employment Agreement"), Mr. Harrison serves as President
of the Company for a three-year Initial Term at an annual base salary of
$275,000. The Harrison Employment Agreement contains provisions for Additional
Terms, salary increases during any Additional Term, non-discretionary and
discretionary bonus payments, severance, other benefits, definitions of Cause
and Disability, and provisions for non-competition and non-solicitation similar
to those in the Rittenberg Employment Agreement, with the exception of the
provision for an election by the Company of a one, two or three-year Restriction
Period following a Sale Event; under the Harrison Employment Agreement, the
Restriction Period is fixed at three years and severance pay is fixed at one
year's annual base salary. In addition, the
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Harrison Employment Agreement provides that Mr. Harrison's bonus for the 1997
calendar year will be equal to the bonus that would have been payable to him in
accordance with the relevant terms of his current employment agreement with the
Company, without taking into account any incremental financing or transaction
costs attributable to the Transaction as determined in good faith by the Board.
The Harrison Employment Agreement also provides that Mr. Harrison will receive a
bonus payment of $105,000 on March 15, 1998, in addition to any other bonus
payable.
Pursuant to the Harrison Employment Agreement, following the Effective
Time, Mr. Harrison was granted New Options to purchase 13.874 shares of Company
Common Stock. Such New Options were granted on terms similar to those granted
pursuant to the Rittenberg Employment Agreement.
Additionally, under the Harrison Employment Agreement, Mr. Harrison
converted, as of the Effective Time, his Company Stock Options to purchase
50,000 shares of Company Common Stock into options ("Rollover Options") to
purchase 2.394 shares of Company Common Stock. The Rollover Options have an
exercise price per share (the "Rollover Exercise Price") equal to $54,545. Mr.
Harrison also received at the Effective Time a cash bonus equal to $176,041 in
connection therewith. The Rollover Options were granted pursuant to the Option
Documents and on the same terms as the New Options.
Pursuant to the Harrison Employment Agreement, Mr. Harrison was granted
immediately prior to the Effective Time, 15.0 shares of MergerCo Common Stock
(the "Restricted Stock"), having an aggregate value of $1,125,000, based on the
New Purchase Price, which shares were converted in the Transaction into 15.0
shares of Company Common Stock. During the Stock Restricted Period (as defined
below), the Restricted Stock will be forfeitable and may not be sold, assigned,
transferred, pledged or otherwise encumbered by Mr. Harrison. For purposes of
the Harrison Employment Agreement, the "Stock Restricted Period" means the
period beginning on the date of grant of the Restricted Stock and ending on the
earliest of (i) the occurrence of an IPO (as such term is defined in the
Stockholders' Agreement); (ii) immediately prior to the consummation of a
transaction or series of transactions, approved by the Board of Directors,
pursuant to which a person, entity or group (within the meaning of Section
13(d)(3) or 14(d)(2) of the Exchange Act, other than Goldman Sachs or any of its
affiliates, acquires a majority of the outstanding voting stock of the Company;
and (iii) the termination of Mr. Harrison's employment with the Company, (1)
because of his death, (2) by the Company without Cause, (3) by Mr. Harrison
because of the Company's material breach of its obligations under the Harrison
Employment Agreement, (4) by Mr. Harrison if the Company imposes on him duties
or work conditions materially burdensome to him which are inconsistent with his
prior duties and work conditions or (5) because of Mr. Harrison's Disability;
provided, however, that the Stock Restricted Period ended with respect to 25% of
the shares of Restricted Stock on January 1, 1998 and with respect to the
remaining 75%, in equal installments on January 1 of each of the years 1999
through 2007. Pursuant to the Harrison Employment Agreement, upon the voluntary
or involuntary termination of Mr. Harrison's employment during the Stock
Restricted Period for any reason other than a reason listed in clause (iii) of
the preceding sentence, all shares of Restricted Stock (with respect to which
the Stock Restricted Period has not then ended) will be forfeited and returned
to the Company without payment.
Mr. Harrison is not permitted to sell, assign, transfer, pledge or
otherwise encumber any New Options, Rollover Options, shares of Restricted Stock
or shares of Company Common Stock acquired upon exercise of the New Options or
Rollover Options (in either case, "Option Shares"), except as provided in the
Stockholders' Agreement and the Option Documents, and the shares of Restricted
Stock and Option Shares will be subject to the terms of the Stockholders'
Agreement.
At the Effective Time, the Harrison Employment Agreement replaced and
superseded Mr. Harrison's former employment agreement with the Company, dated as
of February 1, 1997 (the "Prior Harrison Employment Agreement"). At that time,
in consideration and in full satisfaction, and in lieu of the payment of any
Bonus (other than as set forth above) or Sale Bonus (as such terms
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are defined in the Prior Harrison Employment Agreement), the Company paid to Mr.
Harrison, immediately after the Effective Time, $270,000 in cash. The Harrison
Employment Agreement also provides that none of the Transaction or other
transactions and arrangements contemplated by the Transaction Agreement, the
Stockholders' Agreement, the Voting Agreement and the Harrison Employment
Agreement would be or result in or give rise to any change of control or
potential change of control under or constitute good reason for Mr. Harrison
terminating the Prior Harrison Employment Agreement.
Stock and Option Agreement with William S. Wilkey. Pursuant to a Stock and
Option Agreement, dated as of August 10, 1997, by and between the Company and
William S. Wilkey (the "Wilkey Agreement"), Mr. Wilkey contributed to the
Company immediately after the Effective Time $500,000 in cash in exchange for
6.6666667 shares of Company Common Stock ("New Stock") valued at the New Cost
Per Share. Mr. Wilkey made payment to the Company for the New Stock immediately
after the Effective Time and borrowed the funds for such payment from the
Company. Such borrowing is evidenced by a personal full recourse note maturing
on March 15, 2001, accruing interest at 6.65%, compounded annually, and payable
in annual payments of principal and interest equal to one-quarter of any bonus
Mr. Wilkey receives from the Company (provided, that the first such payment will
be made from any bonus corresponding to the 1998 calendar year), with any
portion of the note remaining at maturity payable at maturity. Mr. Wilkey also
entered into a related stock pledge agreement with the Company.
Also pursuant to the Wilkey Agreement, following the Effective Time, Mr.
Wilkey was granted New Options to purchase 11.654 shares of Company Common
Stock. Such New Options were granted on terms similar to those granted pursuant
to the Rittenberg Employment Agreement.
Additionally, Mr. Wilkey converted, as of the Effective Time, his Company
Stock Options to purchase 100,000 shares of Company Common Stock into Rollover
Options to purchase 4.787 shares of Company Common Stock. The Rollover Options
have a Rollover Exercise Price equal to $54,545. Mr. Wilkey also received at the
Effective Time a cash bonus equal to $352,082 in connection therewith. The
Rollover Options were granted pursuant to the Option Documents and on the same
terms as the New Options.
Mr. Wilkey is not be permitted to sell, assign, transfer, pledge or
otherwise encumber any New Options, Rollover Options, shares of New Stock or
Option Shares, except as provided in the Stockholders' Agreement and the Option
Documents, and the shares of New Stock and Option Shares are subject to the
terms of the Stockholders' Agreement.
The Wilkey Agreement is not intended to, and does not, supersede, amend,
modify or replace Mr. Wilkey's employment agreement with the Company, dated as
of October 4, 1996 (the "Wilkey Employment Agreement"), which, except for
certain provisions thereof relating to option grants under the Prior Stock Plan,
which plan was terminated at the Effective Time (and which provisions therefore
are no longer operative), will remain in full force and effect.
Under the terms of the Wilkey Employment Agreement, which commenced on
January 1, 1997, Mr. Wilkey is employed as Senior Vice President -- Sales and
Marketing of the Company for a period of five years. Mr. Wilkey received an
initial base salary of $200,000 for 1997, which will be increased by 5% each
successive year during the term of the agreement. In addition, Mr. Wilkey is
entitled to receive an annual bonus which will be determined by a formula which
takes into account the amount by which sales and profits are increased on a year
to year basis. Mr. Wilkey's agreement also provides that upon termination of
employment he may not for a period of three years be employed by, or associated
in any manner with, any business which is competitive with the Company. The
Wilkey Employment Agreement may be terminated by the Company upon the death or
permanent disability of Mr. Wilkey or for "cause".
Employment Agreement with Diane D. Spaar. Under the Employment Agreement,
dated August 10, 1997, by and between the Company and Diane D. Spaar (the "Spaar
Employment
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Agreement"), Ms. Spaar serves as Senior Vice President of Creative Development
of the Company for a three-year Initial Term at an annual base salary of
$200,000. The Spaar Employment Agreement contains provisions for Additional
Terms, salary increases during any Additional Term, non-discretionary and
discretionary bonus payments, severance, other benefits, definitions of Cause
and Disability, and provisions for non-competition and non-solicitation similar
to those in the Harrison Employment Agreement. In addition, the Spaar Employment
Agreement provides that Ms. Spaar's bonus for the 1997 calendar year will be
equal to the bonus that would have been payable to her in accordance with the
relevant terms of her current employment agreement with the Company, without
taking into account any incremental financing or transaction costs attributable
to the Transaction as determined in good faith by the Board.
Pursuant to the Spaar Employment Agreement, Ms. Spaar contributed to the
Company immediately after the Effective Time $100,000 in cash in exchange for
1.3333333 shares of New Stock valued at the New Cost Per Share. Ms. Spaar made
payment to the Company for the New Stock immediately after the Effective Time
and borrowed the funds for such payment from the Company. Such borrowing is
evidenced by a personal full recourse note maturing in three years, accruing
interest at 6.07%, compounded annually, and payable in 36 equal monthly
installments of principal and interest. Ms. Spaar also entered into a related
stock pledge agreement with the Company.
Pursuant to the Spaar Employment Agreement, following the Effective Time,
Ms. Spaar was granted New Options to purchase 9.434 shares of Company Common
Stock. Such New Options were granted on terms similar to those granted pursuant
to the Rittenberg Employment Agreement.
Additionally, Ms. Spaar converted, as of the Effective Time, her Company
Stock Options to purchase 50,000 shares of Company Common Stock into Rollover
Options to purchase 2.393 shares of Company Common Stock. The Rollover Options
have a Rollover Exercise Price equal to $59,659. Ms. Spaar also received at the
Effective Time a cash bonus equal to $137,664 in connection therewith. The
Rollover Options were granted pursuant to the Option Documents and on the same
terms as the New Options.
Ms. Spaar is not permitted to sell, assign, transfer, pledge or otherwise
encumber any New Options, Rollover Options, shares of New Stock or Option
Shares, except as provided in the Stockholders' Agreement and the Option
Documents, and the shares of New Stock and Option Shares are subject to the
terms of the Stockholders' Agreement.
At the Effective Time, the Spaar Employment Agreement replaced and
superseded Ms. Spaar's former employment agreement with the Company. The Spaar
Employment Agreement also provides that none of the Transaction or other
transactions and arrangements contemplated by the Transaction Agreement, the
Stockholders' Agreement, the Voting Agreement or the Spaar Employment Agreement
would be or result in or give rise to any change of control under or good reason
for Ms. Spaar terminating her current employment agreement.
Employment Agreement with Katherine A. Kusnierz. Under the Employment
Agreement, dated August 10, 1997, by and between the Company and Katherine A.
Kusnierz (the "Kusnierz Employment Agreement"), Ms. Kusnierz serves as Vice
President of Product Design of the Company for a three-year Initial Term at an
annual base salary of $200,000. The Kusnierz Employment Agreement contains
provisions for Additional Terms, salary increases during any Additional Term,
non-discretionary and discretionary bonus payments, severance, other benefits,
definitions of Cause and Disability, and provisions for non-competition and
non-solicitation similar to those in the Harrison Employment Agreement.
Pursuant to the Kusnierz Employment Agreement, Ms. Kusnierz contributed to
the Company immediately after the Effective Time $150,000 in cash in exchange
for 2.0 shares of New Stock valued at the New Cost Per Share. Ms. Kusnierz made
payment to the Company for the New Stock immediately after the Effective Time
and borrowed the funds for such payment from the Company.
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Such borrowing is evidenced by a personal full recourse note maturing in three
years, accruing interest at 6.07%, compounded annually, and payable in 36 equal
monthly installments of principal and interest. Ms. Kusnierz also entered into a
related stock pledge agreement with the Company.
Pursuant to the Kusnierz Employment Agreement, following the Effective
Time, Ms. Kusnierz was granted New Options to purchase 11.099 shares of Company
Common Stock. Such New Options were granted on terms similar to those granted
pursuant to the Rittenberg Employment Agreement.
Additionally, Ms. Kusnierz converted, as of the Effective Time, her Company
Stock Options to purchase 10,000 shares of Company Common Stock into Rollover
Options to purchase 0.478 shares of Company Common Stock. The Rollover Options
have a Rollover Exercise Price equal to $59,659. Ms. Kusnierz also received at
the Effective Time a cash bonus equal to $32,042 in connection therewith. The
Rollover Options were granted pursuant to the Option Documents and on the same
terms as the New Options.
Ms. Kusnierz is not permitted to sell, assign, transfer, pledge or
otherwise encumber any New Options, Rollover Options, shares of New Stock or
Option Shares, except as provided in the Stockholders' Agreement and the Option
Documents, and the shares of New Stock and Option Shares are subject to the
terms of the Stockholders' Agreement.
Other Employment Matters. The Company has agreed in the Transaction
Agreement that, for a period of at least two years from the Effective Time,
subject to applicable law, the Company and its Subsidiaries will provide
benefits to their employees as a group (and not necessarily on an
individual-by-individual or group-by-group basis) that will, in the aggregate,
be similar to those currently provided by the Company and its Subsidiaries to
their employees.
AMSCAN HOLDINGS, INC. 1997 STOCK INCENTIVE PLAN
Following consummation of the Transaction, the Company adopted the Amscan
Holdings, Inc. 1997 Stock Incentive Plan (the "Stock Incentive Plan") under
which the Company may grant incentive awards in the form of shares of Company
Common Stock ("Restricted Stock Awards"), options to purchase shares of Company
Common Stock ("Company Stock Options") and stock appreciation rights ("Stock
Appreciation Rights") to certain directors, officers, employees and consultants
("Participants") of the Company and its affiliates. The total number of shares
of Company Common Stock initially reserved and available for grant under the
Stock Incentive Plan is 120 shares. A committee of the Company's board of
directors (the "Committee"), or the board itself in the absence of a Committee,
is authorized to make grants and various other decisions under the Stock
Incentive Plan. Unless otherwise determined by the Committee, any Participant
granted an award under the Stock Incentive Plan must become a party to, and
agree to be bound by, the Stockholders' Agreement.
Company Stock Option awards under the Stock Incentive Plan may include
incentive stock options, nonqualified stock options, or both types of Company
Stock Options, in each case with or without Stock Appreciation Rights. Company
Stock Options are nontransferable (except under certain limited circumstances)
and, unless otherwise determined by the Committee, have a term of ten years.
Upon a Participant's death or when the Participant's employment with the Company
or the applicable affiliate of the Company, is terminated for any reason, such
Participant's previously unvested Company Stock Options are forfeited and the
Participant or his or her legal representative may, within three months (if
termination of employment is for any reason other than death) or one year (in
the case of the Participant's death), exercise any previously vested Company
Stock Options. Stock Appreciation Rights may be granted in conjunction with all
or part of any Company Stock Option award, and are exercisable, subject to
certain limitations, only in connection with the exercise of the related Company
Stock Option. Upon termination or exercise of the related Company Stock Option,
Stock Appreciation Rights terminate and are no longer exercisable. Stock
Appreciation Rights are transferable only with the related Company Stock
Options.
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Unless otherwise provided in the related award agreement or, if applicable,
the Stockholders' Agreement, immediately prior to certain change of control
transactions described in the Stock Incentive Plan, all outstanding Company
Stock Options and Stock Appreciation Rights will, subject to certain
limitations, become fully exercisable and vested and any restrictions and
deferral limitations applicable to any Restricted Stock Awards will lapse.
The Stock Incentive Plan will terminate ten years after its effective date;
however, awards outstanding as of such date will not be affected or impaired by
such termination. The Company's board of directors and the Committee have
authority to amend the Stock Incentive Plan and awards granted thereunder,
subject to the terms of the Stock Incentive Plan.
COMPENSATION OF DIRECTORS
The Company currently does not compensate its directors other than for
expense reimbursement.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1996, the Company had no compensation committee. During 1996, Mr.
Svenningsen, then Chairman of the Board and Chief Executive Officer of the
Company, participated in deliberations concerning executive compensation. During
1997, prior to consummation of the Transaction, the members of the Compensation
Committee were Messrs. Rosenberry and Tugwell. See "-- Certain Relationships and
Related Transactions". Following the consummation of the Transaction, the
Company has no compensation committee.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Prior to the Organization and the IPO, Amscan was privately held and its
business was conducted through corporations owned principally by Mr.
Svenningsen. These corporations entered into a variety of transactions and other
arrangements with Mr. Svenningsen and entities under his control, a number of
which have already been terminated. The remaining transactions and arrangements
are described below.
During 1996, the Company leased certain of its facilities from Mr.
Svenningsen or from entities that Mr. Svenningsen either owned directly or in
which he had a direct or indirect beneficial interest. The Company has paid rent
and expenses for those facilities on terms which it believes are at least as
favorable to the Company as the terms which would have been available for leases
negotiated with unaffiliated persons at the inception of each lease.
In March 1996, the Company began leasing approximately 45,000 square feet
for the Company's administrative headquarters in an office building of
approximately 90,000 square feet in Elmsford, New York. Prior to December 16,
1997, the building was owned by a limited liability company which is 79%-owned
by a trust established for the benefit of Mr. Svenningsen's children, 20%-owned
by a trust established for the benefit of Mr. Svenningsen's sister's children
and 1%-owned by a corporation owned by the Estate. Rent expense relating to this
lease was $752,000 for the year ended December 31, 1996. This lease, as amended,
provided for annual rent of $1,003,000 and a term which was scheduled to expire
on February 28, 2001. In July 1997, the limited liability company that owns the
building entered into a purchase and sale agreement pursuant to which the
Elmsford property was sold on December 16, 1997. Prior to March 1996, the
Company's headquarters had been in a facility owned by Mr. Svenningsen. Rent
expense related to that facility was $196,000 for the year ended December 31,
1996.
During 1996, the Company leased a 212,000 square foot warehouse in
Temecula, California from Mr. Svenningsen. Rent expense related to this
warehouse was $1,186,000 for the year ended December 31, 1996. The expiration
date of this lease, as amended, is February 28, 2000; however, the Company has
options to renew at market rental for two additional five-year periods.
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During 1996, the aggregate rent paid to Mr. Svenningsen or the entities
owned directly or indirectly by him was $2,134,000. Future minimum lease
payments for 1997, 1998, 1999, 2000 and 2001 are $2,246,000, $2,309,000,
$2,374,000, $1,239,000 and $167,000, respectively.
The Company and Mr. Svenningsen entered into an agreement pursuant to which
the Company agreed to provide Mr. Svenningsen with the right to seek
reimbursement from the Company for any income tax obligation attributable to any
period prior to the organization of the Company in December 1996 (including any
gross-up for additional taxes), but only to the extent that such tax is
attributable to income that was not distributed to Mr. Svenningsen.
Alternatively, in the event that the status of Amscan Inc. and certain other
Subsidiaries of the Company, including Am-Source, Inc., JCS Realty Corp. or SSY
Realty Corp. as a S corporation is not respected, the Company was provided the
right to seek reimbursement from Mr. Svenningsen, but only to the extent that
Mr. Svenningsen is entitled to a tax refund attributable to amounts he
previously included in income in his capacity as a stockholder of such
corporations. In connection with the Transaction, the Company and the
Svenningsen Stockholders have entered into the Tax Indemnification Agreement,
pursuant to which the parties have agreed to indemnify one another with respect
to certain tax liabilities that may arise in connection with the election by
certain Subsidiaries of the Company to have been treated and operated as S
corporations under the Code. See "The Transaction -- Tax Indemnification
Agreement".
During September 1997, the Company entered into an agreement to convert
$4.0 million of trade accounts receivable from a customer into an equity
interest. The Company subsequently transferred this interest to the Estate for
(i) a cash payment of $1.0 million, (ii) satisfaction of approximately $2.0
million of certain debts and future lease obligations owed to the Estate, and
(iii) substantially all of the assets of Ya Otta Pinata ("Ya Otta"), a
California corporation 100% owned by the Estate, at a valuation of approximately
$1.0 million. Ya Otta manufactures pinatas which historically had been sold by
the Company's sales force with no commissions charged to Ya Otta. After the
Organization, the Company's sales force continued to sell pinatas manufactured
by Ya Otta and on any sales after the Organization, the Company receives a 5%
sales commission. For the year ended December 31, 1996, sales by Ya Otta were
approximately $3,650,000.
Nupaq-Group, Inc., a California corporation which is 100% owned by the
Estate ("Nupaq"), provides packaging services for the Company's novelty item
manufacturing operations. For the year ended December 31, 1996, the Company paid
Nupaq approximately $260,000 for such services.
During 1996, the Company amended its revolving credit agreement with
several banks, including Fleet Bank N.A. ("Fleet"). At the time such credit
agreement was entered into, Mr. Tugwell was President and Chief Executive
Officer of Fleet. Such revolving credit agreement has since been replaced by a
new credit facility. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources".
Under the Transaction Agreement, the Company has agreed to indemnify for
six years after the Effective Time all former directors, officers, employees and
agents of the Company, to the fullest extent currently provided in the Company's
Certificate of Incorporation and By-laws consistent with applicable law, for
acts or omissions occurring prior to the Effective Time to the extent such acts
or omissions are uninsured and will, subject to certain limitations, maintain
for six years its prior directors' and officers' liability insurance.
Goldman Sachs and its affiliates have certain interests in the Transaction
and in the Company in addition to being the Initial Purchaser of the Notes.
Messrs. O'Toole and Mehra are Managing Directors of Goldman Sachs, Mr. DiSabato
is an Associate of Goldman Sachs and each of them is a director of the Company.
GSCP currently owns approximately 81.7% of the outstanding shares of Company
Common Stock. Accordingly, the general and managing partners of each of the GSCP
Fund Partners (as defined herein), which are affiliates of Goldman Sachs and The
Goldman Sachs Group, will each be deemed to be an "affiliate" of GSCP and the
Company. See "Ownership of
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Capital Stock". Goldman Sachs received an underwriting discount of approximately
$3.3 million in connection with its purchase and resale of the Notes.
Goldman Sachs also served as financial advisor to MergerCo in connection
with the Transaction and received a fee equal to 1% of the aggregate
consideration paid in the Transaction plus reimbursement of certain expenses
from MergerCo upon consummation of the Transaction. Goldman Sachs may from time
to time receive customary fees for services rendered to the Company.
In connection with the Bank Credit Facilities, GS Credit Partners acted as
Syndication Agent, Documentation Agent and Arranger, and Fleet is acting as
Administrative Agent. Goldman Sachs received a fee of approximately $2.7 million
plus reimbursement of certain expenses in connection with such services.
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OWNERSHIP OF CAPITAL STOCK
The following table sets forth certain information concerning ownership of
shares of Company Common Stock by: (i) persons who are known by the Company to
own beneficially more than 5% of the outstanding shares of Company Common Stock;
(ii) each director of the Company; (iii) each executive officer of the Company;
and (iv) all directors and executive officers of the Company as a group.
SHARES OF COMPANY
COMMON STOCK PERCENTAGE
BENEFICIALLY OF CLASS
NAME OF BENEFICIAL OWNER OWNED OUTSTANDING(A)
- -------------------------------------------------------- ----------------- --------------
Gerald C. Rittenberg.................................... 60.0 5.9%
James M. Harrison....................................... 15.0 1.5
William S. Wilkey....................................... 6.7 *
Katherine A. Kusnierz................................... 2.0 *
Diane D. Spaar.......................................... 1.3 *
Terence M. O'Toole(b)................................... -- --
Sanjeev K. Mehra(c)..................................... -- --
Joseph P. DiSabato(d)................................... -- --
Estate of John A. Svenningsen........................... 100.0 9.9
c/o Kurzman & Eisenberg LLP
One North Broadway, Suite 1004
White Plains, New York 10601
GS Capital Partners II, L.P(e).......................... 825.0 81.7
and other GSCP funds
85 Broad Street
New York, New York 10004
All directors and executive officers as group (8 85.0 8.4
persons)..............................................
- ---------------
(a) The amounts and percentage of Company Common Stock beneficially owned are
reported on the basis of regulations of the Commission governing the
determination of beneficial ownership of securities. Under the rules of the
Commission, a person is deemed to be a "beneficial owner" of a security if
that person has or shares "voting power", which includes the power to vote
or to direct the voting of such security, or "investment power", which
includes the power to dispose of or to direct the disposition of such
security. A person is also deemed to be a beneficial owner of any
securities of which that person has a right to acquire beneficial ownership
within 60 days. Under these rules, more than one person may be deemed a
beneficial owner of the same securities and a person may be deemed to be a
beneficial owner of securities as to which he has no economic interest. The
percentage of Company Common Stock outstanding is based on the 1,010 shares
of Company Common Stock outstanding as of the date of this Prospectus.
(b) Mr. O'Toole, who is a Managing Director of Goldman Sachs, disclaims
beneficial ownership of the shares of Company Common Stock that will be
owned by GSCP and its affiliates after the Effective Time.
(c) Mr. Mehra, who is a Managing Director of Goldman Sachs, disclaims beneficial
ownership of the shares of Company Common Stock that will be owned by GSCP
and its affiliates after the Effective Time.
(d) Mr. DiSabato, who is an Associate of Goldman Sachs, disclaims beneficial
ownership of the shares of Company Common Stock that will be owned by GSCP
and its affiliates after the Effective Time.
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(e) Of the 825.0 shares of Company Common Stock beneficially owned by GSCP and
its affiliates, approximately 517.6 shares are owned by GSCP II,
approximately 205.8 shares will be owned by GS Capital Partners II
Offshore, L.P., approximately 19.1 shares are owned by Goldman, Sachs & Co.
Verwaltungs GmbH as nominee for GS Capital Partners II (Germany) C.L.P.,
approximately 55.5 shares are owned by Stone Street Fund 1997, L.P. and
approximately 27.0 shares are owned by Bridge Street Fund 1997, L.P. Each
of the GSCP funds are investment partnerships that are managed by Goldman
Sachs or its affiliates, which has full dispositive power with respect to
the holdings of such partnerships.
* Less than 1%
STOCKHOLDERS' AGREEMENT
As of the Effective Time, the Company entered into the Stockholders'
Agreement with GSCP and the Estate and certain employees of the Company listed
as parties thereto (including the Estate, the "Non-GSCP Investors"). The
following discussion summarizes the terms of the Stockholders' Agreement which
the Company believes are material to an investor in the Notes or the Exchange
Notes. This summary is qualified in its entirety by reference to the full text
of the Stockholders' Agreement, a copy of which is filed as an exhibit to the
Registration Statement of which this Propsectus is a part, and is incorporated
by reference herein. The Stockholders' Agreement provides, among other things,
for (i) the right of the Non-GSCP Investors to participate in, and the right of
GSCP to require the Non-GSCP Investors to participate in, certain sales of
Company Common Stock by GSCP, (ii) prior to an initial public offering of the
stock of the Company (as defined in the Stockholders' Agreement), certain rights
of the Company to purchase, and certain rights of the Non-GSCP Investors (other
than the Estate) to require the Company to purchase (except in the case of
termination of employment by such Non-GSCP Investors) all, but not less than
all, of the shares of Company Common Stock owned by a Non-GSCP Investor (other
than the Estate) upon the termination of employment or death of such Non-GSCP
Investor, at prices determined in accordance with the Stockholders' Agreement
and (iii) certain additional restrictions on the rights of the Non-GSCP
Investors to transfer shares of Company Common Stock. The Stockholders'
Agreement also contains certain provisions granting GSCP and the Non-GSCP
Investors certain rights in connection with registrations of Company Common
Stock in certain offerings and provides for indemnification and certain other
rights, restrictions and obligations in connection with such registrations. The
Stockholders' Agreement will terminate (i) with respect to the rights and
obligations of and restrictions on GSCP and the Non-GSCP Investors in connection
with certain restrictions on the transfer of shares of Company Common Stock,
when GSCP and its affiliates no longer hold at least 40% of the outstanding
shares of Company Common Stock, on a fully diluted basis; provided that the
Stockholders' Agreement will terminate in such respect in any event if the
Company enters into certain transactions resulting in GSCP, its affiliates, the
Non-GSCP Investors, and each of their respective permitted transferees, owning
less than a majority of the outstanding voting power of the entity surviving
such transaction; and (ii) with respect to the registration of Company Common
Stock in certain offerings, with certain exceptions, on the earlier of (1) the
date on which there are no longer any registrable securities outstanding (as
determined under the Stockholders' Agreement) and (2) the twentieth anniversary
of the Stockholders' Agreement.
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DESCRIPTION OF SENIOR DEBT
In order to fund a portion of the payment of the cash portion of the
Transaction Consideration, to refinance certain existing outstanding
indebtedness of the Company, to pay transaction costs incurred in connection
with the Transaction, and for general corporate purposes the Company issued the
Notes and entered into the Revolving Credit Agreement and the AXEL Credit
Agreement providing for the Revolving Credit Facility and the Term Loan,
respectively, (together, the "Bank Credit Facilities"). The execution of the
Bank Credit Facilities, the borrowings necessary to complete the Transaction and
the delivery of required documentation thereunder, occurred at the time of
closing of the Transaction.
The following summary of the material provisions of the Revolving Credit
Agreement and the AXEL Credit Agreement does not purport to be complete, and is
qualified by reference to the full text of such agreements, which have been
filed as exhibits to the Registration Statement of which this Prospectus is a
part.
The Term Loan will mature seven years after funding and will provide for
amortization (in quarterly installments) of one percent of the principal amount
thereof per year for the first five years and 32.3% and 62.7% of the principal
amount thereof in the sixth and seventh years, respectively. The Term Loan will
bear interest, at the option of the Company, at the lenders' customary base rate
plus 1.375% per annum or at the lenders' customary reserve adjusted Eurodollar
rate plus 2.375% per annum. The Company will be required to make scheduled
amortization payments on the Term Loan as follows:
FOR THE YEAR ENDING: AMORTIZATION % AMORTIZED
--------------------------------------------------------- ------------ -----------
December 31, 1998........................................ $ 1,170,000 1.0%
December 31, 1999........................................ 1,170,000 1.0
December 31, 2000........................................ 1,170,000 1.0
December 31, 2001........................................ 1,170,000 1.0
December 31, 2002........................................ 1,170,000 1.0
December 31, 2003........................................ 37,787,500 32.3
December 31, 2004........................................ 73,362,500 62.7
------------ ------
Total............................................. $117,000,000 100.0%
============ ======
The Company is obligated to obtain interest rate protection, pursuant to
interest rate swaps, caps or other similar arrangements satisfactory to GS
Credit Partners, with respect to a notional amount of not less than half of the
aggregate amount outstanding under the Term Loan as of the Effective Time, which
protection must remain in effect for not less than three years after the
Effective Time.
In addition, the Company will be required to make prepayments on the Bank
Credit Facilities under certain circumstances, including upon certain asset
sales and issuance of debt or equity securities, subject to certain exceptions.
The Company will also be required to make prepayments on the Bank Credit
Facilities in an amount equal to 75% (to be reduced to 50% for any fiscal year
in which the Company's Consolidated Leverage Ratio (as defined in the Bank
Credit Agreements) is less than 3.75 to 1.0) of the Company's Excess Cash Flow
(as defined in the Bank Credit Agreements) for each fiscal year, commencing with
the fiscal year ending December 31, 1998. Such mandatory prepayments will be
applied to prepay the Term Loan first (on a pro rata basis) and thereafter to
prepay the Revolving Credit Facility and to reduce the commitments thereunder.
Subject to certain call protection provisions applicable for 18 months from the
Effective Time, the Company may prepay, in whole or in part, borrowings under
the Term Loan. Call protection provisions also apply to mandatory prepayments of
borrowings under the Term Loan except for
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\mandatory prepayments from Excess Cash Flow. The Company may prepay borrowings
under or reduce commitments for the Revolving Credit Facility, in whole or in
part, without penalty.
The Revolving Credit Facility has a term of five years and will bear
interest, at the option of the Company, at the lenders' customary base rate plus
1.25% per annum or at the lenders' customary reserve adjusted Eurodollar rate
plus 2.25% per annum. Interest on balances out standing under the Revolving
Credit Facility are subject to adjustment in the future based on the Company's
performance. Amounts drawn on the Revolving Credit Facility for working capital
purposes are also subject to an agreed upon borrowing base and periodic
reduction of outstanding balances. All borrowings under the Revolving Credit
Facility are subject to mandatory prepayments upon the occurrence of certain
events as described above.
The Bank Credit Facilities are guaranteed by the Guarantors. Subject to
certain exceptions, all extensions of credit to the Company and all guarantees
are secured by all existing and after-acquired personal property of the Company
and the Guarantors, including, subject to certain exceptions, a pledge of all of
the stock of all Subsidiaries owned by the Company or any of the Guarantors and
first priority liens on after-acquired real property fee and leasehold interests
of the Company and the Guarantors.
The Bank Credit Facilities contain certain financial covenants, as well as
additional affirmative and negative covenants, constraining the Company. The
Company must maintain a minimum Consolidated Adjusted EBITDA (as defined in the
Bank Credit Agreements) of not less than an amount ranging from $35 million for
the four Fiscal Quarter (as defined in the Bank Credit Agreements) period ending
March 31, 1998 to $48.5 million for the four Fiscal Quarter period ending
December 31, 2002. The Company is required to maintain a Fixed Charge Coverage
Ratio (defined in the Bank Credit Agreements as the ratio of (a) Consolidated
Adjusted EBITDA to (b) Consolidated Fixed Charges (as defined in the Bank Credit
Agreements)) of not less than a ratio of 1.00 to 1.00 for the four-Fiscal
Quarter period ending March 31, 1998 to a ratio of 1.20 to 1.00 for the
four-Fiscal Quarter period ending December 31, 2002. The Company must not permit
the ratio of Consolidated Total Debt (as defined in the Bank Credit Agreements)
to Consolidated Adjusted EBITDA on the last day of any four Fiscal Quarter
period to exceed a ratio ranging from 6.60 to 1.00 for such period ending March
31, 1998 to 3.70 to 1.00 for such period ending December 31, 2002.
Borrowings under the Revolving Credit Facilities are subject to customary
affirmative and negative covenants, including but not limited to limitations on
other indebtedness, liens, investments, guarantees, restricted junior payments
(dividends, redemptions and payments on subordinated debt), mergers and
acquisitions, sales of assets, capital expenditures, leases, transactions with
affiliates, conduct of business and other provisions customary for financings of
this type, including exceptions and baskets.
The Revolving Credit Agreement permits business acquisitions in the same
line of business as the Company and its Subsidiaries subject to certain
restrictions, and permits borrowings thereunder to finance such acquisitions of
up to $25 million in the aggregate. As a condition to any such acquisitions in
excess of $10 million in the aggregate, the pro forma ratio of total
indebtedness to EBITDA at the time of any such acquisition must not exceed a
ratio of 5.5:1.0 through the last fiscal quarter of 1999 and lower ratios
thereafter decreasing to 3.7:1.0 for the four Fiscal Quarter period ending
December 31, 2002. Any such acquisitions in excess of $25 million in the
aggregate must be funded from either equity or a combination of equity and
subordinated debt or equity and additional term loans in accordance with certain
specified ratios.
Borrowings under the Revolving Credit Facility are subject to customary
events of default (with customary grace periods), including without limitation
failure to make payments when due, defaults under other indebtedness,
noncompliance with covenants, breach of representations and warranties,
bankruptcy, judgments in excess of specified amounts, invalidity of guarantees,
impairment of security interests in collateral and "changes of control".
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Borrowings under the Term Loan are subject to affirmative covenants
identical to those set forth above with respect to borrowings under the
Revolving Credit Facility and negative covenants substantially as set forth in
the Notes, including limitations on the incurrence of indebtedness, investments,
guarantees, restricted payments (dividends, redemptions and payments on
subordinated debt), mergers, sales of assets, transactions with affiliates and
other provisions customary for financings of this type. The Term Loan also
contains a negative covenant restricting liens similar to the lien covenant in
the Revolving Credit Facility.
Borrowings under the Term Loan are subject to events of default
substantially as set forth in the Notes and the Exchange Notes; provided that
there is (i) an immediate default for principal payment defaults, (ii) a
three-day grace period for interest payment defaults, (iii) a cross default to
the Revolving Credit Facility and other debt with an aggregate principal amount
of $5 million or more in the event such default is not cured within twenty
business days and (iv) an immediate default if (1) prior to a Qualified Public
Offering (as defined in the Bank Credit Agreements), GSCP II and its affiliates
cease to own and control 51% or more of the voting power of the Company's
securities, (2) after a Qualified Public Offering, a person or group acquires
beneficial ownership of the Company's securities representing greater voting
power than GSCP II and its affiliates or (3) a Change of Control as defined in
the Indenture occurs.
The Indenture permits the Bank Credit Agreement to be amended, modified,
renewed, refunded, refinanced or replaced (in whole or in part) from time to
time.
OTHER SENIOR DEBT
As of the Effective Time, the Company had approximately $10.8 million in
outstanding indebtedness and capital leases outstanding, relating primarily to
mortgages of real property. The Company's distribution center in Chester, New
York, is subject to a ten-year mortgage securing a loan in the original
principal amount of $5,925,000 bearing interest at a rate of 8.51%. Such
mortgage loan matures in September 2004. The principal amount outstanding as of
September 30, 1997 was approximately $4,147,500. The Company's distribution
center in Montreal, Canada is subject to a mortgage securing a loan in the
original principal amount of $2,088,000. Such mortgage loan bears interest at a
rate of the lower of Hong Kong Bank of Canada's Cost of Funds plus 1.6% or
Canadian Prime plus 0.5%. The principal amount outstanding as of September 30,
1997 was approximately $1,924,000. The remaining amounts of indebtedness
outstanding relate to capital leases for the Company's machinery and equipment
and will be due and payable at scheduled maturities through 2003. The mortgages
and capital leases described above are Senior Debt.
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DESCRIPTION OF EXCHANGE NOTES
GENERAL
The Exchange Notes will be issued by the Company pursuant to the same
Indenture (the "Indenture") among the Company, the Guarantors and IBJ Schroder
Bank & Trust Company, as trustee (the "Trustee"), under which the Notes were
issued. The terms of the Exchange Notes include those stated in the Indenture
and those made part of the Indenture by reference to the Trust Indenture Act of
1939 (the "Trust Indenture Act"). The Exchange Notes are subject to all such
terms, and Holders of Exchange Notes are referred to the Indenture and the Trust
Indenture Act for a statement thereof. The discussion below summarizes the terms
of the Exchange Notes that the Company believes are material to an investor in
the Exchange Notes. This summary does not purport to be complete and is
qualified in its entirety by reference to the full text of the agreements
underlying this discussion, copies of which are filed as exhibits to the
Registration Statement of which this Prospectus is a part, and are incorporated
by reference herein. The definitions of certain terms used in the following
summary are set forth below under the caption " -- Certain Definitions".
On December 19, 1997, the Company issued $110.0 million aggregate principal
amount of Notes under the Indenture. The terms of the Exchange Notes are
identical in all material respects to the Notes, except for certain transfer
restrictions and registration and other rights relating to the exchange of the
Notes for Exchange Notes. The Trustee will authenticate and deliver Exchange
Notes for original issue only in exchange for a like principal amount of Notes.
Any Notes that remain outstanding after the consummation of the Exchange Offer,
together with the Exchange Notes, will be treated as a single class of
securities under the Indenture. Accordingly, all references herein to specified
percentages in aggregate principal amount of the outstanding Exchange Notes
shall be deemed to mean, at any time after the Exchange Offer is consummated,
such percentage in aggregate principal amount of the Notes and Exchange Notes
then outstanding.
As of December 19, 1997, all of the Company's Subsidiaries were Restricted
Subsidiaries. However, under certain circumstances, the Company will be able to
designate current or future Subsidiaries as Unrestricted Subsidiaries.
Unrestricted Subsidiaries will not be subject to many of the restrictive
covenants set forth in the Indenture.
PRINCIPAL, MATURITY AND INTEREST
The Exchange Notes are general unsecured obligations of the Company,
limited in aggregate principal amount, together with any outstanding Notes, to
$200 million, of which $110 million was issued in the Note Offering and,
assuming all Holders of Notes exchange their Notes, will be issued in the
Exchange Offer. Notes or Exchange Notes issued thereafter ("Additional Notes")
may be issued in one or more series from time to time, subject to compliance
with the covenants contained in the Indenture, provided, that no Additional Note
may be issued at a price that would cause such Additional Note to have "original
issue discount" within the meaning of Section 1273 of the Code. Any Additional
Notes will have the same terms, including interest rate, maturity and redemption
provisions, as the Exchange Notes initially being issued hereunder.
The Exchange Notes will mature on December 15, 2007. Interest on the
Exchange Notes will accrue at the rate of 9 7/8% per annum and will be payable
in cash semi-annually in arrears on June 15 and December 15, commencing on June
15, 1998, to Holders of record on the immediately preceding June 1 and December
1. Interest on the Exchange Notes will accrue from the most recent date to which
interest has been paid or, if no interest has been paid, from December 19, 1997,
the date of original issuance of the Notes. Interest will be computed on the
basis of a 360-day year consisting of twelve 30-day months.
Principal, premium, if any, and interest on the Exchange Notes will be
payable at the office or agency of the Company maintained for such purpose
within the City and State of New York or, at the
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option of the Company, payment of interest may be made by check mailed to the
Holders of the Exchange Notes at their respective addresses set forth in the
register of Holders of Exchange Notes; provided, however, that all payments with
respect to Global Exchange Notes and definitive Exchange Notes the Holders of
which have given wire transfer instructions to the Company at least 10 Business
Days prior to the applicable payment date will be required to be made by wire
transfer of immediately available funds to the accounts specified by the Holders
thereof. Until otherwise designated by the Company, the Company's office or
agency in New York will be the office of the Trustee maintained for such
purpose. The Exchange Notes will be issued in minimum denominations of $1,000
and integral multiples thereof.
SETTLEMENT AND PAYMENT
Payments by the Company in respect of the Exchange Notes (including
principal, premium, if any, and interest) will be made in immediately available
funds as provided above. The Exchange Notes are expected to trade in the
Depository's settlement system, and any secondary market trading activity will,
therefore, be required by the Depository to be settled in immediately available
funds. No assurance can be given as to the effect, if any, of such settlement
arrangements on trading activity in the Exchange Notes.
Because of time-zone differences, the securities account of Euroclear or
Cedel Bank participants (each, a "Member Organization") purchasing an interest
in a Global Exchange Note from a Participant (as defined herein) that is not a
Member Organization will be credited during the securities settlement processing
day (which must be a business day for Euroclear or Cedel Bank, as the case may
be) immediately following the Depository Trust Company ("DTC") settlement date.
Transactions in interests in a Global Exchange Note settled during any
securities settlement processing day will be reported to the relevant Member
Organization on the same day. Cash received in Euroclear or Cedel Bank as a
result of sales of interests in a Global Exchange Note by or through a Member
Organization to a Participant that is not a Member Organization will be received
with value on the DTC settlement date, but will not be available in the relevant
Euroclear or Cedel Bank cash account until the business day following settlement
in DTC.
SUBORDINATION
The Exchange Notes will be unsecured senior subordinated indebtedness of
the Company ranking pari passu with all other existing and future senior
subordinated indebtedness of the Company. The payment of all Obligations in
respect of the Exchange Notes will be subordinated, as set forth in the
Indenture, in right of payment to the prior payment in full in cash or Cash
Equivalents of all Senior Debt, whether outstanding on the date of the Indenture
or thereafter incurred.
The Indenture provides that, upon any distribution to creditors of the
Company in a liquidation or dissolution of the Company or in a bankruptcy,
reorganization, insolvency, receivership or similar proceeding relating to the
Company or its property, an assignment for the benefit of creditors or any
marshaling of the Company's assets and liabilities, the holders of Senior Debt
will be entitled to receive payment in full of all Obligations due in respect of
such Senior Debt (including interest after the commencement of any such
proceeding at the rate specified in the documents relating to the applicable
Senior Debt, whether or not the claim for such interest is allowed as a claim in
such proceeding), or provision will be made for payment in cash or Cash
Equivalents or otherwise in a manner satisfactory to the holders of such Senior
Debt, before the Holders of Exchange Notes will be entitled to receive any
Securities Payment (other than payments in Permitted Junior Securities) and
until all Obligations with respect to Senior Debt are paid in full, or provision
is made for payment in cash or Cash Equivalents or otherwise in a manner
satisfactory to the holders of such Senior Debt, any Securities Payment (other
than any payments in Permitted Junior Securities) to which the Holders of
Exchange Notes would be entitled will be made to the holders of Senior Debt
(except that Holders of Exchange Notes may receive payments made from the trust
described under " -- Legal Defeasance and Covenant Defeasance").
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The Indenture also provides that the Company may not make any Securities
Payment (other than payments in Permitted Junior Securities) upon or in respect
of the Exchange Notes (except from the trust described under " -- Legal
Defeasance and Covenant Defeasance") if (i) a default in the payment of the
principal of, premium, if any, or interest on Designated Senior Debt occurs and
is continuing, or any judicial proceeding is pending to determine whether any
such default has occurred, or (ii) any other default occurs and is continuing
with respect to Designated Senior Debt that permits, or would permit, with the
passage of time or the giving of notice or both, holders of the Designated
Senior Debt to which such default relates to accelerate its maturity and the
Trustee receives a notice of such default (a "Payment Blockage Notice") from the
Company or the holders of any Designated Senior Debt. Securities Payments on the
Exchange Notes may and shall be resumed (a) in the case of a payment default on
Designated Senior Debt, upon the date on which such default is cured or waived
or shall have ceased to exist, unless another default, event of default or other
event that would prohibit such payment shall have occurred and be continuing, or
all Obligations in respect of such Designated Senior Debt shall have been
discharged or paid in full and (b) in case of a nonpayment default, the earlier
of the date on which such nonpayment default is cured or waived or 179 days
after the date on which the applicable Payment Blockage Notice is received by
the Trustee. No new period of payment blockage may be commenced unless and until
360 days have elapsed since the first day of effectiveness of the immediately
prior Payment Blockage Notice. No nonpayment default that existed or was
continuing on the date of delivery of any Payment Blockage Notice to the Trustee
shall be, or be made, the basis for a subsequent Payment Blockage Notice unless
such default shall have been subsequently cured or waived for a period of not
less than 180 days. In the event that, notwithstanding the foregoing, the
Company makes any Securities Payment (other than payments in Permitted Junior
Securities) to the Trustee or any Holder of an Exchange Note prohibited by the
subordination provisions, then and in such event such Securities Payment will be
required to be paid over and delivered forthwith to the holders of Senior Debt.
The Indenture further requires that the Company promptly notify holders of
Senior Debt if payment of the Exchange Notes is accelerated because of an Event
of Default.
As a result of the subordination provisions described above, in the event
of a liquidation or insolvency of the Company, Holders of Exchange Notes may
recover less ratably than creditors of the Company who are holders of Senior
Debt. See "Risk Factors". On a pro forma basis, after giving effect to the
Transaction and the Transaction Financings and the application of the proceeds
therefrom, the principal amount of Senior Debt outstanding at September 30, 1997
would have been approximately $128 million. The Indenture limits, subject to
certain financial tests, the amount of additional Indebtedness, including Senior
Debt, that the Company and its Restricted Subsidiaries can incur. See "--
Certain Covenants -- Incurrence of Indebtedness and Issuance of Disqualified
Stock".
"Bank Debt" means all Obligations in respect of the Indebtedness
outstanding under the Bank Credit Agreement together with any amendment,
modification, renewal, refunding, refinancing or replacement (in whole or part)
from time to time of such Indebtedness.
"Bank Hedging Obligations" means all present and future Hedging
Obligations of the Company, whether existing now or in the future, that are
secured by the Bank Credit Agreement (or other agreement evidencing Bank Debt or
other Senior Debt) or any of the collateral documents executed from time to time
in connection therewith.
"Designated Senior Debt" means (i) so long as the Bank Debt is
outstanding, the Bank Debt, (ii) the Bank Hedging Obligations and (iii) any
Senior Debt permitted under the Indenture the principal amount of which is $15
million or more and that has been designated by the Company as "Designated
Senior Debt" and as to which the Trustee has been given written notice of such
designation.
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"Permitted Junior Securities" means, with respect to any payment or
distribution of any kind, equity securities or subordinated securities of the
Company or any successor obligor provided for by a plan of reorganization or
readjustment that, in the case of any such subordinated securities, are
subordinated in right of payment to all Senior Debt that may at the time be
outstanding to at least the same extent as the Exchange Notes are so
subordinated as provided in the Indenture.
"Securities Payment" means any payment or distribution of any kind,
whether in cash, property or securities (including any payment or distribution
deliverable by reason of the payment of any other Indebtedness subordinated to
the Exchange Notes) on account of the principal of (and premium, if any) or
interest on the Exchange Notes or on account of the purchase or redemption or
other acquisition of or satisfaction of obligations with respect to Exchange
Notes by the Company or any Subsidiary of the Company.
"Senior Debt" means (i) the Bank Debt, (ii) the Bank Hedging Obligations
and (iii) any other Indebtedness permitted to be incurred by the Company under
the terms of the Indenture, unless the instrument under which such Indebtedness
is incurred expressly provides that it is on a parity with or subordinated in
right of payment to the Exchange Notes. Notwithstanding anything to the contrary
in the foregoing, Senior Debt does not include (1) any liability for federal,
state, local or other taxes owed or owing by the Company, (2) any Indebtedness
of the Company to any of its Restricted Subsidiaries or other Affiliates (other
than Goldman, Sachs & Co. and its Affiliates, including Goldman Sachs Credit
Partners L.P.), (3) any trade payables, (4) that portion of any Indebtedness
that is incurred in violation of the Indenture, (5) Indebtedness which, when
incurred and without respect to any election under Section 1111(b) of Title 11,
United States Code, is without recourse to the Company, (6) any Indebtedness,
Guarantee or obligation of the Company which is contractually subordinate in
right of payment to any other Indebtedness, Guarantee or obligation of the
Company; provided, however, that this clause (6) does not apply to the
subordination of liens or security interests covering particular properties or
types of assets securing Senior Debt, (7) Indebtedness evidenced by the Notes or
the Exchange Notes and (8) Capital Stock.
SENIOR SUBORDINATED GUARANTEES
The Company's payment obligations under the Exchange Notes will be jointly
and severally guaranteed on a senior subordinated basis (the "Senior
Subordinated Guarantees") by each Restricted Subsidiary of the Company (other
than a Restricted Subsidiary organized under the laws of a country other than
the United States) and each other Subsidiary of the Company that becomes a
guarantor under the Bank Credit Agreement. The obligations of each Guarantor
under its Senior Subordinated Guarantee will be subordinated to its Guarantee of
all Obligations under the Bank Credit Agreement (the "Senior Guarantees") and
will be limited so as not to constitute a fraudulent conveyance under applicable
law. See, however, "Risk Factors -- Fraudulent Conveyance".
The Indenture provides that no Guarantor may consolidate with or merge with
or into (whether or not such Guarantor is the surviving Person) another Person
whether or not affiliated with such Guarantor unless (i) subject to the
provisions of the following paragraph, the Person formed by or surviving any
such consolidation or merger (if other than such Guarantor) assumes all the
obligations of such Guarantor, pursuant to a supplemental indenture in form and
substance reasonably satisfactory to the Trustee, under the Exchange Notes and
the Indenture; (ii) immediately after giving effect to such transaction, no
Default or Event of Default exists; and (iii) the Company would be permitted by
virtue of the Company's pro forma Fixed Charge Coverage Ratio to incur,
immediately after giving effect to such transaction, at least $1.00 of
additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set
forth in the covenant described below under the caption "-- Incurrence of
Indebtedness and Issuance of Disqualified Stock". The Indenture provides that
the foregoing will not prevent the merger, consolidation or sale of assets
between Guarantors or between the Company and any Guarantor.
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The Indenture provides that in the event of a sale or other disposition of
all or substantially all of the assets of any Guarantor, by way of merger,
consolidation or otherwise, or a sale or other disposition (including, without
limitation, by foreclosure) of all of the Capital Stock of any Guarantor, then
such Guarantor (in the event of a sale or other disposition, by way of such a
merger, consolidation or otherwise (including, without limitation, by
foreclosure), of all of the capital stock of such Guarantor) or the Person
acquiring the property (in the event of a sale or other disposition of all or
substantially all of the assets of such Guarantor) will be automatically
released and relieved of any obligations under its Senior Subordinated
Guarantee; provided that the Net Proceeds of such sale or other disposition are
applied, as and if required, in accordance with the applicable provisions of the
Indenture. In addition, if any Guarantor is released and relieved of all
obligations it may have as a guarantor under the Bank Credit Agreement, then
such Guarantor will also be automatically released and relieved of any
obligations under its Senior Subordinated Guarantee. See "-- Repurchase at the
Option of Holders -- Asset Sales".
Certain of the operations of the Company, including a substantial portion
of its operations outside the United States, are conducted through Subsidiaries
that are not Guarantors. The Company is dependent upon the cash flow of those
Subsidiaries to meet its obligations, including its obligations under the
Exchange Notes. The Exchange Notes will be effectively subordinated to all
indebtedness and other liabilities (including trade payables and capital lease
obligations) of the Company's Subsidiaries that are not Guarantors, which were
approximately $3 million (excluding inter-company payables to the Company) at
September 30, 1997. Any right of the Company to receive assets of any of such
Subsidiaries upon the latter's liquidation or reorganization (and the consequent
right of the Holders of the Exchange Notes to participate in those assets) will
be effectively subordinated to the claims of such Subsidiary's creditors, except
to the extent that the Company or a Guarantor is itself recognized as a creditor
of such Subsidiary, in which case the claims of the Company would still be
subordinate to any security in the assets of such Subsidiary and any
indebtedness of such Subsidiary senior to that held by the Company or a
Guarantor. See "Risk Factors -- Holding Company Structure".
OPTIONAL REDEMPTION
Except as described below, the Exchange Notes are not redeemable at the
Company's option prior to December 15, 2002. From and after December 15, 2002,
the Exchange Notes will be subject to redemption at the option of the Company,
in whole or in part, upon not less than 30 nor more than 60 days' written
notice, at the Redemption Prices (expressed as percentages of principal amount)
set forth below, plus accrued and unpaid interest thereon to the applicable
redemption date, if redeemed during the twelve-month period beginning on
December 15 of each of the years indicated below:
PERCENTAGE OF
PRINCIPAL
YEAR AMOUNT
------------------------------------------------------ -------------
2002.................................................. 104.937%
2003.................................................. 103.292
2004.................................................. 101.646
2005 and thereafter................................... 100.000
Prior to December 15, 2000, the Company may, at its option, on any one or
more occasions, redeem up to 35% of the principal amount of Exchange Notes at a
redemption price equal to 109.875% of the principal amount thereof, plus accrued
and unpaid interest thereon to the redemption date, with the net proceeds of
public or private sales of common stock of, or contributions to the common
equity capital of, the Company; provided that at least $65 million in aggregate
principal amount of Notes and Exchange Notes (or if Additional Notes have been
issued, a correspondingly higher amount) remains outstanding immediately after
the occurrence of each
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such redemption; and provided, further, that such redemption shall occur within
120 days of the date of the closing of the related sale of common stock of, or
capital contribution to, the Company.
In addition, at any time on or prior to December 15, 2002, upon the
occurrence of a Change of Control, the Company may redeem the Exchange Notes, in
whole but not in part, at a redemption price equal to the principal amount
thereof plus the Applicable Premium plus accrued and unpaid interest, if any, to
the date of redemption. Notice of redemption of the Exchange Notes pursuant to
this paragraph shall be mailed to holders of the Exchange Notes not more than 30
days following the occurrence of a Change of Control.
"Applicable Premium" means, with respect to an Exchange Note, the greater
of (i) 1.0% of the then outstanding principal amount of such Exchange Note and
(ii)(a) the present value of all remaining required interest and principal
payments due on such Exchange Note and all premium payments relating thereto
assuming a redemption date of December 15, 2002, computed using a discount rate
equal to the Treasury Rate plus 50 basis points minus (b) the then outstanding
principal amount of such Exchange Note minus (c) accrued interest thereon paid
on the redemption date.
"Treasury Rate" means the yield to maturity at the time of computation of
United States Treasury securities with a constant maturity (as compiled and
published in the most recent Federal Reserve Statistical Release H.15(519) which
has become publicly available at least two business days prior to the date fixed
for redemption (or, if such Statistical Release is no longer published, any
publicly available source of similar market data)) most nearly equal to the then
remaining term to December 15, 2002; provided, however, that if the then
remaining term to December 15, 2002 is not equal to the constant maturity of a
United States Treasury security for which a weekly average yield is given, the
Treasury Rate shall be obtained by linear interpolation (calculated to the
nearest one-twelfth of a year) from the weekly average yields of United States
Treasury securities for which such yields are given, except that if the then
remaining term to December 15, 2002 is less than one year, the weekly average
yield on actually traded United States Treasury securities adjusted to a
constant maturity of one year shall be used.
SELECTION AND NOTICE
If less than all of the Exchange Notes are to be redeemed at any time,
selection of such Exchange Notes for redemption will be made by the Trustee in
compliance with the requirements of the principal national securities exchange,
if any, on which the Exchange Notes are listed, or, if the Exchange Notes are
not so listed, on a pro rata basis, by lot or by such method as the Trustee
shall deem fair and appropriate; provided that the unredeemed portion of any
Exchange Note redeemed in part shall equal $1,000 or an integral multiple
thereof.
Notices of redemption shall be mailed by first class mail at least 30 but
not more than 60 days before the redemption date to each Holder of Exchange
Notes to be redeemed at such Holder's registered address. If any Exchange Note
is to be redeemed in part only, the notice of redemption that relates to such
Exchange Note shall state the portion of the principal amount thereof to be
redeemed. A new Exchange Note in principal amount equal to the unredeemed
portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Exchange Note. On and after the redemption date,
unless the Company defaults in payment of the redemption price, interest ceases
to accrue on Exchange Notes or portions of them called for redemption.
MANDATORY REDEMPTION; SINKING FUND PAYMENTS
Except as set below under "-- Repurchase at the Option of Holders", the
Company is not required to make mandatory redemption or sinking fund payments
with respect to the Exchange Notes.
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REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of Exchange Notes
will have the right to require the Company to repurchase all or any part (equal
to $1,000 or an integral multiple thereof) of such Holder's Exchange Notes
pursuant to the offer described below (the "Change of Control Offer") at an
offer price in cash (the "Change of Control Payment") equal to 101% of the
aggregate principal amount thereof plus accrued and unpaid interest, including
Liquidated Damages, if any, thereon to the date of repurchase. Within 30 days
following any Change of Control, the Company will mail a notice to each Holder
describing the transaction or transactions that constitute the Change of Control
and offering to repurchase Exchange Notes pursuant to the procedures required by
the Indenture and described in such notice. The Company will comply with the
requirements of Rule 14e-1 under the Exchange Act and any other securities laws
and regulations thereunder to the extent such laws and regulations are
applicable in connection with the repurchase of the Exchange Notes as a result
of a Change of Control.
On a date that is no earlier than 30 days nor later than 60 days from the
date that the Company mails notice of the Change of Control to the Holders (the
"Change of Control Payment Date"), the Company will, to the extent lawful, (1)
accept for payment all Exchange Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (2) deposit with the Paying Agent an
amount equal to the Change of Control Payment in respect of all Exchange Notes
or portions thereof so tendered and (3) deliver or cause to be delivered to the
Trustee for cancellation the Exchange Notes so accepted together with an
Officers' Certificate stating the aggregate principal amount of Exchange Notes
or portions there of being purchased by the Company. The Paying Agent will
promptly mail to each Holder of Exchange Notes so tendered the Change of Control
Payment for such Exchange Notes, and the Trustee will promptly authenticate and
mail (or cause to be transferred by book entry) to each Holder a new Exchange
Note equal in principal amount to any unpurchased portion of the Exchange Notes
surrendered, if any. The Company will publicly announce the results of the
Change of Control Offer on or as soon as practicable after the Change of Control
Payment Date.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as described
above with respect to a Change of Control, the Indenture does not contain
provisions that permit the Holders of the Exchange Notes to require that the
Company repurchase or redeem the Exchange Notes in the event of a takeover,
recapitalization or similar transaction. Such a transaction could occur, and
could have an effect on the Exchange Notes, without constituting a Change of
Control.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by the Company and
purchases all Exchange Notes validly tendered and not withdrawn under such
Change of Control Offer.
The existence of a Holder's right to require the Company to repurchase such
Holder's Exchange Notes upon the occurrence of a Change of Control may deter a
third party from seeking to acquire the Company in a transaction that would
constitute a Change of Control.
ASSET SALES
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, cause, make or suffer to exist an Asset Sale
unless (i) the Company (or the Restricted Subsidiary, as the case may be)
receives consideration at the time of such Asset Sale at least equal to the fair
market value (evidenced by a resolution of the Board of Directors set forth in
an Officers' Certificate delivered to the Trustee) of the assets or Equity
Interests issued or sold or
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otherwise disposed of and (ii) at least 80% of the consideration therefor
received by the Company or such Restricted Subsidiary is in the form of cash or
Cash Equivalents; provided that the amount of (x) any liabilities (as shown on
the Company's or such Restricted Subsidiary's most recent balance sheet) of the
Company or any Restricted Subsidiary (other than contingent liabilities and
liabilities that are by their terms subordinated to the Exchange Notes or any
guarantee thereof) that are assumed by the transferee of any such assets
pursuant to a customary novation agreement that releases the Company or such
Restricted Subsidiary from further liability, (y) any Excludable Current
Liabilities, and (z) any notes or other obligations received by the Company or
any such Restricted Subsidiary from such transferee that are immediately
converted by the Company or such Restricted Subsidiary into cash (to the extent
of the cash received), shall be deemed to be cash for purposes of this
provision.
Within 365 days after the Company's or any Restricted Subsidiary's receipt
of the Net Proceeds of any Asset Sale (or in the case of an Asset Sale involving
the Specified Real Estate, by the later of (i) June 30, 1999 and (ii) the date
365 days after receipt of such Net Proceeds) the Company or such Restricted
Subsidiary may apply the Net Proceeds from such Asset Sale, at its option, (i)
to permanently repay or reduce Obligations under the Bank Credit Agreement (and
to correspondingly reduce commitments with respect thereto) or other Senior
Debt, (ii) to secure Letter of Credit Obligations to the extent related letters
of credit have not been drawn or been returned undrawn, and/or (iii) to an
investment in any one or more businesses, capital expenditures or acquisitions
of other assets, in each case, used or useful in a Principal Business; provided,
that such Net Proceeds may, at the Company's option, be deemed to have been
applied pursuant to this clause (iii) to the extent of any expenditures by the
Company made to invest in, acquire or construct businesses, properties or assets
used in a Principal Business within one year preceding the date of such Asset
Sale. Pending the final application of any such Net Proceeds, the Company or
such Restricted Subsidiary may temporarily reduce Indebtedness under a revolving
credit facility, if any, or otherwise invest such Net Proceeds in Cash
Equivalents. The Indenture provides that any Net Proceeds from the Asset Sale
that are not used as provided and within the time period set forth in the first
sentence of this paragraph will be deemed to constitute "Excess Proceeds".
When the aggregate amount of Excess Proceeds exceeds $15 million, the
Company will be required to make offers to all Holders of Exchange Notes and to
the holders of any other Senior Subordinated Indebtedness the terms of which so
require (each an "Asset Sale Offer") to purchase the maximum principal amount of
Exchange Notes and such other Senior Subordinated Indebtedness, that is an
integral multiple of $1,000, that may be purchased out of the Excess Proceeds at
an offer price in cash in an amount equal to 100% of the aggregate principal
amount thereof (or 100% of the accreted value thereof, in case of Senior
Subordinated Indebtedness issued at a discount), plus accrued and unpaid
interest thereon to the date fixed for the closing of such offer, in accordance
with the procedures set forth in the Indenture. The Excess Proceeds shall be
allocated to the respective Asset Sale Offers for the Exchange Notes and such
other Senior Subordinated Indebtedness in proportion to their relative principal
amounts (or accreted value, as applicable). The Indenture provides that the
Company may, in lieu of making an Asset Sale Offer for other Senior Subordinated
Indebtedness, satisfy its obligation under the governing agreement with respect
thereto by applying the Excess Proceeds allocated thereto to the prepayment,
redemption or public or private repurchase of such Senior Subordinated
Indebtedness.
The Company will commence any required Asset Sale Offer with respect to
Excess Proceeds within ten Business Days after the date that the aggregate
amount of Excess Proceeds exceeds $15 million by mailing the notice required
pursuant to the terms of the Indenture, with a copy to the Trustee. To the
extent that the aggregate amount of Exchange Notes (and such other Senior
Subordinated Indebtedness) tendered pursuant to any required Asset Sale Offer is
less than the Excess Proceeds allocated thereto, the Company may use any
remaining Excess Proceeds (x) to offer to redeem or purchase other Senior
Subordinated Indebtedness or Subordinated Indebtedness (a "Subordinated Asset
Sale Offer") in accordance with the provisions of the indenture or other
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agreement governing such other Senior Subordinated Indebtedness or Subordinated
Indebtedness or (y) for any other purpose not prohibited by the Indenture. If
the aggregate principal amount of Exchange Notes tendered pursuant to any Asset
Sale Offer exceeds the amount of Excess Proceeds allocated thereto, the Exchange
Notes so tendered shall be purchased on a pro rata basis, based upon the
principal amount tendered. Upon completion of any such Asset Sale Offer, the
amount of Excess Proceeds shall be reset at zero.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the Notes and Exchange Notes as a result of an Asset Sale.
The Bank Credit Agreement prohibits the Company from purchasing any
Exchange Notes, and also provides that certain change of control events with
respect to the Company will constitute a default thereunder. Any future credit
agreements or other agreements relating to Senior Debt to which the Company
becomes a party may contain similar restrictions and provisions. In the event a
Change of Control occurs or an Asset Sale Offer is required to be made at a time
when the Company is prohibited from purchasing Exchange Notes, the Company could
seek the consent of its lenders to the purchase of Exchange Notes or could
attempt to refinance the borrowings that contain such prohibition. If the
Company does not obtain such a consent or repay such borrowings, the Company
will remain prohibited from purchasing Exchange Notes. In such case, while the
Company's failure to purchase tendered Exchange Notes would constitute an Event
of Default under the Indenture, the subordination provisions of the Indenture
would likely have the practical effect of restricting payments to the Holders of
the Exchange Notes.
CERTAIN COVENANTS
RESTRICTED PAYMENTS
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay
any dividend or make any other payment or distribution on account of the
Company's or any of its Restricted Subsidiaries' Equity Interests (other than
dividends or distributions payable in Equity Interests (other than Disqualified
Stock) of the Company or dividends or distributions payable to the Company or
any Restricted Subsidiary of the Company); (ii) purchase, redeem, defease or
otherwise acquire or retire for value any Equity Interests of the Company; (iii)
make any payment on or with respect to, or purchase, redeem, defease or
otherwise acquire or retire for value any Subordinated Indebtedness, except for
a payment of principal or interest at Stated Maturity; or (iv) make any
Restricted Investment (all such payments and other actions set forth in clauses
(i) through (iv) above being collectively referred to as "Restricted Payments"),
unless, at the time of and after giving effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof;
(b) the Company would, at the time of such Restricted Payment and
immediately after giving pro forma effect thereto as if such Restricted
Payment had been made at the beginning of the applicable four-quarter
period, have been permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in
the first paragraph of the covenant described below under the caption "--
Incurrence of Indebtedness and Issuance of Disqualified Stock"; and
(c) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by the Company and its Restricted Subsidiaries
after the date of the Indenture (including Restricted Payments permitted by
clause (i) of the next succeeding paragraph, but excluding all other
Restricted Payments permitted by the next succeeding paragraph), is less
than the
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sum of (i) 50% of the Consolidated Net Income of the Company for the period
(taken as one accounting period) from the beginning of the first fiscal
quarter commencing after the date of the Indenture to the end of the
Company's most recently ended fiscal quarter for which internal financial
statements are available at the time of such Restricted Payment (or, if
such Consolidated Net Income for such period is a deficit, less 100% of
such deficit), plus (ii) 100% of the aggregate net cash proceeds and the
fair market value, as determined in good faith by the Board of Directors,
of marketable securities received by the Company from the issue or sale
since the date of the Indenture of Equity Interests (including Retired
Capital Stock (as defined below)) of the Company or of debt securities of
the Company that have been converted into such Equity Interests (other than
Refunding Capital Stock (as defined below) or Equity Interests or
convertible debt securities of the Company sold to a Restricted Subsidiary
of the Company and other than Disqualified Stock or debt securities that
have been converted into Disqualified Stock), plus (iii) 100% of the
aggregate amounts contributed to the common equity capital of the Company
since the date of the Indenture, plus (iv) 100% of the aggregate amounts
received in cash and the fair market value of marketable securities (other
than Restricted Investments) received from (x) the sale or other
disposition of Restricted Investments made by the Company and its
Restricted Subsidiaries since the date of the Indenture or (y) the sale of
the stock of an Unrestricted Subsidiary or the sale of all or substantially
all of the assets of an Unrestricted Subsidiary to the extent that a
liquidating dividend is paid to the Company or any Subsidiary from the
proceeds of such sale, plus (v) 100% of any dividends received by the
Company or a Wholly Owned Restricted Subsidiary of the Company after the
date of the Indenture from an Unrestricted Subsidiary of the Company, plus
(vi) $10 million.
The foregoing provisions will not prohibit:
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at the date of declaration such payment would have
complied with the provisions of the Indenture;
(ii) the redemption, repurchase, retirement or other acquisition of
any Equity Interests of the Company or any Restricted Subsidiary (the
"Retired Capital Stock") or any Subordinated Indebtedness, in each case, in
exchange for, or out of the proceeds of, the substantially concurrent sale
(other than to a Restricted Subsidiary of the Company) of Equity Interests
of the Company (other than any Disqualified Stock) (the "Refunding Capital
Stock");
(iii) the defeasance, redemption or repurchase of Subordinated
Indebtedness with the net cash proceeds from an incurrence of Permitted
Refinancing Indebtedness;
(iv) the redemption, repurchase or other acquisition or retirement for
value of any Equity Interests of the Company or any Restricted Subsidiary
of the Company held by any member of the Company's (or any of its
Subsidiaries') management pursuant to any management equity subscription
agreement or stock option or similar agreement; provided that the aggregate
price paid for all such repurchased, redeemed, acquired or retired Equity
Interests shall not exceed the sum of $5 million in any twelve-month period
plus the aggregate cash proceeds received by the Company during such
twelve-month period from any issuance of Equity Interests by the Company to
members of management of the Company and its Subsidiaries; provided that
the amount of any such net cash proceeds that are utilized for any such
redemption, repurchase, retirement or other acquisition shall be excluded
from clause (c)(ii) of the immediately preceding paragraph;
(v) Investments in Unrestricted Subsidiaries or in Joint Ventures
having an aggregate fair market value, taken together with all other
Investments made pursuant to this clause (v) that are at that time
outstanding, not to exceed $15 million plus 5% of the increase in Total
Assets since the Closing Date (as defined herein) at the time of such
Investment (with the fair market value of each Investment being measured at
the time made and without giving effect to subsequent changes in value);
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(vi) repurchases of Equity Interests deemed to occur upon exercise or
conversion of stock options, warrants, convertible securities or other
similar Equity Interests if such Equity Interests represent a portion of
the exercise or conversion price of such options, warrants, convertible
securities or other similar Equity Interests;
(vii) the making and consummation of a Subordinated Asset Sale Offer
in accordance with the provisions described under the caption entitled "--
Repurchase at the Option of Holders -- Asset Sales"; and
(viii) any dividend or distribution payable on or in respect of any
class of Equity Interests issued by a Restricted Subsidiary of the Company;
provided that such dividend or distribution is paid on a pro rata basis to
all of the holders of such Equity Interests in accordance with their
respective holdings of such Equity Interests;
provided, further, that at the time of, and after giving effect to, any
Restricted Payment permitted under clauses (iv), (v) or (vii) above, no Default
or Event of Default shall have occurred and be continuing or would occur as a
consequence thereof.
As of December 19, 1997, all of the Company's Subsidiaries were Restricted
Subsidiaries. The Company will not permit any Unrestricted Subsidiary to become
a Restricted Subsidiary except pursuant to the last sentence of the definition
of "Unrestricted Subsidiary". For purposes of designating any Restricted
Subsidiary as an Unrestricted Subsidiary, all outstanding Investments by the
Company and its Restricted Subsidiaries (except to the extent repaid) in the
Subsidiary so designated will be deemed to be Restricted Payments in an amount
equal to the book value of such Investment at the time of such designation. Such
designation will only be permitted if a Restricted Payment in such amount would
be permitted at such time and if such Subsidiary otherwise meets the definition
of an Unrestricted Subsidiary. Unrestricted Subsidiaries will not be subject to
any of the restrictive covenants set forth in the Indenture.
The amount of all Restricted Payments (other than cash) shall be the fair
market value (evidenced by a resolution of the Board of Directors set forth in
an Officers' Certificate delivered to the Trustee) on the date of the Restricted
Payment of the asset(s) proposed to be transferred by the Company or such
Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment.
Not later than the date of making any Restricted Payment, the Company shall
deliver to the Trustee an Officers' Certificate stating that such Restricted
Payment is permitted and setting forth the basis upon which the calculations
required by the covenant "Restricted Payments" were computed, which calculations
may be based upon the Company's latest available financial statements.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF DISQUALIFIED STOCK
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, directly or indirectly, create, incur, issue, assume,
guaranty or otherwise become directly or indirectly liable, contingently or
otherwise, with respect to (collectively, "incur" and correlatively, an
"incurrence" of) any Indebtedness (including Acquired Debt) and that the Company
will not issue any Disqualified Stock; provided, however, that the Company may
incur Indebtedness (including Acquired Debt) or issue shares of Disqualified
Stock if the Fixed Charge Coverage Ratio for the Company for the most recent
four full fiscal quarters for which internal financial statements are available
at the time of such incurrence would have been at least 2.00 to 1.0, determined
on a pro forma basis (including a pro forma application of the net proceeds
therefrom), as if the additional Indebtedness had been incurred or the
Disqualified Stock had been issued, as the case may be, and the application of
the proceeds therefrom had occurred at the beginning of such four-quarter
period.
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The foregoing provisions will not apply to:
(a) the incurrence by the Company (and the Guarantee thereof by the
Guarantors) of Indebtedness under the Bank Credit Agreement and the
issuance of letters of credit thereunder (with letters of credit being
deemed to have a principal amount equal to the aggregate maximum amount
then available to be drawn thereunder, assuming compliance with all
conditions for drawing) up to an aggregate principal amount of $167 million
outstanding at any one time, less principal repayments of term loans and
permanent commitment reductions with respect to revolving loans and letters
of credit under the Bank Credit Agreement (in each case, other than in
connection with an amendment, refinancing, refunding, replacement, renewal
or modification) made after the date of the Indenture;
(b) the incurrence by the Company or any of its Restricted
Subsidiaries of any Existing Indebtedness;
(c) the incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness represented by the Notes and the Exchange
Notes (other than any Additional Notes);
(d) Indebtedness (including Acquired Debt) incurred by the Company or
any of its Restricted Subsidiaries to finance the purchase, lease or
improvement of property (real or personal), assets or equipment (whether
through the direct purchase of assets or the Capital Stock of any Person
owning such assets), in an aggregate principal amount not to exceed $15
million plus 5% of the increase in Total Assets since the Closing Date;
(e) Indebtedness incurred by the Company or any of its Restricted
Subsidiaries constituting reimbursement obligations with respect to letters
of credit issued in the ordinary course of business, including, without
limitation, letters of credit in respect of workers' compensation claims or
self-insurance, or other Indebtedness with respect to reimbursement type
obligations regarding workers' compensation claims;
(f) intercompany Indebtedness between or among the Company and any of
its Restricted Subsidiaries and Guarantees by the Company of Indebtedness
of any Restricted Subsidiary of the Company or by a Restricted Subsidiary
of the Company of Indebtedness of any other Restricted Subsidiary of the
Company or the Company;
(g) Hedging Obligations that are incurred (1) for the purpose of
fixing or hedging interest rate or currency exchange rate risk with respect
to any Indebtedness that is permitted by the terms of the Indenture to be
outstanding or (2) for the purpose of fixing or hedging currency exchange
rate risk with respect to any purchases or sales of goods or other
transactions or expenditures made or to be made in the ordinary course of
business and consistent with past practices as to which the payment
therefor or proceeds therefrom, as the case may be, are denominated in a
currency other than U.S. dollars;
(h) obligations in respect of performance and surety bonds and
completion guarantees provided by the Company or any Restricted Subsidiary
in the ordinary course of business;
(i) the incurrence by the Company or any of its Restricted
Subsidiaries of Permitted Refinancing Indebtedness in exchange for, or the
net proceeds of which are used to extend, refinance, renew, replace,
defease or refund, Indebtedness that was permitted by the Indenture to be
incurred;
(j) the incurrence by the Company's Unrestricted Subsidiaries of
Non-Recourse Debt, provided, however, that if any such Indebtedness ceases
to be Non-Recourse Debt of an Unrestricted Subsidiary, such event shall be
deemed to constitute an incurrence of Indebtedness by a Restricted
Subsidiary of the Company; and
(k) the incurrence by the Company of additional Indebtedness
(including pursuant to the Bank Credit Agreement) not otherwise permitted
hereunder in an amount under this clause (k)
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not to exceed $25 million in aggregate principal amount (or accreted value,
as applicable) outstanding at any one time.
For purposes of calculating the Fixed Charge Coverage Ratio, the Indenture
permits, among other things, the Company to give pro forma effect to
acquisitions, and the cost savings expected to be realized in connection with
such acquisitions, that have occurred or are occurring since the beginning of
the applicable four-quarter reference period (or during the immediately
preceding four quarters). These adjustments and the other adjustments permitted
under the definition of Fixed Charge Coverage Ratio will be in addition to the
pro forma adjustments permitted to be included in pro forma financial statements
prepared in accordance with GAAP or Article 11 of Regulation S-X under the
Exchange Act.
ANTI-LAYERING PROVISION
The Indenture provides that (i) the Company will not directly or indirectly
incur, create, issue, assume, guarantee or otherwise become liable for any
Indebtedness that is subordinate or junior in right of payment to any Senior
Debt and senior in any respect in right of payment to the Exchange Notes and
(ii) no Guarantor will directly or indirectly incur, create, issue, assume,
guarantee or otherwise become liable for any Indebtedness that is subordinate or
junior in right of payment to the Senior Guarantees and senior in any respect in
right of payment to the Senior Subordinated Guarantees.
Except for the limitations on the incurrence of debt described above under
the caption "-- Incurrence of Indebtedness and Issuance of Disqualified Stock,"
the Indenture does not limit the amount of debt that is pari passu with the
Exchange Notes.
LIENS
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create, incur, assume
or suffer to exist any Lien that secures obligations under any Senior
Subordinated Indebtedness or Subordinated Indebtedness on any asset or property
now owned or hereafter acquired by the Company or any of its Restricted
Subsidiaries, or on any income or profits therefrom, or assign or convey any
right to receive income therefrom to secure any Senior Subordinated Indebtedness
or Subordinated Indebtedness, unless the Exchange Notes are equally and ratably
secured with the obligations so secured or until such time as such obligations
are no longer secured by a Lien; provided, that in any case involving a Lien
securing Subordinated Indebtedness, such Lien is subordinated to the Lien
securing the Exchange Notes to the same extent that such Subordinated
Indebtedness is subordinated to the Exchange Notes.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any encumbrance or restriction on
the ability of any Restricted Subsidiary to (i) (a) pay dividends or make any
other distributions to the Company or any of its Restricted Subsidiaries (1) on
its Capital Stock or (2) with respect to any other interest or participation in,
or measured by, its profits, or (b) pay any indebtedness owed to the Company or
any of its Restricted Subsidiaries, (ii) make loans or advances to the Company
or any of its Restricted Subsidiaries or (iii) sell, lease or transfer any of
its properties or assets to the Company or any of its Restricted Subsidiaries,
except for such encumbrances or restrictions existing under or by reason of (a)
Existing Indebtedness as in effect on the date of the Indenture, (b) the Bank
Credit Agreement and any amendments, modifications, restatements, renewals,
increases, supplements, refundings, replacements or refinancings thereof,
provided that the Bank Credit Agreement and any amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements or
refinancings thereof are no more
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restrictive taken as a whole with respect to such dividend and other payment
restrictions than those terms included in the Bank Credit Agreement on the date
of the Indenture, (c) the Indenture and the Exchange Notes, (d) applicable law,
(e) any instrument governing Indebtedness or Capital Stock of a Person acquired
by the Company or any of its Restricted Subsidiaries as in effect at the time of
such acquisition (except to the extent such Indebtedness was incurred in
connection with or in contemplation of such acquisition), which encumbrance or
restriction is not applicable to any Person, or the properties or assets of any
Person, other than the Person, or the property or assets of the Person, so
acquired, provided that, in the case of Indebtedness, such Indebtedness was
permitted by the terms of the Indenture to be incurred, (f) customary
non-assignment or net worth provisions in leases and other agreements entered
into in the ordinary course of business and consistent with past practices, (g)
purchase money obligations for property acquired in the ordinary course of
business that impose restrictions of the nature described in clause (iii) above
on the property so acquired, (h) Permitted Refinancing Indebtedness, provided
that the restrictions contained in the agreements governing such Permitted
Refinancing Indebtedness are no more restrictive than those contained in the
agreements governing the Indebtedness being refinanced, (i) any Mortgage
Financing or Mortgage Refinancing that imposes restrictions on the real property
securing such Indebtedness, (j) any Permitted Investment, (k) contracts for the
sale of assets, including, without limitation customary restrictions with
respect to a Restricted Subsidiary of the Company pursuant to an agreement that
has been entered into for the sale or disposition of all or substantially all of
the Capital Stock or assets of such Restricted Subsidiary or (l) customary
provisions in joint venture agreements and other similar agreements.
MERGER, CONSOLIDATION, OR SALE OF ALL OR SUBSTANTIALLY ALL ASSETS
The Indenture provides that the Company may not consolidate or merge with
or into (whether or not the Company is the surviving corporation), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially all
of its properties or assets in one or more related transactions to, another
Person unless (i) the Company is the surviving corporation or the Person formed
by or surviving any such consolidation or merger (if other than the Company) or
to which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made is a corporation organized or existing under the laws of
the United States, any state thereof or the District of Columbia; (ii) the
Person formed by or surviving any such consolidation or merger (if other than
the Company) or Person to which such sale, assignment, transfer, lease,
conveyance or other disposition shall have been made assumes all the obligations
of the Company under the Exchange Notes and the Indenture pursuant to a
supplemental Indenture in form reasonably satisfactory to the Trustee; (iii)
immediately after such transaction no Default or Event of Default exists; and
(iv) except in the case of a merger of the Company with or into a Wholly Owned
Restricted Subsidiary of the Company, the Company or the Person formed by or
surviving any such consolidation or merger (if other than the Company), or to
which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made will, at the time of such transaction and after giving pro
forma effect thereto as if such transaction had occurred at the beginning of the
applicable four-quarter period, be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set
forth in the first paragraph of the covenant described above under the caption
"-- Incurrence of Indebtedness and Issuance of Disqualified Stock".
Notwithstanding the foregoing clauses (iii) and (iv), (a) any Restricted
Subsidiary may consolidate with, merge into or transfer all or part of its
properties and assets to the Company and (b) the Company may merge with an
Affiliate incorporated solely for the purpose of reincorporating the Company in
another jurisdiction.
TRANSACTIONS WITH AFFILIATES
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, make any payment to, or sell, lease, transfer
or otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into or make or amend
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any contract, agreement, understanding, loan, advance or guarantee with, or for
the benefit of, any Affiliate (each of the foregoing, an "Affiliate
Transaction"), unless (i) such Affiliate Transaction is on terms that are no
less favorable to the Company or the relevant Restricted Subsidiary than those
that would have been obtained in a comparable transaction by the Company or such
Restricted Subsidiary with an unrelated Person and (ii) the Company delivers to
the Trustee (a) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of $5
million, a resolution of the Board of Directors set forth in an Officers'
Certificate certifying that such Affiliate Transaction complies with clause (i)
above and (if there are any disinterested members of the Board of Directors)
that such Affiliate Transaction has been approved by a majority of the
disinterested members of the Board of Directors and (b) with respect to any
Affiliate Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $10 million, or with respect to any
Affiliate Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $5 million as to which there are no
disinterested members of the Board of Directors, an opinion as to the fairness
to the Holders of such Affiliate Transaction from a financial point of view
issued by an accounting, appraisal or investment banking firm of national
standing.
The foregoing provisions will not apply to the following: (i) transactions
between or among the Company and/or any of its Restricted Subsidiaries; (ii)
Restricted Payments or Permitted Investments permitted by the provisions of the
Indenture described above under "-- Restricted Payments"; (iii) the payment of
all fees, expenses and other amounts relating to the Transaction; (iv) the
payment of reasonable and customary regular fees to, and indemnity provided on
behalf of, officers, directors, employees or consultants of the Company or any
Restricted Subsidiary of the Company; (v) the transfer or provision of
inventory, goods or services by the Company or any Restricted Subsidiary of the
Company in the ordinary course of business to any Affiliate of the Company on
terms that are customary in the industry or consistent with past practices,
including with respect to price and volume discounts; (vi) the execution of, or
the performance by the Company or any of its Restricted Subsidiaries of its
obligations under the terms of, any financial advisory, financing, underwriting
or placement agreement or any other agreement relating to investment banking or
financing activities with Goldman, Sachs & Co. or any of its Affiliates
including, without limitation, in connection with acquisitions or divestitures,
in each case to the extent that such agreement was approved by a majority of the
disinterested members of the Board of Directors in good faith; (vii) payments,
advances or loans to employees that are approved by a majority of the
disinterested members of the Board of Directors of the Company in good faith;
(viii) the performance of any agreement as in effect as of the date of the
Indenture or any transaction contemplated thereby (including pursuant to any
amendment thereto so long as any such amendment is not disadvantageous to the
Holders of the Exchange Notes in any material respect); (ix) the existence of,
or the performance by the Company or any of its Restricted Subsidiaries of its
obligations under the terms of, any stockholders agreement (including any
registration rights agreement or purchase agreement related thereto) to which it
is a party as of the date of the Indenture and any similar agreements which it
may enter into thereafter, provided, however, that the existence of, or the
performance by the Company or any of its Restricted Subsidiaries of obligations
under, any future amendment to any such existing agreement or under any similar
agreement entered into after the date of the Indenture shall only be permitted
by this clause (ix) to the extent that the terms of any such amendment or new
agreement are not otherwise disadvantageous to the Holders of the Exchange Notes
in any material respect; (x) transactions permitted by, and complying with, the
provisions of the covenant described under "-- Merger, Consolidation, or Sale of
All or Substantially All Assets"; and (xi) transactions with suppliers or other
purchases or sales of goods or services, in each case in the ordinary course of
business (including, without limitation, pursuant to joint venture agreements)
and otherwise in compliance with the terms of the Indenture which are fair to
the Company or its Restricted Subsidiaries, in the reasonable determination of a
majority of the disinterested members of the Board of Directors of the
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Company or an executive officer thereof, or are on terms at least as favorable
as might reasonably have been obtained at such time from an unaffiliated party.
ISSUANCES OF GUARANTEES OF INDEBTEDNESS
The Indenture provides that the Company will not permit any Restricted
Subsidiary, directly or indirectly, to Guarantee or pledge any assets to secure
the payment of any other Indebtedness unless such Restricted Subsidiary either
(i) is a Guarantor, or (ii) simultaneously executes and delivers a supplemental
indenture to the Indenture providing for the Guarantee of the payment of all
Obligations with respect to the Exchange Notes by such Restricted Subsidiary,
which Guarantee shall be senior to such Restricted Subsidiary's Guarantee of or
pledge to secure any other Indebtedness that constitutes Subordinated
Indebtedness and subordinated to such Restricted Subsidiary's Guarantee of or
pledge to secure any other Indebtedness that constitutes Senior Debt to the same
extent as the Exchange Notes are subordinated to Senior Debt. In addition, the
Indenture provides that (x) if the Company shall, after the date of the
Indenture, create or acquire any new Restricted Subsidiary (other than a
Restricted Subsidiary organized under the laws of a country other than the
United States), then such newly created or acquired Restricted Subsidiary shall
execute a Senior Subordinated Guarantee and deliver an opinion of counsel in
accordance with the terms of the Indenture, and (y) if the Company shall
(whether before or after the date of the Indenture) create or acquire any other
new Subsidiary that becomes a guarantor under the Bank Credit Agreement, then
such newly created or acquired Subsidiary shall execute a Senior Subordinated
Guarantee and deliver an opinion of counsel in accordance with the terms of the
Indenture. Notwithstanding the foregoing, any such Senior Subordinated Guarantee
shall provide by its terms that it shall be automatically and unconditionally
released and discharged upon certain mergers, consolidations, sales and other
dispositions (including, without limitation, by foreclosure) pursuant to the
terms of the Indenture. In addition, if any Guarantor is released and relieved
of all obligations it may have as a guarantor under the Bank Credit Agreement,
then such Guarantor will also be automatically released and relieved of any
obligations under its Senior Subordinated Guarantee. See "-- Senior Subordinated
Guarantees". The form of such Senior Subordinated Guarantee is attached as an
exhibit to the Indenture.
REPORTS
The Indenture provides that, whether or not required by the rules and
regulations of the Commission, so long as any Exchange Notes are outstanding,
the Company will, commencing after consummation of the Transaction, furnish to
the Holders of Exchange Notes (i) all quarterly and annual financial information
that would be required to be contained in a filing with the Commission on Forms
10-Q and 10-K if the Company were required to file such Forms, including a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and, with respect to the annual information only, a report thereon
by the Company's certified independent accountants and (ii) all current reports
that would be required to be filed with the Commission on Form 8-K if the
Company were required to file such reports. In addition, whether or not required
by the rules and regulations of the Commission, following the consummation of
the Transaction, the Company will file a copy of all such information and
reports with the Commission for public availability (unless the Commission will
not accept such a filing) and make such information available to securities
analysts and prospective investors upon request. In addition, the Company and
the Guarantors have agreed that, for so long as any Notes or Exchange Notes
remain outstanding, they will furnish to the Holders of the Notes and/or
Exchange Notes and to securities analysts and prospective investors, upon their
request, the information required to be delivered pursuant to Rule 144A (d)(4)
under the Securities Act.
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EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default with respect to the Exchange Notes: (i) default for 30 days in the
payment when due of interest, including Liquidated Damages, if any, on the
Exchange Notes (whether or not prohibited by the subordination provisions of the
Indenture); (ii) default in payment when due of the principal of or premium, if
any, on the Exchange Notes (whether or not prohibited by the subordination
provisions of the Indenture); (iii) failure by the Company for 30 days after
notice from the Trustee or the Holders of at least 25% in principal amount of
the then outstanding Exchange Notes to comply with the provisions described
under "-- Change of Control", "-- Restricted Payments", "-- Incurrence of
Indebtedness and Issuance of Disqualified Stock" or "-- Merger, Consolidation,
or Sale of All or Substantially All Assets"; (iv) failure by the Company for 60
days after notice from the Trustee or the Holders of at least 25% in principal
amount of the then outstanding Exchange Notes to comply with any of its other
agreements in the Indenture or the Exchange Notes; (v) default under any
mortgage, indenture or instrument under which there may be issued or by which
there may be secured or evidenced any Indebtedness for money borrowed by the
Company or any of its Restricted Subsidiaries (or the payment of which is
guaranteed by the Company or any of its Restricted Subsidiaries) whether such
Indebtedness or guarantee now exists, or is created after the date of the
Indenture, which default results in the acceleration of such Indebtedness prior
to its express maturity and, in each case, the principal amount of any such
Indebtedness, together with the principal amount of any other such Indebtedness
the maturity of which has been so accelerated, aggregates $15 million or more;
(vi) failure by the Company or any of its Restricted Subsidiaries to pay final
judgments aggregating in excess of $15 million, which judgments are not paid,
discharged or stayed for a period of 60 days; (vii) certain events of bankruptcy
or insolvency with respect to the Company or any of its Restricted Subsidiaries;
(viii) except as permitted by the Indenture, any Senior Subordinated Guarantee
shall be held in any judicial proceeding to be unenforceable or invalid or shall
cease for any reason to be in full force and effect (except by its terms) or any
Guarantor, or any Person acting on behalf of any Guarantor, shall deny or
disaffirm its obligations under its Senior Subordinated Guarantee.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding Exchange
Notes may declare all the Exchange Notes to be due and payable immediately. Upon
such declaration the principal, interest, premium, if any, and Liquidated
Damages, if any, shall be due and payable immediately; provided, however, that
so long as Senior Debt or any commitment therefor is outstanding under the Bank
Credit Agreement, any such notice or declaration shall not be effective until
the earlier of (a) five Business Days after such notice is delivered to the
Representative for the Bank Debt or (b) the acceleration of any Indebtedness
under the Bank Credit Agreement. Notwithstanding the foregoing, in the case of
an Event of Default arising from certain events of bankruptcy or insolvency,
with respect to the Company, any Significant Restricted Subsidiary or any group
of Restricted Subsidiaries that, taken together, would constitute a Significant
Restricted Subsidiary, all outstanding Exchange Notes will become due and
payable without further action or notice. Holders of the Exchange Notes may not
enforce the Indenture or the Exchange Notes except as provided in the Indenture.
Subject to certain limitations, Holders of a majority in principal amount of the
then outstanding Exchange Notes may direct the Trustee in its exercise of any
trust or power. The Trustee may withhold from Holders of the Exchange Notes
notice of any continuing Default or Event of Default (except a Default or Event
of Default relating to the payment of principal, premium, if any, or interest)
if it determines that withholding notice is in their interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have had
to pay if the Company then had elected to redeem the Exchange Notes pursuant to
the optional redemption provisions of the Indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon
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the acceleration of the Exchange Notes. If an Event of Default occurs prior to
December 15, 2002 by reason of any willful action (or inaction) taken (or not
taken) by or on behalf of the Company with the intention of avoiding the
prohibition on redemption of the Exchange Notes prior to December 15, 2002, then
the premium specified in the Indenture shall also become immediately due and
payable to the extent permitted by law upon the acceleration of the Exchange
Notes.
The Holders of a majority in aggregate principal amount of the Exchange
Notes then outstanding by notice to the Trustee may on behalf of the Holders of
all of the Exchange Notes waive any existing Default or Event of Default and its
consequences under the Indenture except a continuing Default or Event of Default
in the payment of interest on, or the principal of and premium, if any, on, the
Exchange Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No past, present or future director, officer, employee, incorporator or
stockholder of the Company or any Guarantor, as such, shall have any liability
for any obligations of the Company or the Guarantors under the Exchange Notes,
the Senior Subordinated Guarantees or the Indenture or for any claim based on,
in respect of, or by reason of, such obligations or their creation. Each Holder
of Exchange Notes by accepting an Exchange Note waives and releases all such
liability. The waiver and release are part of the consideration for issuance of
the Exchange Notes.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all
obligations of the Company and the Guarantors discharged with respect to the
outstanding Exchange Notes and the Senior Subordinated Guarantees ("Legal
Defeasance") except for (i) the rights of Holders of outstanding Exchange Notes
to receive payments in respect of the principal of and premium, if any, and
interest on such Exchange Notes when such payments are due from the trust
referred to below, (ii) the Company's obligations with respect to the Exchange
Notes concerning issuing temporary Exchange Notes, registration of Exchange
Notes, mutilated, destroyed, lost or stolen Exchange Notes and the maintenance
of an office or agency for payment and money for security payments held in
trust, (iii) the rights, powers, trusts, duties and immunities of the Trustee,
and the Company's obligations in connection therewith and (iv) the Legal
Defeasance provisions of the Indenture. In addition, the Company may, at its
option and at any time, elect to have the obligations of the Company and the
Guarantors released with respect to certain covenants that are described in the
Indenture and the Senior Subordinated Guarantees ("Covenant Defeasance") and
thereafter any omission to comply with such obligations shall not constitute a
Default or Event of Default with respect to the Exchange Notes and the Senior
Subordinated Guarantees. In the event Covenant Defeasance occurs, certain events
(not including non-payment, bankruptcy, receivership, rehabilitation and
insolvency events) described under "-- Events of Default and Remedies" will no
longer constitute an Event of Default with respect to the Exchange Notes and the
Senior Subordinated Guarantees.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company or the Guarantors must irrevocably deposit with the Trustee, in
trust, for the benefit of the Holders of the Exchange Notes, cash in U.S.
dollars, non-callable Government Securities, or a combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally recognized firm of
independent public accountants, to pay the principal of and premium, if any, and
interest on the outstanding Exchange Notes on the stated maturity or on the
applicable redemption date, as the case may be, and the Company or the
Guarantors must specify whether the Exchange Notes are being defeased to
maturity or to a particular redemption date; (ii) in the case of Legal
Defeasance, the Company or the Guarantors shall have delivered to the Trustee an
opinion of counsel in the
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United States reasonably acceptable to the Trustee confirming that (A) the
Company or the Guarantors have received from, or there has been published by,
the Internal Revenue Service a ruling or (B) since the date of the Indenture,
there has been a change in the applicable federal income tax law, in either case
to the effect that, and based thereon such opinion of counsel shall confirm
that, the Holders of the outstanding Exchange Notes will not recognize income,
gain or loss for federal income tax purposes as a result of such Legal
Defeasance and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such Legal
Defeasance had not occurred; (iii) in the case of Covenant Defeasance, the
Company or the Guarantors shall have delivered to the Trustee an opinion of
counsel in the United States reasonably acceptable to the Trustee confirming
that the Holders of the outstanding Exchange Notes will not recognize income,
gain or loss for federal income tax purposes as a result of such Covenant
Defeasance and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such Covenant
Defeasance had not occurred; (iv) no Default or Event of Default shall have
occurred and be continuing on the date of such deposit (other than a Default or
Event of Default resulting from the borrowing of funds to be applied to such
deposit) or insofar as Events of Default from bankruptcy or insolvency events
are concerned, at any time in the period ending on the 91st day after the date
of deposit; (v) such Legal Defeasance or Covenant Defeasance will not result in
a breach or violation of, or constitute a default under, any material agreement
or instrument (other than the Indenture) to which the Company or any of its
Restricted Subsidiaries is a party or by which the Company or any of its
Restricted Subsidiaries is bound; (vi) the Company or the Guarantors must have
delivered to the Trustee an opinion of counsel to the effect that after the 91st
day following the deposit, the trust funds will not be subject to the effect of
any applicable bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally; (vii) the Company or the Guarantors must deliver to
the appropriate Trustee an Officers' Certificate stating that the deposit was
not made by the Company or the Guarantors, as applicable, with the intent of
preferring the Holders of Exchange Notes over the other creditors of the Company
or the Guarantors, as applicable, with the intent of defeating, hindering,
delaying or defrauding creditors of the Company or the Guarantors, as
applicable, or others; and (viii) the Company or the Guarantors must deliver to
the Trustee an Officers' Certificate and an opinion of counsel, each stating
that all conditions precedent provided for or relating to the Legal Defeasance
or the Covenant Defeasance have been complied with.
TRANSFER AND EXCHANGE
A holder may transfer or exchange Exchange Notes in accordance with the
Indenture. The Registrar and the Trustee may require a Holder, among other
things, to furnish appropriate endorsements and transfer documents and the
Company may require a Holder to pay any taxes and fees required by law or
permitted by the Indenture. The Company is not required to transfer or exchange
any Exchange Note selected for redemption. Also, the Company is not required to
transfer or exchange any Exchange Note for a period of 15 days before a
selection of Exchange Notes to be redeemed.
The registered Holder of an Exchange Note will be treated as the owner of
it for all purposes.
BOOK-ENTRY, DELIVERY AND FORM
The Exchange Notes initially issued in exchange for the Notes generally
will be represented by one or more fully-registered global notes (collectively,
the "Global Exchange Note"). Notwithstanding the foregoing, Notes held in
certificated form will be exchanged solely for Exchange Notes in certificated
form, as discussed below. The Global Exchange Note will be deposited upon
issuance with the Depository and registered in the name of the Depository or a
nominee of the Depository (the "Global Exchange Note Registered Owner"). Except
as set forth below, the Global Exchange Note may be transferred, in whole and
not in part, only to another nominee of the Depository or to a successor of the
Depository or its nominee.
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The Depository is a limited-purpose trust company that was created to hold
securities for its participating organizations (collectively, the "Participants"
or the "Depository's Participants") and to facilitate the clearance and
settlement of transactions in such securities between Participants through
electronic book-entry changes in accounts of its Participants. The Depository's
Participants include securities brokers and dealers (including the initial
Purchaser), banks and trust companies, clearing corporations and certain other
organizations. Access to the Depository's system is also available to other
entities such as banks, brokers, dealers and trust companies (collectively, the
"Indirect Participants" or the "Depository's Indirect Participants") that clear
through or maintain a custodial relationship with a Participant, either directly
or indirectly. Persons who are not Participants may beneficially own securities
held by or on behalf of the Depository only through the Depository's
Participants or the Depository's Indirect Participants.
The Company expects that pursuant to procedures established by the
Depository, (i) upon deposit of the Global Exchange Note, the Depository will
credit the accounts of Participants designated by the Exchange Agent with
portions of the principal amount of the Global Exchange Note and (ii) ownership
of such interests in the Global Exchange Note will be shown on, and the transfer
of ownership thereof will be effected only through, records maintained by the
Depository (with respect to the interests of the Depository's Participants), the
Depository's Participants and the Depository's Indirect Participants. The laws
of some states require that certain persons take physical delivery in definitive
form of securities that they own. Consequently, the ability to transfer Exchange
Notes is limited to that extent. For certain other restrictions on the
transferability of the Exchange Notes, see "Risk Factors -- Restrictions on
Transfer".
Except as described below, owners of interests in the Global Exchange Note
will not have Exchange Notes registered in their names, will not receive
physical delivery of Exchange Notes in definitive form and will not be
considered the registered owners or holders thereof under the Indenture for any
purpose.
Payments in respect of the principal of and premium, if any, and interest
on any Exchange Notes registered in the name of the Global Exchange Note
Registered Owner will be payable by the Trustee to the Global Exchange Note
Registered Owner in its capacity as the registered Holder under the Indenture.
Under the terms of the Indenture, the Company and the Trustee will treat the
persons in whose names the Exchange Notes, including the Global Exchange Note,
are registered as the owners thereof for the purpose of receiving such payments
and for any and all other purposes whatsoever. Consequently, neither the
Company, the Trustee nor any agent of the Company or the Trustee has or will
have any responsibility or liability for (i) any aspect of the Depository's
records or any Participant's records relating to or payments made on account of
beneficial ownership interests in the Global Exchange Note, or for maintaining,
supervising or reviewing any of the Depository's records or any Participant's
records relating to the beneficial ownership interests in the Global Exchange
Note or (ii) any other matter relating to the actions and practices of the
Depository or any of its Participants. The Company believes, however, that it is
the current practice of the Depository, upon receipt of any payment in respect
of securities such as the Exchange Notes (including principal and interest), to
credit the accounts of the relevant Participants with the payment on the payment
date, in the amounts proportionate to their respective holdings in principal
amount of beneficial interests in the relevant security as shown on the records
of the Depository unless the Depository has reason to believe it will not
receive payment on such payment date. Payments by the Participants and the
Indirect Participants to the beneficial owners of the Exchange Notes will be
governed by standing instructions and customary practices and will be the
responsibility of the Participants or the Indirect Participants and will not be
the responsibility of the Depository, the Trustee or the Company. Neither the
Company nor the Trustee will be liable for any delay by the Depository or any of
its Participants in identifying the beneficial owners of the Exchange Notes, and
the Company and the Trustee may conclusively rely on and will be protected in
relying on instruction from the Global Exchange Note Registered Owner for all
purposes.
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The Global Exchange Note is exchangeable for definitive Exchange Notes if
(i) the Depository notifies the Company that it is unwilling or unable to
continue as Depository of the Global Exchange Note and the Company thereupon
fails to appoint a successor Depository, (ii) the Company, at its option,
notifies the Trustee in writing that it elects to cause the issuance of the
Exchange Notes in definitive registered form, (iii) there shall have occurred
and be continuing an Event of Default or any event which after notice or lapse
of time or both would be an Event of Default with respect to the Exchange Notes
or (iv) as provided in the following paragraph. Such definitive Exchange Notes
shall be registered in the names of the owners of the beneficial interests in
the Global Exchange Note as provided by the Participants. Exchange Notes issued
in definitive form will be in fully registered form, without coupons, in minimum
denominations of $1,000 and integral multiples thereof. Upon issuance of
Exchange Notes in definitive form, the Trustee is required to register the
Exchange Notes in the name of, and cause the Exchange Notes to be delivered to,
the person or persons (or the nominee thereof) identified as the beneficial
owners as the Depository shall direct.
Subject to the restrictions on the transferability of the Exchange Notes
described in "Risk Factors -- Restrictions on Transfer," an Exchange Note in
definitive form will be issued (i) in the Exchange Offer solely in exchange for
certificated Notes or (ii) following the Exchange Offer, upon the resale, pledge
or other transfer of any Exchange Note or interest therein to any person or
entity that does not participate in the Depository. The exchange of certificated
notes in the Exchange Offer may be made only by presentation of the Notes, duly
endorsed, together with a duly completed Letter of Transmittal and other
required documentation as described under "The Exchange Offer -- Procedures for
Tendering" and "-- Guaranteed Delivery Procedures". Transfers of certificated
Exchange Notes may be made only by presentation of Exchange Notes, duly
endorsed, to the Trustee for registration of transfer on the Note Register
maintained by the Trustee for such purposes.
The information in this section concerning the Depository and the
Depository's book-entry system has been obtained from sources that the Company
believes to be reliable, but the Company takes no responsibility for the
accuracy thereof.
CERTIFICATED SECURITIES
If (i) the Company notifies the Trustee in writing that the Depository is
no longer willing or able to act as a depository and the Company is unable to
locate a qualified successor within 90 days or (ii) the Company, at its option,
notifies the Trustee in writing that it elects to cause the issuance of Exchange
Notes evidenced by registered, definitive certificates ("Certificated
Securities") under the Indenture, then, upon surrender by the Global Exchange
Note Holder of its Global Exchange Notes, Exchange Notes in such form will be
issued to each person that the Global Exchange Note Holder and the Depository
identify as being the beneficial owner of the related Exchange Note.
Neither the Company nor the Trustee will be liable for any delay by the
Global Exchange Note Holder or the Depository in identifying the beneficial
owners of Exchange Notes and the Company and the Trustee may conclusively rely
on, and will be protected in relying on, instructions from the Global Exchange
Note Holder or the Depository for all purposes.
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
The Company, the Guarantors and the Initial Purchaser entered into the
Registration Rights Agreement on December 19, 1997 (the "Closing Date").
Pursuant to the Registration Rights Agreement, the Company and the Guarantors
agreed to file with the Commission on or prior to 45 days after the Closing Date
the Exchange Offer Registration Statement on the appropriate form under the
Securities Act with respect to the Exchange Notes. Upon the effectiveness of the
Exchange Offer Registration Statement, the Company will offer to the Holders of
Transfer Restricted Securities pursuant to the Exchange Offer who are able to
make certain representations the opportunity to exchange their Transfer
Restricted Securities for Exchange Notes. If (i) the
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Company and the Guarantors are not required to file the Exchange Offer
Registration Statement or permitted to consummate the Exchange Offer because the
Exchange Offer is not permitted by applicable law or Commission policy or (ii)
any Holder of Transfer Restricted Securities notifies the Company on or prior to
the 20th Business Day following consummation of the Exchange Offer that it alone
or together with Holders who hold in the aggregate at least $1.0 million in
principal amount of Notes (A) is prohibited by law or Commission policy from
participating in the Exchange Offer or (B) may not resell the Exchange Notes
acquired by it in the Exchange Offer to the public without delivering a
prospectus and the prospectus contained in the Exchange Offer Registration
Statement is not appropriate or available for such resales or (C) is a
broker-dealer and owns Notes acquired directly from the Company or an affiliate
of the Company, the Company and the Guarantors will use their best efforts to
file with the Commission a Shelf Registration Statement to cover resales of the
Notes by the Holders thereof who satisfy certain conditions relating to the
provision of information in connection with the Shelf Registration Statement.
The Company and the Guarantors will use their best efforts to cause the
applicable registration statement to be declared effective by the Commission as
described below. For purposes of the foregoing, "Transfer Restricted Securities"
means each Note until the earliest to occur of (i) the date on which such Note
has been exchanged by a person other than a broker-dealer for an Exchange Note
in the Exchange Offer and entitled to be resold to the public by the Holder
thereof without complying with the prospectus delivery requirements of the
Securities Act, (ii) following the exchange by a broker-dealer in the Exchange
Offer of a Note for an Exchange Note, the date on which such Exchange Note is
sold to a purchaser who receives from such broker-dealer on or prior to the date
of such sale a copy of the prospectus contained in the Exchange Offer
Registration Statement, (iii) the date on which such Note has been effectively
registered under the Securities Act and disposed of in accordance with a Shelf
Registration Statement and (iv) the date on which such Note is distributed to
the public pursuant to Rule 144 under the Securities Act. Notwithstanding the
foregoing, at any time after Consummation (as defined in the Registration Rights
Agreement) of the Exchange Offer, the Company and the Guarantors may allow the
Shelf Registration Statement to cease to be effective and usable if (i) the
Board of Directors of the Company determines in good faith that such action is
in the best interests of the Company, and the Company notifies the Holders
within a certain period of time after the Board of Directors makes such
determination or (ii) the prospectus contained in the Shelf Registration
Statement or the Shelf Registration Statement contains an untrue statement of a
material fact required to be stated therein or omits to state a material fact
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading; provided that the period referred to
in the Registration Rights Agreement during which the Shelf Registration
Statement is required to be effective and usable will be extended by the number
of days during which such registration statement was not effective or usable
pursuant to the foregoing provisions.
The Registration Rights Agreement provides that (i) the Company and the
Guarantors will file an Exchange Offer Registration Statement with the
Commission on or prior to 45 days after the Closing Date, (ii) the Company and
the Guarantors will use their best efforts to have the Exchange Offer
Registration Statement declared effective by the Commission on or prior to 105
days after the date on which such Exchange Offer Registration Statement is filed
with the Commission, (iii) unless the Exchange Offer would not be permitted by
applicable law or Commission policy, the Company and the Guarantors will
commence the Exchange Offer and use their best efforts to issue on or prior to
45 days after the date on which the Exchange Offer Registration Statement was
declared effective by the Commission, Exchange Notes in exchange for all Notes
tendered prior thereto in the Exchange Offer and (iv) if obligated to file the
Shelf Registration Statement, the Company and the Guarantors will use their best
efforts to file the Shelf Registration Statement with the Commission on or prior
to 45 days after such filing obligation arises and to cause the Shelf
Registration Statement to be declared effective by the Commission on or prior to
105 days after the date such filing is required. If (a) the Company and the
Guarantors fail to file either of the Registration Statements required by the
Registration Rights Agreement on or before the date specified for such filing,
(b) either of such
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Registration Statements is not declared effective by the Commission on or prior
to the date specified for such effectiveness (the "Effectiveness Target Date"),
(c) the Company and the Guarantors fail to consummate the Exchange Offer within
45 days of the Effectiveness Target Date with respect to the Exchange Offer
Registration Statement, or (d) the Shelf Registration Statement or the Exchange
Offer Registration Statement is declared effective but thereafter ceases to be
effective or usable in connection with resales of Transfer Restricted Securities
during the periods specified in the Registration Rights Agreement (each such
event referred to in clauses (a) through (d) above a "Registration Default"),
then, subject to the last sentence of the preceding paragraph, the Company will
pay Liquidated Damages to each Holder of Transfer Restricted Securities, with
respect to the first 90-day period immediately following the occurrence of such
Registration Default in an amount equal to $0.05 per week per $1,000 in
principal amount of Notes constituting Transfer Restricted Securities held by
such Holder. The amount of the Liquidated Damages will increase by an additional
$0.05 per week per $1,000 in principal amount of Notes constituting Transfer
Restricted Securities with respect to each subsequent 90-day period until all
Registration Defaults have been cured, up to a maximum amount of Liquidated
Damages of $0.50 per week per $1,000 in principal amount of Notes constituting
Transfer Restricted Securities. All accrued Liquidated Damages will be paid by
the Company in cash on each Damages Payment Date (as defined in the Registration
Rights Agreement) to the Global Note Holder (and any Holder of Certificated
Securities who has given wire transfer instructions to the Company at least 10
Business Days prior to the Damages Payment Date) by wire transfer of immediately
available funds and to all other Holders of Certificated Securities by mailing
checks to their registered addresses. Following the cure of all Registration
Defaults, the accrual of Liquidated Damages will cease.
Holders of Notes will be required to make certain representations to the
Company (as described in the Registration Rights Agreement) in order to
participate in the Exchange Offer and will be required to deliver information to
be used in connection with the Shelf Registration Statement and will be provided
an opportunity to provide comments on the Shelf Registration Statement within
the time periods set forth in the Registration Rights Agreement in order to have
their Notes included in the Shelf Registration Statement and benefit from the
provisions regarding Liquidated Damages set forth above.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, the full text of the Registration Rights
Agreement, which has been filed as an exhibit to the Registration Statement of
which this Prospectus is a part and is incorporated by reference herein.
CONSENT OF HOLDERS; SINGLE CLASS
Except as described below under "-- Amendment, Supplement and Waiver", and
as otherwise described herein or in the Indenture, the Notes and the Exchange
Notes will be considered collectively to be a single class for all purposes
under the Indenture, including, without limitation, waivers, amendments,
redemptions and Repurchase Offers, and for purposes of this "Description of
Exchange Notes" (except under the caption, "-- Registration Rights; Liquidated
Damages") all reference herein to "Exchange Notes" shall be deemed to refer
collectively to the Notes and any Exchange Notes, unless the context otherwise
requires.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture and
the Exchange Notes may be amended or supplemented with the consent of the
Holders of at least a majority in principal amount of the Exchange Notes then
outstanding (including, without limitation, consents obtained in connection with
a purchase of, or tender offer or exchange offer for, such Exchange Notes), and
any existing default or compliance with any provision of the Indenture or the
Exchange Notes may be waived with the consent of the Holders of a majority in
principal amount of the then
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outstanding Exchange Notes (including consents obtained in connection with a
purchase of, or tender offer or exchange offer for, such Exchange Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Exchange Notes held by a nonconsenting Holder): (i) reduce
the principal amount of Exchange Notes whose Holders must consent to an
amendment, supplement or waiver, (ii) reduce the principal of or change the
fixed maturity of any Exchange Note or alter the provisions with respect to the
redemption of the Exchange Notes (other than provisions relating to the
covenants described above under "-- Repurchase at the Option of Holders"), (iii)
reduce the rate of or change the time for payment of interest, including
Liquidated Damages, if any, on any Exchange Note, (iv) waive a Default or Event
of Default in the payment of principal of or premium, if any, or interest,
including Liquidated Damages, if any, on the Exchange Notes (except a rescission
of acceleration of the Exchange Notes by the Holders of at least a majority in
aggregate principal amount thereof and a waiver of the payment default that
resulted from such acceleration), (v) make any Exchange Note payable in money
other than that stated in the Exchange Notes, (vi) make any change in the
provisions of the Indenture relating to waivers of past Defaults or the rights
of Holders of Exchange Notes to receive payments of principal of or premium, if
any, or interest, including Liquidated Damages, if any, on the Exchange Notes,
(vii) waive a redemption payment with respect to any Exchange Note (other than a
payment required by one of the covenants described above under "-- Repurchase at
the Option of Holders") or (viii) make any change in the foregoing amendment and
waiver provisions.
Notwithstanding the foregoing, without the consent of any Holder of
Exchange Notes, the Company and the Trustee may amend or supplement the
Indenture or the Exchange Notes to cure any ambiguity, defect or inconsistency,
to provide for uncertificated Exchange Notes in addition to or in place of
certificated Exchange Notes, to provide for the assumption of the Company's
obligations to Holders of Exchange Notes in the case of a merger or
consolidation, to make any change that would provide any additional rights or
benefits to the Holders of Exchange Notes or that does not adversely affect the
legal rights under the Indenture of any such Holder, or to comply with
requirements of the Commission in order to effect or maintain the qualification
of the Indenture under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should the Trustee become a creditor of the Company, to obtain payment of claims
in certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage in
other transactions; however, if the Trustee acquires any conflicting interest it
must eliminate such conflict within 90 days, apply to the Commission for
permission to continue or resign.
The Holders of a majority in principal amount of the then outstanding
Exchange Notes will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Trustee,
subject to certain exceptions. The Indenture provides that in case an Event of
Default shall occur (which shall not be cured), the Trustee will be required, in
the exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the Indenture
at the request of any Holder, unless such Holder shall have offered to the
Trustee security and indemnity satisfactory to it against any loss, liability or
expense.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
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"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Restricted Subsidiary of such specified Person,
including, without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Restricted Subsidiary of such specified Person, and (ii) Indebtedness secured by
a Lien encumbering any asset acquired by such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling", "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control.
"Asset Sale" means:
(i) the sale, conveyance, transfer or other disposition (whether in a
single transaction or a series of related transactions) of property or
assets (including by way of a sale and leaseback) of the Company or any
Restricted Subsidiary (each referred to in this definition as a
"disposition") or
(ii) the issuance or sale of Equity Interests of any Restricted
Subsidiary (whether in a single transaction or a series of related
transactions),
in each case, other than:
(a) a disposition of Cash Equivalents or goods held for sale in the
ordinary course of business or obsolete equipment or other obsolete
assets in the ordinary course of business consistent with past practices
of the Company;
(b) the disposition of all or substantially all of the assets of
the Company in a manner permitted pursuant to the provisions described
above under the covenant entitled "-- Merger, Consolidation, or Sale of
All or Substantially All Assets" or any disposition that constitutes a
Change of Control pursuant to the Indenture;
(c) any disposition that is a Restricted Payment or Permitted
Investment that is permitted under the covenant described above under
"-- Restricted Payments";
(d) any individual disposition, or series of related dispositions,
of assets with an aggregate fair market value of less than $2.5 million;
(e) any sale of an Equity Interest in, or Indebtedness or other
securities of, an Unrestricted Subsidiary; and
(f) foreclosures on assets.
"Asset Sale Offer" has the meaning set forth under the caption "--
Repurchase at the Option of Holders -- Asset Sales".
"Bank Credit Agreement" means one or more credit agreements to be entered
into by and among the Company and the financial institutions party thereto
providing a portion of the financing for the Transaction, as well as financing
for the Company's ongoing requirements, including any related notes, guarantees,
collateral documents, instruments and agreements executed in connection
therewith, and in each case as amended, modified, renewed, refunded, refinanced
or replaced (in whole or in part) from time to time.
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"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership, partnership interests
(whether general or limited) and (iv) any other interest or participation that
confers on a Person the right to receive a share of the profits and losses of,
or distributions of assets of, the issuing Person (but excluding customary
employee incentive or bonus arrangements, and customary earn-out provisions
granted in connection with acquisition transactions and providing for aggregate
payouts not in excess of $5 million per year).
"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof, (iii) certificates of deposit and
eurodollar time deposits with maturities of one year or less from the date of
acquisition, bankers' acceptances with maturities not exceeding one year and
overnight bank deposits, in each case with any domestic bank having capital and
surplus in excess of $500 million and a Keefe Bank Watch Rating of "B" (or the
equivalent rating under a substantially similar ratings system if Keefe Bank
Watch Ratings are no longer published) or better, (iv) repurchase obligations
with a term of not more than seven days for underlying securities of the types
described in clauses (ii) and (iii) above entered into with any financial
institution meeting the qualifications specified in clause (iii) above and (v)
commercial paper having the highest rating obtainable from Moody's Investors
Service, Inc. or Standard & Poor's Corporation (or in their absence, an
equivalent rating from another nationally recognized securities rating agency)
and in each case maturing within one year after the date of acquisition.
"Change of Control" means the occurrence of any of the following:
(i) the sale, lease, transfer, conveyance or other disposition (other
than by way of merger or consolidation), in one or a series of
transactions, of all or substantially all of the assets of the Company and
its Restricted Subsidiaries, taken as a whole, to any "person" (as such
term is used in Section 13(d)(3) of the Exchange Act) other than the
Permitted Holders and their Related Parties;
(ii) the Company becomes aware (by way of a report or any other filing
pursuant to Section 13(d) of the Exchange Act, proxy, vote, written notice
or otherwise) of the acquisition by any Person or group (within the meaning
of Section 13(d)(3) or Section 14(d)(2) of the Exchange Act, or any
successor provision), including any group acting for the purpose of
acquiring, holding or disposing of securities (within the meaning of Rule
13d-5(b)(1) under the Exchange Act), other than the Permitted Holders or
any of their Related Parties, in a single transaction or in a related
series of transactions, by way of merger, consolidation or other business
combination or purchase of beneficial ownership (within the meaning of Rule
13d-3 under the Exchange Act, or any successor provision) of 50% or more of
the aggregate voting power of the Voting Stock of the Company, and such
Person or group beneficially owns Voting Stock having greater aggregate
voting power than the Permitted Holders and their Related Parties; or
(iii) a majority of the members of the Board of Directors of the
Company cease to be Continuing Directors.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus (i) an amount
equal to any extraordinary loss plus any net loss realized in connection with an
Asset Sale (to the extent such losses were deducted in computing such
Consolidated Net Income), plus (ii) provision for taxes based on income or
profits of such Person and its Restricted Subsidiaries for such period, to the
extent that such provision for
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taxes was deducted in computing such Consolidated Net Income, plus (iii)
consolidated interest expense of such Person and its Restricted Subsidiaries for
such period, whether paid or accrued and whether or not capitalized (including,
without limitation, amortization of original issue discount, non-cash interest
payments, the interest component of any deferred payment obligations, the
interest component of all payments associated with Capital Lease Obligations,
commissions, discounts and other fees and charges incurred in respect of letter
of credit or bankers' acceptance financings, and net payments (if any) pursuant
to Hedging Obligations), to the extent that any such expense was deducted in
computing such Consolidated Net Income, plus (iv) depreciation, amortization
(including amortization of goodwill and other intangibles but excluding
amortization of prepaid cash operating expenses that were paid in a prior
period) and other non-cash charges of such Person and its Restricted
Subsidiaries for such period to the extent that such depreciation, amortization
and other non-cash charges were deducted in computing such Consolidated Net
Income, minus (v) cash outlays that were made by such Person or any of its
Restricted Subsidiaries during such period in respect of any item that was
reflected as a non-cash charge in a prior period, provided that such non-cash
charge was added to Consolidated Net Income in determining Consolidated Cash
Flow for such prior period.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided that (i) the Net Income (but not loss) for such period of any Person
that is not a Restricted Subsidiary or that is accounted for by the equity
method of accounting shall be included only to the extent of the amount of
dividends or distributions paid in cash to the referent Person or a Wholly Owned
Restricted Subsidiary thereof, (ii) the Net Income of any Restricted Subsidiary
shall be excluded to the extent that the declaration or payment of dividends or
similar distributions by that Restricted Subsidiary of that Net Income is not at
the date of determination permitted without any prior governmental approval
(that has not been obtained) or, directly or indirectly, by operation of the
terms of its charter or any agreement, instrument, judgment, decree, order,
statute, rule or governmental regulation applicable to that Restricted
Subsidiary or its stockholders, (iii) the Net Income of any Person acquired in a
pooling of interests transaction for any period prior to the date of such
acquisition shall be excluded, (iv) the cumulative effect of a change in
accounting principles shall be excluded and (v) the Net Income of any
Unrestricted Subsidiary shall be excluded, whether or not distributed to the
Company or one of its Restricted Subsidiaries.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors who (i) was a member of such Board of Directors on the
date of the Indenture or (ii) was nominated for election or elected to such
Board of Directors with, or whose election to such Board of Directors was
approved by, the affirmative vote of a majority of the Continuing Directors who
were members of such Board of Directors at the time of such nomination or
election or (iii) is any designee of the Permitted Holders or their Affiliates
or was nominated by the Permitted Holders or their Affiliates or any designees
of the Permitted Holders or their Affiliates on the Board of Directors.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at
the option of the holder thereof, in whole or in part, on or prior to the date
on which the Exchange Notes mature.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
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"Excludable Current Liabilities" means, with respect to the consideration
received by the Company in connection with any Asset Sale, (i) each trade
payable incurred in the ordinary course of business of the Company or any
Restricted Subsidiary, (ii) each current liability that is in an amount less
than $50,000 on an individual basis, and (iii) each liability due within 90 days
of the date of consummation of such Asset Sale, in the case of each of clauses
(i) through (iii), that is assumed by the transferee of the assets that are
subject to such Asset Sale pursuant to customary assumption provisions.
"Existing Indebtedness" means Indebtedness of the Company and its
Restricted Subsidiaries (other than Indebtedness under the Bank Credit
Agreement) in existence on the date of the Indenture, until such amounts are
repaid.
"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person and its
Restricted Subsidiaries for such period to the Fixed Charges of such Person and
its Restricted Subsidiaries for such period. In the event that the Company or
any of its Restricted Subsidiaries incurs, assumes, Guarantees or redeems any
Indebtedness (other than revolving credit borrowings) or issues Preferred Stock
subsequent to the commencement of the period for which the Fixed Charge Coverage
Ratio is being calculated but on or prior to the date on which the event for
which the calculation of the Fixed Charge Coverage Ratio is made (the
"Calculation Date"), then the Fixed Charge Coverage Ratio shall be calculated
giving pro forma effect to such incurrence, assumption, Guarantee or redemption
of Indebtedness, or such issuance or redemption of Preferred Stock, as if the
same had occurred at the beginning of the applicable four-quarter reference
period.
In calculating the Fixed Charge Coverage Ratio, acquisitions will be given
pro forma effect as follows:
(i) (A) acquisitions that have been made or are being made by the Company
or any of its Restricted Subsidiaries during the four-quarter reference
period or subsequent to such reference period and on or prior to the
Calculation Date (including through mergers or consolidations and
including any related financing transactions) shall be deemed to have
occurred on the first day of the four-quarter reference period, and
(B) for purposes of determining the pro forma effects of any such
acquisition, Consolidated Cash Flow shall be increased to reflect the
annualized amount of any cost savings expected by the Company to be
realized in connection with such acquisition (from steps to be taken not
later than the first anniversary of such acquisition, and without
reduction for any non-recurring charges expected in connection with such
acquisition), as set forth in an Officers' Certificate signed by the
Company's chief executive and chief financial officers (which shall be
determinative of such matters) which states (x) the amount of such
increase, (y) that such increase is based on the reasonable beliefs of
the officers executing such Officers' Certificate at the time of such
execution (and that estimates of cost savings from prior acquisitions
have been reevaluated and updated) and (z) that any related incurrence
of Indebtedness is permitted pursuant to the Indenture.
(ii) Consolidated Cash Flow shall be further increased to reflect the
annualized amount of any cost savings expected by the Company but not
yet realized in respect of any acquisition made by the Company during
the four fiscal quarters immediately preceding the four-quarter
reference period prior to the Calculation Date, to the extent such cost
savings are (x) expected to result from steps taken not later than the
first anniversary of the relevant acquisition and (y) determined and
certified as set forth in clause (i) above.
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In addition, in calculating the Fixed Charge Coverage Ratio, discontinued
operations will be given pro forma effect as follows:
(1) the Consolidated Cash Flow attributable to discontinued operations, as
determined in accordance with GAAP, and operations or businesses
disposed of on or prior to the Calculation Date, shall be excluded, and
(2) the Fixed Charges attributable to discontinued operations, as
determined in accordance with GAAP, and operations or businesses
disposed of on or prior to the Calculation Date, shall be excluded, but
only to the extent that the obligations giving rise to such Fixed
Charges will not be obligations of the Company or any of its Restricted
Subsidiaries following the Calculation Date.
"Fixed Charges" means, with respect to any Person for any period, the sum
of (i) the consolidated interest expense of such Person and its Restricted
Subsidiaries for such period, whether paid or accrued (including, without
limitation, amortization of original issue discount, non-cash interest payments,
the interest component of any deferred payment obligations, the interest
component of all payments associated with Capital Lease Obligations,
commissions, discounts and other fees and charges incurred in respect of letter
of credit or bankers' acceptance financings, and net payments (if any) pursuant
to Hedging Obligations) and (ii) the consolidated interest expense of such
Person and its Restricted Subsidiaries that was capitalized during such period,
and (iii) any interest expense on Indebtedness of another Person that is
Guaranteed by such Person or one of its Restricted Subsidiaries or secured by a
Lien on assets of such Person or one of its Restricted Subsidiaries (whether or
not such Guarantee or Lien is called upon) and (iv) the product of (a) all cash
dividend payments (and non-cash dividend payments in the case of a Person that
is a Restricted Subsidiary) paid to any Person other than the Company or a
Restricted Subsidiary on any series of Preferred Stock of such Person, times (b)
a fraction, the numerator of which is one and the denominator of which is one
minus the then current combined federal, state and local statutory tax rate of
such Person paying the dividend, expressed as a decimal, in each case, on a
consolidated basis and in accordance with GAAP.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of the Indenture.
"Government Securities" means securities that are (a) direct obligations of
the United States of America for the timely payment of which its full faith and
credit is pledged or (b) obligations of a Person controlled or supervised by and
acting as an agency or instrumentality of the United States of America the
timely payment of which is unconditionally guaranteed as a full faith and credit
obligation by the United States of America, which, in either case, are not
callable or redeemable at the option of the issuer thereof, and shall also
include a depository receipt issued by a bank (as defined in Section 3(a)(2) of
the Securities Act), as custodian with respect to any such Government Security
or a specific payment of principal of or interest on any such Government
Security held by such custodian for the account of the holder of such depository
receipt; provided that (except as required by law) such custodian is not
authorized to make any deduction from the amount payable to the holder of such
depository receipt from any amount received by the custodian in respect of the
Government Security or the specific payment of principal of or interest on the
Government Security evidenced by such depository receipt.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
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"Guarantors" means each Subsidiary of the Company that executes a Senior
Subordinated Guarantee in accordance with the provisions of the Indenture, and,
in each case, their respective successors and assigns, while such Senior
Subordinated Guarantee is outstanding.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) currency exchange or interest rate swap agreements,
currency exchange or interest rate cap agreements and currency exchange or
interest rate collar agreements and (ii) other agreements or arrangements
designed to protect such Person against fluctuations in currency exchange or
interest rates.
"Holder" means a holder of any of the Notes or the Exchange Notes.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of the
purchase price of any property or representing any Hedging Obligations, except
any such balance that constitutes an accrued expense or trade payable, if and to
the extent any of the foregoing indebtedness (other than letters of credit and
Hedging Obligations) would appear as a liability upon a balance sheet of such
Person prepared in accordance with GAAP, as well as all indebtedness of others
secured by a Lien on any asset of such Person (whether or not such indebtedness
is assumed by such Person) and, to the extent not otherwise included, the
Guarantee by such Person of any Indebtedness of any other Person.
"Independent Financial Advisor" means an accounting, appraisal, investment
banking firm or consultant of nationally recognized standing that is not an
Affiliate of the Company and that is, in the judgment of the Company's Board of
Directors, qualified to perform the task for which it has been engaged.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances (other than cash advances made to suppliers with respect to current or
anticipated purchases of inventory in the ordinary course of business) or
capital contributions (excluding commission, travel and similar advances to
officers and employees made in the ordinary course of business), purchases or
other acquisitions of Indebtedness, Equity Interests or other securities
(directly from the issuer thereof or from third parties) together with all items
that are or would be classified as investments on a balance sheet prepared in
accordance with GAAP; provided that an acquisition of Equity Interests or other
securities by the Company for consideration consisting of common equity
securities of the Company shall not be deemed to be an Investment. If the
Company or any Subsidiary of the Company sells or otherwise disposes of any
Equity Interests of any direct or indirect Subsidiary of the Company such that,
after giving effect to any such sale or disposition, the Company no longer owns,
directly or indirectly, greater than 50% of the outstanding Equity Interests of
such Subsidiary, the Company shall be deemed to have made an Investment on the
date of any such sale or disposition equal to the fair market value of the
Equity Interests of such Subsidiary not sold or disposed of.
"Joint Ventures" means all corporations, partnerships, associations or
other business entities (i) that are engaged in a Principal Business and (ii) of
which 50% of the total voting power of shares of Capital Stock entitled (without
regard to the occurrence of any contingency) to vote in the election of
directors, managers or trustees thereof is at the time owned or controlled,
directly or indirectly, by the Company or one or more Restricted Subsidiaries of
the Company (or a combination thereof).
"Letter of Credit Obligations" means all Obligations in respect of
Indebtedness of the Company or any of its Restricted Subsidiaries with respect
to letters of credit issued pursuant to the Bank Credit Agreement, which
Indebtedness shall be deemed to consist of (a) the aggregate maximum
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amount then available to be drawn under all such letters of credit (the
determination of such maximum amount to assume compliance with all conditions
for drawing), and (b) the aggregate amount that has then been paid by, and not
reimbursed to, the issuers under such letters of credit.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction).
"Mortgage Financing" means the incurrence by the Company or a Restricted
Subsidiary of the Company of any Indebtedness secured by a mortgage or other
Lien on real property acquired or improved by the Company or any Restricted
Subsidiary of the Company after the date of the Indenture.
"Mortgage Refinancing" means the incurrence by the Company or a Restricted
Subsidiary of the Company of any Indebtedness secured by a mortgage or other
Lien on real property subject to a mortgage or other Lien existing on the date
of the Indenture or created or incurred subsequent to the date of the Indenture
as permitted by the terms of the Indenture and owned by the Company or any
Restricted Subsidiary of the Company.
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of Preferred Stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b) the
disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such Person or any of
its Restricted Subsidiaries and (ii) any extraordinary or nonrecurring gain (but
not loss), together with any related provision for taxes on such extraordinary
or nonrecurring gain (but not loss).
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), net of the direct costs
relating to such Asset Sale (including, without limitation, legal, accounting
and investment banking fees, and brokerage and sales commissions) and any
relocation expenses incurred as a result thereof, taxes paid or payable as a
result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements), amounts required to be applied to
the repayment of Indebtedness (other than Bank Debt) secured by a Lien on the
asset or assets that were the subject of such Asset Sale and any reserve for
adjustment in respect of the sale price of such asset or assets established in
accordance with GAAP.
"Non-Guarantor Subsidiary" means each Subsidiary of the Company that is not
a Guarantor.
"Non-Recourse Debt" means Indebtedness of an Unrestricted Subsidiary (i) as
to which neither the Company nor any of its Restricted Subsidiaries (a) provides
credit support of any kind (including any undertaking, agreement or instrument
that would constitute Indebtedness), (b) is directly or indirectly liable (as a
guarantor or otherwise), or (c) constitutes the lender; and (ii) no default with
respect to which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness of the
Company or any of its Restricted Subsidiaries to declare a default on such other
Indebtedness of the Company or any of its Restricted Subsidiaries or cause the
payment thereof to be accelerated or payable prior to its stated maturity; and
(iii) as to which the lenders have been notified in writing that they will not
have any recourse to the stock or assets of the Company or any of its Restricted
Subsidiaries.
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"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Officers' Certificate" means a certificate signed on behalf of the
Company, by two officers of the Company, one of whom must be the principal
executive officer, the principal financial officer, the treasurer or the
principal accounting officer of the Company, that meets the requirements set
forth in the Indenture.
"Permitted Holders" means Goldman, Sachs & Co. and any of its Affiliates.
"Permitted Investments" means (a) any Investment in the Company or in a
Restricted Subsidiary of the Company (including the acquisition of any Equity
Interest in a Restricted Subsidiary) (b) any investment in cash and Cash
Equivalents; (c) any Investment by the Company or any Restricted Subsidiary of
the Company in a Person, if as a result of such Investment (A) such Person
becomes a Restricted Subsidiary of the Company or (B) such Person, in one
transaction or a series of related transactions, is merged, consolidated or
amalgamated with or into, or transfers or conveys substantially all of its
assets to, or is liquidated into, the Company or a Restricted Subsidiary of the
Company; (d) any Investment made as a result of the receipt of consideration not
constituting cash or Cash Equivalents from an Asset Sale that was made pursuant
to and in compliance with the covenant described above under "-- Repurchase at
the Option of Holders -- Asset Sales"; (e) any Investment existing on the date
of the Indenture; (f) any Investment by Restricted Subsidiaries in other
Restricted Subsidiaries and Investments by Subsidiaries that are not Restricted
Subsidiaries in other Subsidiaries that are not Restricted Subsidiaries; (g)
advances to employees not in excess of $2.5 million outstanding at any one time;
(h) any Investment acquired by the Company or any of its Restricted Subsidiaries
(A) in exchange for any other Investment or accounts receivable held by the
Company or any such Restricted Subsidiary in connection with or as a result of a
bankruptcy, workout, reorganization or recapitalization of the issuer of such
other Investment or accounts receivable or (B) as a result of a foreclosure by
the Company or any of its Restricted Subsidiaries with respect to any secured
Investment or other transfer of title with respect to any secured Investment in
default; (i) Hedging Obligations; (j) loans and advances to officers, directors
and employees for business-related travel expenses, moving expenses and other
similar expenses, in each case incurred in the ordinary course of business; (k)
Investments the payment for which consists exclusively of Equity Interests
(exclusive of Disqualified Stock) of the Company; and (l) additional Investments
having an aggregate fair market value, taken together with all other Investments
made pursuant to this clause (l) that are at that time outstanding, not to
exceed $15 million plus 5% of the increase in Total Assets since the Closing
Date at the time of such Investment (with the fair market value of each
Investment being measured at the time made and without giving effect to
subsequent changes in value).
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any of its Restricted Subsidiaries
in whole or in part; provided that: (i) the principal amount (or accreted value,
if applicable) of such Permitted Refinancing Indebtedness does not exceed the
principal amount (or accreted value, if applicable) of the Indebtedness so
extended, refinanced, renewed, replaced, defeased or refunded (plus the amount
of reasonable expenses incurred in connection therewith); (ii) such Permitted
Refinancing Indebtedness has a final maturity date on or later than the final
maturity date of, and has a Weighted Average Life to Maturity equal to or
greater than the Weighted Average Life to Maturity of, the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded; (iii) if the
Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded
is subordinated in right of payment to the Exchange Notes, such Permitted
Refinancing Indebtedness has a final maturity date later than the final maturity
date of the Exchange Notes, and is subordinated in right of payment to the
Exchange Notes, on terms at least as favorable to the Holders of Exchange Notes
as those contained in the documentation governing the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded; and
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(iv) such Indebtedness is incurred either by the Company or by the Restricted
Subsidiary who is the obligor on the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.
"Preferred Stock" means any Equity Interest with preferential right of
payment of dividends or upon liquidation, dissolution, or winding up.
"Principal Business" means (i) the design, manufacture and distribution of
party goods and related products, including, but not limited to, tableware (such
as plates, cups, cutlery, napkins and table covers), decorations, banners,
balloons, novelties, horns, party hats, party favors, stationery, invitations,
greeting cards, gift wrap, ribbons, gift boxes, gift bags, giftware, costumes,
masks and makeup, and (ii) any activity or business incidental, directly related
or similar to those set forth in clause (i) of this definition, or any business
or activity that is a reasonable extension, development or expansion thereof or
ancillary thereto.
"Regulation S" means Regulation S promulgated under the Securities Act.
"Related Parties" means any Person controlled by the Permitted Holders,
including any partnership of which any of the Permitted Holders or their
Affiliates is a general partner.
"Repurchase Offer" means an offer made by the Company to purchase all or
any portion of the Exchange Notes pursuant to the provisions described under the
covenants entitled " -- Repurchase at the Option of Holders -- Change of
Control" or " -- Repurchase at the Option of Holders -- Asset Sales".
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not (i) an Unrestricted Subsidiary or (ii) a direct or indirect
Subsidiary of an Unrestricted Subsidiary; provided, however, that upon the
occurrence of any Unrestricted Subsidiary ceasing to be an Unrestricted
Subsidiary, such Subsidiary shall be included in the definition of Restricted
Subsidiary.
"Rule 144A" means Rule 144A promulgated under the Securities Act.
"Senior Guarantees" means the Guarantees by the Guarantors of Obligations
under the Bank Credit Agreement.
"Senior Subordinated Guarantees" means the Guarantees by the Guarantors of
the Obligations under the Indenture and the Exchange Notes.
"Senior Subordinated Indebtedness" means the Exchange Notes and any other
indebtedness which ranks pari passu in right of payment to the Exchange Notes.
"Significant Restricted Subsidiary" means any Restricted Subsidiary that
would be a "significant subsidiary" as defined in Article 1, Rule 1-02 of
Regulation S-X, promulgated pursuant to the Act, as such Regulation is in effect
on the date of the Indenture.
"Specified Real Estate" means the real properties owned by the Company or
its Subsidiaries as of the date of the Indenture, comprising the distribution
facilities in Chester, New York, Montreal, Quebec, Canada, and Melbourne,
Australia.
"Stated Maturity"means, with respect to any installment of interest or
principal on, or any other payments with respect to, any series of Indebtedness,
the date on which such payment of interest or principal or other payment
(including any sinking fund payment) was scheduled, or required to be paid, but
shall not include any acceleration of such payment or any contingent obligations
to repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
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"Subordinated Asset Sale Offer" has the meaning set forth under the caption
" -- Repurchase at the Option of Holders -- Asset Sales".
"Subordinated Indebtedness" means any Indebtedness of the Company or any of
its Restricted Subsidiaries which is expressly by its terms subordinated in
right of payment to any other Senior Subordinated Indebtedness.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or one or more Subsidiaries
of such Person (or any combination thereof).
"Total Assets" means, with respect to any Person, the total consolidated
assets of such Person and its Restricted Subsidiaries, as shown on the most
recent balance sheet of such Person.
"Unrestricted Subsidiary" means any Subsidiary (other than the Guarantors
or any successor to any of them) that is designated by the Board of Directors as
an Unrestricted Subsidiary pursuant to a Board Resolution, but only to the
extent that such Subsidiary: (a) has no Indebtedness other than Non-Recourse
Debt; (b) is not party to any agreement, contract, arrangement or understanding
with the Company or any Restricted Subsidiary of the Company unless the terms of
any such agreement, contract, arrangement or understanding are no less favorable
to the Company or such Restricted Subsidiary than those that might be obtained
at the time from Persons who are not Affiliates of the Company; (c) is a Person
with respect to which neither the Company nor any of its Restricted Subsidiaries
has any direct or indirect obligation (x) to subscribe for additional Equity
Interests or (y) to maintain or preserve such Person's financial condition or to
cause such Person to achieve any specified levels of operating results; (d) has
not guaranteed and does not otherwise directly or indirectly provide credit
support for any Indebtedness of the Company or any of its Restricted
Subsidiaries; and (e) has at least one director on its board of directors that
is not a director or executive officer of the Company or any of its Restricted
Subsidiaries and has at least one executive officer that is not a director or
executive officer of the Company or any of its Restricted Subsidiaries. Any such
designation by the Board of Directors shall be evidenced to the Trustee by
filing with the Trustee a certified copy of the Board Resolution giving effect
to such designation and an Officers' Certificate certifying that such
designation complied with the foregoing conditions and was permitted by the
covenant described above under "Certain Covenants -- Restricted Payments". If,
at any time, any Unrestricted Subsidiary would fail to meet the foregoing
requirements as an Unrestricted Subsidiary, it shall thereafter cease to be an
Unrestricted Subsidiary for purposes of the Indenture and, so long as such
Unrestricted Subsidiary remains a Subsidiary, any Indebtedness of such
Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of the
Company as of such date (and, if such Indebtedness is not permitted to be
incurred as of such date under the covenant described under " -- Incurrence of
Indebtedness and Issuance of Disqualified Stock', the Company shall be in
default of such covenant). The Board of Directors of the Company may at any time
designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided
that such designation shall be deemed to be an incurrence of Indebtedness by a
Restricted Subsidiary of the Company of any outstanding Indebtedness of such
Unrestricted Subsidiary and such designation shall only be permitted if (i) such
Indebtedness is permitted under the covenant described under "Certain Covenants
- -- Incurrence of Indebtedness and Issuance of Disqualified Stock", and (ii) no
Default or Event of Default would be in existence following such designation.
"Voting Stock" means, with respect to any Person, any class or series of
capital stock of such Person that is ordinarily entitled to vote in the election
of directors thereof at a meeting of
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stockholders called for such purpose, without the occurrence of any additional
event or contingency.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" is any Wholly Owned Subsidiary that is
a Restricted Subsidiary.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person
all of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person or by such
Person and one or more Wholly Owned Subsidiaries of such Person.
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DESCRIPTION OF CERTAIN FEDERAL INCOME TAX
CONSEQUENCES OF AN INVESTMENT IN THE EXCHANGE NOTES
The following is a summary of certain federal income tax consequences
associated with the acquisition, ownership, and disposition of the Exchange
Notes by holders who acquire the Exchange Notes in the Exchange Offer. The
following summary does not discuss all of the aspects of federal income taxation
that may be relevant to such a prospective holder of the Exchange Notes in light
of his or her particular circumstances, or to certain types of holders
(including dealers in securities, insurance companies, tax-exempt organizations,
financial institutions, broker-dealers, S corporations, and except as discussed
below, foreign corporations, persons who are not citizens or residents of the
United States and persons who hold the Exchange Notes as part of a hedge,
straddle, "synthetic security" or other integrated investment) which are subject
to special treatment under the federal income tax laws. This discussion also
does not address the tax consequences to nonresident aliens or foreign
corporations that are subject to United States federal income tax on a net basis
on income with respect to an Exchange Note because such income is effectively
connected with the conduct of a U.S. trade or business. Such holders generally
are taxed in a similar manner to U.S. Holders (as defined below); however,
certain special rules apply. In addition, this discussion is limited to holders
who hold the Exchange Notes as capital assets within the meaning of Section 1221
of the Code. This summary also does not describe any tax consequences under
state, local, or foreign tax laws.
The discussion is based upon the Code, Treasury Regulations, IRS rulings
and pronouncements and judicial decisions all in effect as of the date hereof,
all of which are subject to change at any time by legislative, judicial or
administrative action. Any such changes may be applied retroactively in a manner
that could adversely affect a holder of the Exchange Notes. The Company has not
sought and will not seek any rulings or opinions from the IRS or counsel with
respect to the matters discussed below. There can be no assurance that the IRS
will not take positions concerning the tax consequences of the purchase,
ownership or disposition of the Exchange Notes which are different from those
discussed herein.
PERSONS CONSIDERING THE PURCHASE, OWNERSHIP OR DISPOSITION OF EXCHANGE
NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE U.S. FEDERAL
INCOME TAX CONSEQUENCES THAT MAY APPLY TO THEM, AS WELL AS THE APPLICATION OF
STATE, LOCAL, FOREIGN AND OTHER TAX LAWS.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES TO U.S. HOLDERS
A U.S. Holder is any holder who or which is (i) a citizen or resident of
the United States; (ii) a domestic corporation or domestic partnership; (iii) an
estate other than a "foreign estate" as defined in Section 7701(a)(31) of the
Code; or (iv) a trust if a court within the United States is able to exercise
primary supervision over the administration of the trust and one or more United
States persons have the authority to control all substantial decisions of the
trust.
Taxation of Stated Interest. In general, U.S. Holders of the Exchange
Notes will be required to include interest received thereon in taxable income as
ordinary income at the time it accrues or is received, in accordance with the
holder's regular method of accounting for federal income tax purposes.
Effect of Optional Redemption and Repurchase. Under certain circumstances
the Company may be entitled to redeem a portion of the Exchange Notes. In
addition, under certain circumstances, each holder of Exchange Notes will have
the right to require the Company to repurchase all or any part of such holder's
Exchange Notes. Treasury Regulations contain special rules for determining the
yield to maturity and maturity on a debt instrument in the event the debt
instrument provides for a contingency that could result in the acceleration or
deferral of one or more payments. The Company does not believe that these rules
should apply to either the Company's right to redeem Exchange Notes or to the
holders' rights to require the Company to repurchase Exchange
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Notes. Therefore, the Company has no present intention of treating such
redemption and repurchase provisions of the Exchange Notes as affecting the
computation of the yield to maturity or maturity date of the Exchange Notes.
Sale or other Taxable Disposition of the Exchange Notes. The sale,
exchange, redemption, retirement or other taxable disposition of an Exchange
Note will result in the recognition of gain or loss to a U.S. Holder in an
amount equal to the difference between (a) the amount of cash and fair market
value of property received in exchange therefor (except to the extent
attributable to the payment of accrued but unpaid stated interest) and (b) the
holder's adjusted tax basis in such Exchange Note.
A U.S. Holder's basis in an Exchange Note acquired in exchange for a Note
pursuant to the terms set forth in this Prospectus should be the same as such
U.S. Holder's basis in the Notes exchanged therefor. See "Certain Federal Income
Tax Consequences of the Exchange Offer", above. Otherwise, a U.S. Holder's
initial tax basis in an Exchange Note purchased by such Holder will be equal to
the price paid for the Exchange Note.
Any gain or loss on the sale or other taxable disposition of an Exchange
Note generally will be capital gain or loss. Payments on such disposition for
accrued interest not previously included in income will be treated as ordinary
interest income.
Backup Withholding. The backup withholding rules require a payor to deduct
and withhold a tax if (i) the payee fails to furnish a taxpayer identification
number ("TIN") in the prescribed manner, (ii) the IRS notifies the payor that
the TIN furnished by the payee is incorrect, (iii) the payee has failed to
report properly the receipt of "reportable payments" and the IRS has notified
the payor that withholding is required, or (iv) the payee fails to certify under
the penalty of perjury that such payee is not subject to backup withholding. If
any one of the events discussed above occurs with respect to a holder of
Exchange Notes, the Company, its paying agent or other withholding agent will be
required to withhold a tax equal to 31% of any "reportable payment" made in
connection with the Exchange Notes of such holder. A "reportable payment"
includes, among other things, amounts paid in respect of interest on an Exchange
Note. Any amounts withheld from a payment to a holder under the backup
withholding rules will be allowed as a refund or credit against such holder's
federal income tax, provided that the required information is furnished to the
IRS. Certain holders (including, among others, corporations and certain
tax-exempt organizations) are not subject to backup withholding.
MARKET DISCOUNT AND PREMIUM
If a U.S. Holder of an Exchange Note has a tax basis in the Exchange Note
that is less than its "stated redemption price at maturity," the amount of the
difference will be treated as "market discount" for U.S. federal income tax
purposes, unless such difference is less than a specified de minimis amount.
Under the market discount rules of the Code, a U.S. Holder will be required to
treat any principal payment on, or any gain on the sale, exchange, retirement or
other disposition of, an Exchange Note as ordinary income to the extent of any
accured market discount that has not previously been included in income. Market
discount generally accrues on a straight-line basis over the term of a debt
instrument remaining after the acquisition. A U.S. Holder may not be allowed to
deduct immediately all or a portion of the interest expense on any indebtedness
incurred or continued to purchase or to carry such Exchange Note (or the Note
for which the Exchange Note was exchanged, as the case may be). A U.S. Holder
may elect to include market discount in income currently as it accrues (either
on a straight-line basis or, if the U.S. Holder so elects, on a constant yield
basis), in which case the interest deferral rule set forth in the preceding
sentence will not apply. Such an election will apply to all bonds acquired by
the U.S. Holder on or after the first day of the first taxable year to which
such election applies and may be revoked only with the consent of the IRS.
130
138
If a U.S. Holder purchases an Exchange Note (or purchased the Note for
which the Exchange Note was exchanged, as the case may be) for an amount greater
than the sum of all amounts payable on the Exchange Note (or Note) after the
purchase date, other than stated interest, such holder will be considered to
have purchased such Exchange Note (or such Note) with "amortizable bond premium"
equal in amount to such excess, and may elect (in accordance with applicable
Code provisions) to amortize such premium, using a constant yield method over
the remaining term. The amount amortized in any year will be treated as a
reduction of the U.S. Holder's interest income from the Exchange Note in such
year. A U.S. Holder that elects to amortize bond premium must reduce its tax
basis in the Exchange Note by the amount of the premium amortized in any year.
An election to amortize bond premium applies to all taxable debt obligations
then owned and thereafter acquired by the U.S. Holder and may be revoked only
with the consent of the IRS.
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES FOR NON-U.S. HOLDERS
This section discusses special rules applicable to a Non-U.S. Holder of
Exchange Notes. This summary does not address the tax consequences to
stockholders, partners or beneficiaries in a Non-U.S. Holder. For purposes
hereof, a "Non-U.S. Holder" is any person who is not a U.S. Holder and is not
subject to U.S. federal income tax on a net basis on income with respect to an
Exchange Note because such income is effectively connected with the conduct of a
U.S. trade or business.
Interest. Payments of interest to a Non-U.S. Holder that do not qualify
for the portfolio interest exception discussed below will be subject to
withholding of U.S. federal income tax at a rate of 30% unless a U.S. income tax
treaty applies to reduce the rate of withholding. To claim a treaty reduced
rate, the Non-U.S. Holder must provide a properly executed Form 1001.
Interest that is paid to a Non-U.S. Holder on an Exchange Note will not be
subject to U.S. income or withholding tax if the interest qualifies as
"portfolio interest". Generally, interest on the Exchange Notes that is paid by
the Company will qualify as portfolio interest if (i) the Non-U.S. Holder does
not own, actually or constructively, 10% or more of the total combined voting
power of all classes of stock of the Company entitled to vote; (ii) the Non-U.S.
Holder is not a controlled foreign corporation that is related to the Company
actually or constructively through stock ownership for U.S. federal income tax
purposes; (iii) the Non-U.S. Holder is not a bank receiving interest on a loan
entered into in the ordinary course of business; and (iv) either (x) the
beneficial owner of the Exchange Note provides the Company or its paying agent
with a properly executed certification on IRS Form W-8 (or a suitable substitute
form) signed under penalties of perjury that the beneficial owner is not a "U.S.
person" for U.S. federal income tax purposes and that provides the beneficial
owner's name and address, or (y) a securities clearing organization, bank or
other financial institution that holds customers' securities in the ordinary
course of its business holds the Exchange Note and certifies to the Company or
its agent under penalties of perjury that the IRS Form W-8 (or a suitable
substitute) has been received by it from the beneficial owner of the Exchange
Note or a qualifying intermediary and furnishes the payor a copy thereof.
Recently issued Treasury regulations (the "Withholding Regulations") that
will be effective with respect to payments made after December 31, 1998, will
provide alternative methods for satisfying the certification requirements
described in clause (iv) above. The Withholding Regulations also will require,
in the case of Exchange Notes held by a foreign partnership, that (x) the
certification described in clause (iv) above be provided by the partners and (y)
the partnership provide certain information, including its taxpayer
identification number. A look-through rule will apply in the case of tiered
partnerships.
Sale, Exchange or Retirement of Exchange Notes. Any gain realized by a
Non-U.S. Holder on the sale, exchange or retirement of the Exchange Notes, will
generally not be subject to U.S. federal income tax or withholding unless (i)
the Non-U.S. Holder is an individual who was present in the U.S. for 183 days or
more in the taxable year of the disposition and meets certain other
131
139
requirements; or (ii) the Non-U.S. Holder is subject to tax pursuant to certain
provisions of the Code applicable to certain individuals who renounce their U.S.
citizenship or terminate long-term U.S. residency. If a Non-U.S. Holder falls
under (ii) above, the holder will be taxed on the net gain derived from the sale
under the graduated U.S. federal income tax rates that are applicable to U.S.
citizens and resident aliens, and may be subject to withholding under certain
circumstances. If a Non-U.S. Holder falls under (i) above, the holder generally
will be subject to U.S. federal income tax at a rate of 30% on the gain derived
from the sale (or reduced treaty rate) and may be subject to withholding in
certain circumstances.
U.S. Information Reporting and Backup Withholding Tax. Back-up withholding
generally will not apply to an Exchange Note issued in registered form that is
beneficially owned by a Non-U.S. Holder if the certification of Non-U.S. Holder
status is provided to the Company or its agent as described above in "Certain
Federal Income Tax Consequences to Non-U.S. Holders -- Interest", provided that
the payor does not have actual knowledge that the holder is a U.S. person. The
Company may be required to report annually to the IRS and to each Non-U.S.
Holder the amount of interest paid to, and the tax withheld, if any, with
respect to each Non-U.S. Holder.
If payments of principal and interest are made to the beneficial owner of
an Exchange Note by or through the foreign office of a custodian, nominee or
other agent of such beneficial owner, or if the proceeds of the sale of Exchange
Notes are paid to the beneficial owner of an Exchange Note through a foreign
office of a "broker" (as defined in the pertinent Regulations), the proceeds
will not be subject to backup withholding (absent actual knowledge that the
payee is a U.S. person). Information reporting (but not backup withholding) will
apply, however, to a payment by a foreign office of a custodian, nominee, agent
or broker that is (i) a U.S. person, (ii) a controlled foreign corporation for
U.S. federal income tax purposes, or (iii) a foreign person that derives 50% or
more of its gross income from the conduct of a U.S. trade or business for a
specified three-year period or, effective after December 31, 1998, by a foreign
office of certain other persons; unless the broker has in its records
documentary evidence that the holder is a Non-U.S. Holder and certain conditions
are met (including that the broker has no actual knowledge that the holder is a
U.S. Holder) or the holder otherwise establishes an exemption. Payment through
the U.S. office of a custodian, nominee, agent or broker is subject to both
backup withholding at a rate of 31% and information reporting, unless the holder
certifies that it is a Non-U.S. Holder under penalties of perjury or otherwise
establishes an exemption.
Any amount withheld under the backup withholding rules from a payment to a
Non-U.S. Holder will be allowed as a credit against, or refund of, such holder's
U.S. federal income tax liability, provided that certain information is provided
by the holder to the IRS.
132
140
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Exchange Notes received in
exchange for Notes where such Notes were acquired as a result of market-making
activities or other trading activities. The Company has agreed that, for a
period of 195 days after the Registration Statement is declared effective, it
will make this Prospectus, as amended or supplemented, available to any
broker-dealer for use in connection with any such resale. In addition, until
, 1998 (90 days after commencement of the Exchange Offer), all
dealers effecting transactions in the Exchange Notes may be required to deliver
a Prospectus.
The Company will not receive any proceeds from any sales of the Exchange
Notes by broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Exchange Notes or a combination of such
methods of resale, or negotiated prices. Any such resale may be made directly to
the purchaser or to or through brokers or dealers who may receive compensation
in the form of commissions or concessions from any such broker-dealer and/or the
purchasers of any such Exchange Notes. Any broker-dealer that resells the
Exchange Notes that were received by it for its own account pursuant to the
Exchange Offer and any broker or dealer that participates in a distribution of
such Exchange Notes may be deemed to be an "underwriter" within the meaning of
the Securities Act and any profit on any such resale of Exchange Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that, by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 195 days after the Registration Statement is declared
effective, the Company will promptly send additional copies of this Prospectus
and any amendment or supplement to this Prospectus to any broker-dealer that
requests such documents in the Letter of Transmittal. The Company has agreed to
pay certain expenses incident to the Exchange Offer, other than commission or
concessions of any brokers or dealers, and will indemnify the holders of the
Exchange Notes (including any broker-dealers) against certain liabilities,
including liabilities under the Securities Act.
By acceptance of this Exchange Offer, each broker-dealer that receives
Exchange Notes for its own account pursuant to the Exchange Offer agrees that,
upon receipt of notice from the company of the happening of any event which
makes any statement in the Prospectus untrue in any material respect or which
requires the making of any changes in the Prospectus in order to make the
statements therein not misleading (which notice the Company agrees to deliver
promptly to such broker-dealer), such broker-dealer will suspend use of the
Prospectus until the Company has amended or supplemented the Prospectus to
correct such misstatement or omission and has furnished copies of the amended or
supplemental Prospectus to such broker-dealer.
EXPERTS
The financial statements and schedule of the Company as of December 31,
1995 and 1996 and for the years ended December 31, 1994, 1995 and 1996, included
in this Prospectus, have been included herein and in the Registration Statement
in reliance upon the report of KPMG Peat Marwick LLP, independent certified
public accountants, appearing elsewhere herein and in the Registration
Statement, and upon the authority of said firm as experts in accounting and
auditing.
VALIDITY OF THE EXCHANGE NOTES
The validity of the Exchange Notes will be passed upon for the Company by
Wachtell, Lipton, Rosen & Katz, New York, New York, counsel to the Company.
133
141
INDEX TO FINANCIAL STATEMENTS
PAGE
------
Audited Financial Statements and Schedule:
Report of Independent Auditors....................................................... F-2
Consolidated Balance Sheets -- December 31, 1996 and 1995............................ F-3
Consolidated Statements of Income -- For the Years Ended December 31,
1996, 1995 and 1994............................................................... F-4
Consolidated Statements of Stockholders' Equity -- For the Years Ended
December 31, 1996, 1995 and 1994.................................................. F-5
Consolidated Statements of Cash Flows -- For the Years Ended
December 31, 1996, 1995 and 1994.................................................. F-6
Notes to Consolidated Financial Statements........................................... F-8
Schedule -- Valuation and Qualifying Accounts........................................ F-31
Unaudited Financial Statements:
Consolidated Balance Sheets -- September 30, 1997 and December 31, 1996.............. F-32
Consolidated Statements of Income -- For the Nine Months Ended
September 30, 1997 and 1996....................................................... F-33
Consolidated Statement of Stockholders' Equity -- For the Nine Months Ended
September 30, 1997................................................................ F-34
Consolidated Statements of Cash Flows -- For the Nine Months Ended
September 30, 1997 and 1996....................................................... F-35
Notes to Consolidated Financial Statements........................................... F-36
F-1
142
AMSCAN HOLDINGS, INC. AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
AMSCAN HOLDINGS, INC.:
We have audited the accompanying consolidated financial statements of
Amscan Holdings, Inc. and subsidiaries as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule as listed in the accompanying
index. These consolidated financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Amscan
Holdings, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
KPMG PEAT MARWICK LLP
February 14, 1997, except for Notes 16 and 18
which are as of December 19, 1997
Stamford, Connecticut
F-2
143
AMSCAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
DECEMBER 31,
----------------------
1996 1995
-------- --------
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 1,589 $ 2,492
Accounts receivable, net of allowances of $4,138 and $2,505,
respectively................................................. 37,378 31,880
Inventories..................................................... 45,693 45,013
Deposits and other.............................................. 11,360 2,920
-------- --------
Total current assets......................................... 96,020 82,305
Property, plant and equipment, net................................ 34,663 29,173
Intangible assets, net............................................ 7,443 350
Other assets, net................................................. 2,148 2,773
-------- --------
Total assets................................................. $140,274 $114,601
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Loans and notes payable......................................... $ 29,328 $ 37,849
Subordinated debt and other to stockholders..................... 1,393 18,453
Accounts payable................................................ 7,128 5,855
Accrued expenses................................................ 10,225 9,526
Current installments of long-term indebtedness.................. 2,541 2,239
-------- --------
Total current liabilities.................................... 50,615 73,922
Long-term indebtedness, excluding current installments............ 15,085 12,284
Deferred tax liabilities.......................................... 5,662 --
Other............................................................. 963 1,190
-------- --------
Total liabilities............................................ 72,325 87,396
Stockholders' equity:
Preferred stock................................................. -- --
Common stock.................................................... 2,070 393
Additional paid-in capital...................................... 61,503 9,090
Retained earnings............................................... 4,748 18,462
Foreign currency translation adjustment......................... (372) (653)
Treasury stock, at cost......................................... -- (87)
-------- --------
Total stockholders' equity................................... 67,949 27,205
-------- --------
Total liabilities and stockholders' equity................... $140,274 $114,601
========= =========
See accompanying notes to consolidated financial statements.
F-3
144
AMSCAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
--------- -------- --------
Net sales.......................................... $ 192,705 $167,403 $132,029
Cost of sales...................................... 123,913 108,654 86,748
-------- -------- --------
Gross profit.................................. 68,792 58,749 45,281
Operating expenses:
Selling.......................................... 11,838 12,241 11,309
General and administrative....................... 19,266 15,002 14,460
Art and development.............................. 5,173 4,256 2,796
Non-recurring compensation in connection with the
IPO........................................... 15,535
Special bonuses.................................. 4,222 2,581 2,200
-------- -------- --------
Total operating expenses...................... 56,034 34,080 30,765
-------- -------- --------
Income from operations........................ 12,758 24,669 14,516
Interest expense, net.............................. 6,691 5,772 3,843
Other expense (income), net........................ 335 (309) 82
-------- -------- --------
Income before income taxes and minority
interests........................................ 5,732 19,206 10,591
Income taxes....................................... 1,952 731 464
Minority interests................................. 1,653 1,041 160
-------- -------- --------
Net income.................................... $ 2,127 $ 17,434 $ 9,967
======== ======== ========
Pro forma data (unaudited) (note (16)):
Income before income taxes....................... $ 4,079 $ 18,165 $ 10,431
Pro forma income tax expense..................... 1,827 7,403 4,238
-------- -------- --------
Pro forma net income.......................... $ 2,252 $ 10,762 $ 6,193
======== ======== ========
Pro forma net income used for pro forma net
income per share calculation................ $ 12,010
Pro forma net income per share................ $ 11,891
Pro forma weighted average common shares
outstanding................................. 1,010
See accompanying notes to consolidated financial statements.
F-4
145
AMSCAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
FOREIGN
ADDITIONAL CURRENCY
COMMON PAID-IN RETAINED TRANSLATION TREASURY
STOCK CAPITAL EARNINGS ADJUSTMENT STOCK TOTAL
------- ---------- --------- ---------- -------- ---------
Balance as of December 31, 1993..... $ 393 $ 9,090 $ 9,520 $ (420) $ (87) $ 18,496
Net income.......................... 9,967 9,967
Subchapter S distributions and
other............................. (7,450) (7,450)
Net change in cumulative translation
adjustment........................ (193) (193)
------ ------- -------- ----- ---- --------
Balance as of December 31, 1994..... 393 9,090 12,037 (613) (87) 20,820
Net income.......................... 17,434 17,434
Subchapter S distributions and
other............................. (11,009) (11,009)
Net change in cumulative translation
adjustment........................ (40) (40)
------ ------- -------- ----- ---- --------
Balance as of December 31, 1995..... 393 9,090 18,462 (653) (87) 27,205
Net income.......................... 2,127 2,127
Net adjustment for exchange of
shares issued in the
Organization...................... 1,123 (1,210) 87 --
Subchapter S distributions and
other............................. (7,583) (15,841) (23,424)
Net proceeds from IPO............... 400 42,940 43,340
Shares issued to officer............ 66 7,854 7,920
Shares issued for acquisition....... 63 7,437 7,500
Contribution to ESOP and stock
bonuses........................... 25 2,975 3,000
Net change in cumulative translation
adjustment........................ 281 281
------ ------- -------- ----- ---- --------
Balance as of December 31, 1996..... $2,070 $ 61,503 $ 4,748 $ (372) $ -- $ 67,949
====== ======= ======== ===== ==== ========
See accompanying notes to consolidated financial statements.
F-5
146
AMSCAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
--------- --------- --------
Cash flows from operating activities:
Net income.................................................... $ 2,127 $ 17,434 $ 9,967
Adjustments to reconcile net income to net cash provided by
operating activities:
Stock compensation expenses in connection with the IPO...... 10,920
Depreciation and amortization............................... 5,137 4,332 3,672
Loss (gain) on disposal of property and equipment........... 660 (5) 35
Provision for doubtful accounts............................. 2,350 1,581 2,676
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable....................................... (7,848) (9,614) (5,041)
Inventories............................................... (680) (10,548) (5,682)
Deposits and other, net................................... (3,048) (101) (155)
Other assets.............................................. 683 (1,172) (1,265)
Accounts payable and accrued expenses..................... 1,972 2,814 912
--------- --------- --------
Net cash provided by operating activities................. 12,273 4,721 5,119
Cash flows from investing activities:
Capital expenditures.......................................... (7,613) (4,522) (7,392)
Proceeds from disposal of property and equipment.............. 9 98
--------- --------- --------
Net cash used in investing activities..................... (7,613) (4,513) (7,294)
Cash flows from financing activities:
Net proceeds from IPO......................................... 43,340
Proceeds from loans, notes payable and long-term
indebtedness................................................ 3,273 42,311 6,324
Repayment of loans, notes payable and long-term indebtedness.. (11,968) (32,313) (2,434)
Proceeds from loans, notes payable and subordinated
indebtedness to Principal Stockholder....................... 4,000 6,316
Repayment of loans, notes payable and subordinated
indebtedness to Principal Stockholder....................... (17,179) (2,842)
Subchapter S distributions and other.......................... (23,424) (11,009) (7,450)
--------- --------- --------
Net cash (used in) provided by financing activities....... (5,958) 147 2,756
Effect of exchange rate changes on cash....................... 395 (92) 270
--------- --------- --------
Net increase (decrease) in cash and cash equivalents...... (903) 263 851
Cash and cash equivalents at beginning of year.................. 2,492 2,229 1,378
--------- --------- --------
Cash and cash equivalents at end of year........................ $ 1,589 $ 2,492 $ 2,229
========= ========= ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest...................................................... $ 7,826 $ 4,486 $ 4,025
Taxes......................................................... 1,085 601 112
See accompanying notes to consolidated financial statements.
F-6
147
AMSCAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
SUPPLEMENTAL INFORMATION ON NONCASH ACTIVITIES:
Capital lease obligations of $3,395 and $648 were incurred in 1996 and 1994
respectively. There were no capital lease obligations incurred in 1995.
In conjunction with the IPO, John A. Svenningsen (the "Principal
Stockholder") and certain affiliates of the Principal Stockholder exchanged
shares in Amscan Inc. and certain affiliated entities for 15,024,616 and 138,461
shares, respectively, in the Company.
In conjunction with the IPO, the Company entered into an agreement to
purchase an additional 50% of Am-Source, Inc. The Am-Source, Inc. stockholders
exchanged all of their outstanding capital stock for 624,999 shares of the
Company's stock valued at $7,500.
In conjunction with the IPO, the Company incurred stock compensation
expense of $7,920 for the issuance of stock to an officer and $3,000 for the
establishment of the ESOP for the benefit of the Company's domestic employees
and the payment of stock bonuses to certain of such employees.
See accompanying notes to consolidated financial statements.
F-7
148
AMSCAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(1) ORGANIZATION AND DESCRIPTION OF BUSINESS
Amscan Holdings, Inc. ("Amscan Holdings") was incorporated on October 3,
1996 for the purpose of becoming the holding company for Amscan Inc. and certain
affiliated entities in connection with an initial public offering of common
stock ("IPO") involving the sale of 4,000,000 shares of its common stock at
$12.00 per share. The IPO was completed on December 18, 1996 pursuant to which
the Principal Stockholder and certain affiliates of the Principal Stockholder
exchanged shares in Amscan Inc. and certain affiliates for 15,024,616 and
138,461 shares, respectively, in Amscan Holdings (the "Organization") and in the
case of the Principal Stockholder, $133,000 in cash. Prior to the IPO, certain
subsidiaries of Amscan Holdings were operated as Subchapter S corporations for
federal and, where available, for state income tax purposes. In connection with
the IPO, such subsidiaries declared a dividend representing distributions of
accumulated Subchapter S corporation profits and a return of capital. These
amounts were reflected as subordinated debt and repaid from the net proceeds of
the IPO.
Amscan Holdings and its subsidiaries (collectively the "Company") design,
manufacture, contract for manufacture and distribute party and novelty goods
principally in the United States, Canada and Europe.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Amscan
Holdings and its majority-owned subsidiaries (or with respect to less than
majority-owned subsidiaries, on the equity basis). In connection with the IPO,
there was a transfer of ownership between the former stockholders of Amscan Inc.
and certain of its affiliates and Amscan Holdings whereby Amscan Holdings became
the holding company for the business conducted by Amscan Inc. and certain of its
affiliates. Such transfer of ownership was accounted for in a manner similar to
a pooling of interests and resulted in Amscan Inc., Am-Source, Inc., JCS Realty
Corp. and SSY Realty Corp. being taxed as Subchapter C corporations under
federal and certain state income tax requirements. All material intercompany
balances and transactions have been eliminated in consolidation. For periods
prior to December 18, 1996, financial statements are presented on a combined
basis. The name, Amscan Holdings' ownership and a brief description of the
principal business activity of each consolidated subsidiary is presented below.
SUBSIDIARY OWNERSHIP PRINCIPAL ACTIVITY
- ------------------------------------ --------- ---------------------------------------------
Amscan Inc.......................... 100% Manufacturer -- paper tableware; and
distributor -- worldwide
Am-Source, Inc...................... 100 Manufacturer -- plastic products
Trisar, Inc......................... 100 Manufacturer -- gift products
Amscan Distributors (Canada) Ltd.... 100 Distributor -- Canada
Amscan Holdings Limited............. 75 Distributor -- United Kingdom
Amscan (Asia-Pacific) Pty. Ltd...... 85 Distributor -- Australia and Asia
Amscan Partyartikel GmbH............ 95 Distributor -- Germany
Amscan Svenska AB................... 100 Distributor -- Sweden
Amscan de Mexico, S.A. de C.V....... 50 Distributor -- Mexico
JCS Realty Corp..................... 100 Real estate -- Canada
SSY Realty Corp..................... 100 Real estate -- United States
F-8
149
AMSCAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACQUISITIONS
In conjunction with the IPO, the Company entered into an agreement to
acquire an additional 50% of Am-Source, Inc. The stockholders of Am-Source, Inc.
exchanged all of their outstanding capital stock for 624,999 shares of the
Company's stock valued at $7,500,000. The acquisition has been accounted for as
a purchase and the excess purchase price over the fair value of the net assets
acquired of $7,443,000 is being amortized on a straight-line basis over thirty
years.
The results of operations for the acquisition of the 50% balance of
Am-Source, Inc. are included in the accompanying financial statements from the
date of acquisition. The results of operations for this acquisition for the
years ended December 31, 1996, 1995 and 1994 had the acquisition occurred at the
beginning of 1994, are not significant.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
Highly liquid investments with a maturity of three months or less when
purchased are considered to be equivalents.
INVENTORIES
Substantially all inventories of the Company are valued at the lower cost
or market (principally on the first-in, first-out method).
PROPERTY, PLANT, AND EQUIPMENT
Property, plant and equipment are stated at cost. Machinery and equipment
under capital leases are stated at the present value of the minimum lease
payments at the inception of the lease.
Depreciation is calculated principally on the straight-line method over the
estimated useful lives of the assets. Machinery and equipment held under capital
leases and leasehold improvements are amortized straight-line over the shorter
of the lease term or estimated useful life of the asset.
INTANGIBLE ASSETS
Intangible assets are comprised of $7,443,000 and $350,000 at December 31,
1996 and 1995 respectively, of goodwill, net of amortization, which represents
the excess of the purchase price of acquired companies over the estimated fair
value of the net assets acquired. Goodwill is being amortized on a straight-line
basis over periods ranging from three years to thirty years. Accumulated
amortization was $1,050,000 and $700,000 as of December 31, 1996 and 1995,
respectively.
The Company adopted Financial Accounting Standards No. 121, "Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
("SFAS No. 121"). Such adoption had no impact on the Company's financial
statements. In accordance with SFAS No. 121, the Company systematically reviews
the recoverability of its intangible and other long-lived assets by comparing
their unamortized carrying value to their related anticipated undiscounted
future cash flows. Any impairment related to long-lived assets is measured by
reference to the assets' fair market value, and any impairment related to
goodwill is measured against discounted cash flows. Impairments are charged to
expense when such determination is made.
F-9
150
AMSCAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REVENUE RECOGNITION
The Company recognizes revenue from product sales when the goods are
shipped to the customers. Product returns and warranty costs are immaterial.
CATALOGUE COSTS
The Company expenses costs associated with the production of annual
catalogues when incurred.
ART AND DEVELOPMENT COSTS
Art and development costs are primarily internal costs that are not easily
associated with specific designs which may not reach commercial production.
Accordingly, the Company expenses these costs as incurred.
INCOME TAXES
Prior to the IPO, Amscan Inc., Am-Source, Inc., JCS Realty Corp. and SSY
Realty Corp. were operated as Subchapter S corporations for federal income and,
where available, for state income tax purposes. As a result, these corporations
did not record or pay any federal or state income taxes except in states which
do not recognize Subchapter S corporation status.
Since December 18, 1996, the Company has been taxed as a Subchapter C
corporation, and as a result, the Company accounts for income taxes in
accordance with the provisions of Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes ("SFAS 109"). Under the asset and liability
method of SFAS 109, certain income and expense items are reported differently
for financial reporting and income tax purposes. Deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities and operating loss and tax
credit carryforwards applying enacted statutory tax rates in effect for the year
in which the differences are expected to reverse. Deferred tax assets are
reduced by a valuation allowance when, in the judgment of management, it is more
likely than not that some portion or all of the deferred tax assets will not be
realized.
NON-RECURRING COMPENSATION EXPENSES
In conjunction with the IPO, the Company has recorded non-recurring
compensation expenses of $15,535,000 in 1996 related to stock and cash payments
of $12,535,000 to certain executives in connection with the termination of prior
employment agreements and $3,000,000 for the establishment of an ESOP for the
benefit of the Company's domestic employees and the payment of stock bonuses to
certain of such employees.
STOCK-BASED COMPENSATION
The Company has accounted for the distribution of stock and for the
issuance of stock options under its stock option plan in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25 "Accounting for
Stock Issued to Employees" and related interpretations ("APB 25"). As such,
compensation expense would be recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price. On January 1,
1996, the Company adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123"), which permits
entities to recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123 allows
entities to apply the provisions of APB Opinion No. 25 and provide pro forma net
F-10
151
AMSCAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
income and pro forma earnings per share disclosures for employee stock option
grants made in 1995 and future years as if the fair-value-based method defined
in SFAS No. 123 had been applied. The Company has elected to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions
of SFAS No. 123 (see note (10)).
FOREIGN CURRENCY TRANSACTIONS AND TRANSLATION
Realized foreign currency exchange gains or losses, which result from the
settlement of receivables or payables in currencies other than U.S. dollars, are
credited or charged to operations. Unrealized gains or losses on foreign
currency exchanges are insignificant.
The balance sheets of foreign subsidiaries are translated into U.S. dollars
at the exchange rates in effect on the balance sheet date. The results of
operations of foreign subsidiaries are translated into U.S. dollars at the
average exchange rates effective for the periods presented. The differences from
historical exchange rates are reflected as a separate component of stockholders'
equity.
CONCENTRATION OF CREDIT RISK
While the Company's customers are geographically disbursed throughout North
America, South America, Europe, Asia and Australia, there is a concentration of
sales made to and accounts receivable from the stores which operate in the party
superstore channel of distribution. At December 31, 1996 and 1995, the Company's
two largest customers, with approximately 185 stores, accounted for 21.7% and
12%, respectively, of consolidated accounts receivable. For the years ended
December 31, 1996, 1995 and 1994, sales to the Company's two largest customers
represented 21.5%, 17% and 10%, respectively, of consolidated net sales. Of such
amount, sales to the Company's largest customer represented 14.5%, 11% and 8%,
respectively. No other group or combination of customers subjected the Company
to a concentration of credit risk.
RECLASSIFICATIONS
In connection with the preparation of the accompanying financial
statements, the Company has classified printing plates purchased from third
party vendors as property, plant and equipment. Previously, the Company
classified such printing plates that are used in the Company's manufacturing
process as other assets. Prior balances of property, plant and equipment and
other assets have been reclassified accordingly.
Certain other amounts in prior financial statements have been reclassified
to conform to the current year presentation.
USE OF ESTIMATES
Management has made estimates and assumptions relating to the reporting of
assets and liabilities to prepare these financial statements in conformity with
generally accepted accounting principles. Actual results could differ from those
estimates.
F-11
152
AMSCAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) INVENTORIES
Inventories at December 31, 1996 and 1995 consisted of the following
(dollars in thousands):
1996 1995
------- -------
Finished goods.............................................. $42,127 $42,125
Raw materials............................................... 3,863 2,277
Work-in-process............................................. 1,388 1,839
------- -------
47,378 46,241
Less: reserve for slow moving and obsolete inventory........ (1,685) (1,228)
------- -------
$45,693 $45,013
======== ========
(4) PROPERTY, PLANT AND EQUIPMENT
Major classifications of property, plant and equipment at December 31, 1996
and 1995 consisted of the following (dollars in thousands):
ESTIMATED
1996 1995 USEFUL LIVES
-------- -------- ------------
Machinery and equipment................... $ 31,621 $ 25,530 3-15
Buildings................................. 10,153 9,524 31-40
Data processing equipment................. 9,259 6,123 5
Leasehold improvements.................... 3,449 4,784 25
Furniture and fixtures.................... 3,071 2,370 10
Land...................................... 1,917 1,917 --
-------- --------
59,470 50,248
Less: accumulated depreciation and
amortization............................ (24,807) (21,075)
-------- --------
$ 34,663 $ 29,173
========= =========
Depreciation and amortization expense was $4,787,000, $3,982,000 and
$3,322,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
(5) LOANS AND NOTES PAYABLE
The Company has entered into a revolving credit agreement with several
banks which expires on September 20, 2000. Amounts available for borrowing under
this agreement, subject to asset availability and other restrictions, are as
follows (dollars in thousands):
September 20, 1996 -- September 19, 1997................................ $55,000
September 20, 1997 -- September 20, 2000................................ 60,000
Such revolving credit agreement is collateralized by a first lien on
certain of the assets of the Company. The revolving credit agreement provides
for interest on the borrowings to be based on either a prime borrowing rate or
LIBOR plus 0.875%, whichever is lower. Additionally, the revolving credit
agreement requires the Company to comply with certain covenants including the
maintenance of financial ratios, as defined. At December 31, 1996, the Company
was in compliance with all such covenants.
F-12
153
AMSCAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Loans and notes payable outstanding at December 31, 1996 and 1995 consisted
of the following (dollars in thousands):
1996 1995
------- -------
Revolving credit line with interest at LIBOR plus 0.875% (6.75% and
6.41%, at December 31, 1996 and 1995, respectively)................. $ 5,000 $35,000
Revolving credit line with interest at the prime rate (8.25% and 8.5%,
at December 31, 1996 and 1995, respectively)........................ 23,950 2,060
Revolving credit line denominated in Canadian Dollars with interest at
the Canadian prime rate (4.75% at December 31, 1996)................ 378
Revolving credit line denominated in British Pounds Sterling with
interest at the U.K. Base rate plus 2% (8.5% at December 31,
1995)............................................................... 789
------- -------
$29,328 $37,849
======= =======
The weighted average interest rates on loans and notes payable outstanding
at December 31, 1996 and 1995 were 7.95% and 6.57%, respectively.
The Company is currently involved in three interest rate swap transactions
covering $25,000,000 of its outstanding obligation under the revolving credit
agreement. The transactions fix the interest rates as indicated below and
entitles the Company to settle with the counterparty on a quarterly basis, the
product of the notional amount times the amount, if any, by which the ninety day
LIBOR exceeds the fixed rate. Net payments to the counterparty under the swap
agreements for the years ended December 31, 1996, 1995 and 1994, which have been
recorded as additional interest expense, were as follows (dollars in thousands):
ADDITIONAL INTEREST
EXPENSE
NOTIONAL FIXED ---------------------
DATE OF CONTRACT AMOUNT TERM RATE 1996 1995 1994
- ------------------------------------- -------- -------- ------ ---- ---- ---
September 28, 1994................... $ 5,000 10 years 7.945% $122 $ 94 $34
May 12, 1995......................... 10,000 5 years 6.590 105 42
July 20, 1995........................ 10,000 10 years 6.750 122 38
---- ---- ---
$349 $174 $34
==== ==== ===
(6) LONG-TERM INDEBTEDNESS
Long-term indebtedness at December 31, 1996 and 1995 consisted of the
following (dollars in thousands):
1996 1995
------- -------
Mortgage obligations(a)..................................... $ 6,654 $ 6,956
Term loans(b)............................................... 5,778 5,152
Capital lease obligations(c)................................ 5,194 2,415
------- -------
Total long-term indebtedness.............................. 17,626 14,523
Less: current installments.................................. (2,541) (2,239)
------- -------
Long-term indebtedness, excluding current installments...... $15,085 $12,284
======= =======
(a) The Company has mortgage obligations payable to financial institutions
relating to certain distribution facilities due through September 13,
2004. The mortgages are
F-13
154
AMSCAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
collateralized by specific real estate assets of the Company and carry
interest rates ranging from the Canadian prime rate plus 0.5% (5.25%
and 8.0% as of December 31, 1996 and 1995, respectively) to 8.51%. At
December 31, 1996 and 1995, $2,100,000 and $1,800,000 of mortgage
obligations, respectively, are denominated in Canadian dollars.
(b) The Company has various term loans payable to financial institutions
due through April 1, 2002. The loans are collateralized by specific
assets of the Company and carry interest rates which range from 8.01%
to 9.5%.
(c) The Company has entered into various capital leases for machinery and
equipment with implicit interest rates ranging from 4.71% to prime rate
plus 1.0% (9.25% at December 31, 1996) which extend to 2003.
At December 31, 1996, principal maturities of long-term indebtedness
consisted of the following (dollars in thousands):
CAPITAL
MORTGAGES LEASE
AND LOANS OBLIGATIONS TOTAL
--------- ----------- -------
1997.......................................... $ 1,682 $ 1,139 $ 2,821
1998.......................................... 1,741 1,243 2,984
1999.......................................... 1,718 1,176 2,894
2000.......................................... 1,682 1,136 2,818
2001.......................................... 1,682 1,281 2,963
Thereafter.................................... 3,927 147 4,074
------- ------ -------
12,432 6,122 18,554
Amount representing interest.................. (928) (928)
------- ------ -------
Long-term indebtedness........................ $12,432 $ 5,194 $17,626
======= ====== =======
(7) DUE TO PRINCIPAL STOCKHOLDER
At December 31, 1996 and 1995, the Company owed the Principal Stockholder
$1,274,000 and $16,000,000, respectively, under a subordinated note with
interest payable monthly. This note is subject to a subordination agreement
among the Principal Stockholder, Amscan Inc., and the lenders involved with the
revolving credit agreement as discussed in note (5). Interest is the prime rate
plus 0.5% (8.75% and 9% at December 31, 1996 and 1995, respectively).
Prior to the IPO, certain subsidiaries of the Company declared a dividend
representing distributions of accumulated Subchapter S profits of $15,841,000
and a return of capital of $7,583,000. These amounts and nearly all of the
previous balances of subordinated debt were repaid from the net proceeds of the
IPO. A waiver was obtained from the banks for the repayment of these amounts due
to the Principal Stockholder.
Further, the Company had unsecured current loans payable to the Principal
Stockholder aggregating $2,453,000 at December 31, 1995 at interest rates
ranging from 7% to 12%. The loans had different forms of collateral but were
generally subordinated to the credit facility discussed in note (5). During
1996, these amounts were converted to subordinated debt.
(8) EMPLOYEE BENEFIT PLANS
Certain subsidiaries of the Company maintain a profit-sharing plan for all
eligible employees providing for annual discretionary contributions to a trust.
As of January 1, 1995, the plan required
F-14
155
AMSCAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the subsidiaries to match 25% to 50% of the first 6% of an employee's annual
salary contributed to the plan. Benefit expense for the years ended December 31,
1996, 1995 and 1994 totaled $731,000, $558,000 and $548,000, respectively.
In connection with the IPO, the Company established the Employee Stock
Ownership Plan (the "ESOP") for the benefit of its domestic employees and
authorized the payments of stock bonuses to certain of such employees. There was
a special one-time issuance of 250,000 shares of common stock of the Company,
valued at $1,898,000 for the establishment of the ESOP and $1,102,000 for
payment of stock bonuses.
(9) SPECIAL BONUSES
During the periods presented, Amscan Inc. had employment agreements with
certain key executives and senior managers which provided for these individuals
to receive annual bonuses based upon the pre-tax income of Amscan, Inc. and
certain of its affiliates. These bonuses, which amounted to approximately 18% to
20% of pre-tax income, are reflected in the Consolidated Statements of
Operations in the caption "Special Bonuses". These individuals will not receive
such special bonuses after 1996. At December 31, 1996 and 1995, respectively,
$1,584,000 and $2,581,000 were accrued for such bonuses and included in accrued
expenses.
(10) STOCK OPTION PLAN
In 1996, the Company adopted a stock option plan (the "Plan") pursuant to
which a committee of the Company's Board of Directors may grant stock options to
officers and key employees. The Plan authorizes grants of options to purchase up
to 2,000,000 shares of authorized but unissued common stock. Stock options are
granted with an exercise price no less than the stock's fair market value at the
date of grant. An option may not be exercised within one year of grant and no
option will be exercisable after ten years from the date granted. Participants
may exercise approximately 25% of the total number of shares granted in each
year subsequent to the year of the grant.
The Company has adopted the disclosure-only provisions of SFAS No. 123.
Accordingly, no compensation cost has been recognized in connection with the
issuance of options under the stock option plan. Had the Company's stock option
plan been determined based on the fair value of the options granted at the grant
date, the compensation cost for 1996 would not have been material.
Options were issued in connection with the IPO totaling 425,000 shares of
common stock at the initial offering price. It has been assumed that the
estimated fair value of the options is amortized on a straight line basis to
compensation expense over the vesting period of the grant, which is
approximately four years. The estimated fair value of each option on the date of
grant is $5.22, using the Black-Scholes option-pricing model with the following
assumptions: dividend yield of 0%; expected volatility of 25%; risk-free
interest rate of 6.43%; and expected lives of 7 years. All options issued were
outstanding and none was exercisable as of December 31, 1996.
(11) INCOME TAXES
Prior to the consummation of the IPO, Amscan Inc., Am-Source, Inc., JCS
Realty Corp. and SSY Realty Corp. elected to be taxed as Subchapter S
corporations under the Internal Revenue Code. Accordingly, these companies were
not subject to federal and state income taxes, to the extent that states
recognize Subchapter S corporation status. Upon the termination of the
Subchapter S corporation status in connection with the IPO, the aforementioned
companies became subject to federal and state income taxes. The cumulative
effect of such tax status change relating to the
F-15
156
AMSCAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
recording of deferred taxes as of December 18, 1996 was $786,000 and has been
included in the income tax expense for the year ended December 31, 1996.
A summary of the domestic and foreign pre-tax income for the years ended
December 31, 1996, 1995 and 1994 were as follows (dollars in thousands):
1996 1995 1994
------ ------- -------
Domestic.......................................... $3,137 $17,750 $10,009
Foreign........................................... 2,595 1,456 582
The provision for income taxes consisted of the following (dollars in
thousands):
YEARS ENDED DECEMBER 31,
--------------------------
1996 1995 1994
------ ---- ----
Current:
Foreign.............................................. $ 992 $731 $464
State................................................ 212
------ ---- ----
Total current provision........................... 1,204 731 464
------ ---- ----
Deferred:
Change in tax status................................. 786
Foreign.............................................. 100
Federal.............................................. (113)
State................................................ (25)
------ ---- ----
Total deferred provision.......................... 748 -- --
------ ---- ----
Income tax expense..................................... $1,952 $731 $464
====== ==== ====
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. At December 31, 1996, the
deferred assets and liabilities consisted of the following (dollars in
thousands):
Current deferred tax assets:
Provision for doubtful accounts........................................ $1,692
Accrued liabilities.................................................... 1,568
Inventories............................................................ 1,438
Other.................................................................. 175
------
Current deferred tax assets......................................... $4,873
======
Non-current deferred tax liabilities:
Property, plant and equipment.......................................... $4,484
Future taxable income resulting from a change in accounting method for
tax purposes........................................................ 823
Other.................................................................. 355
------
Non-current deferred tax liabilities..................................... $5,662
======
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will be realized. The ultimate
F-16
157
AMSCAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies in
making this assessment. Based upon the level of historical income and
projections for future taxable income over the periods in which the deferred tax
assets are deductible, management believes it is more likely than not the
Company will realize the benefits of these deductible differences.
The difference between the Company's effective tax rate and the federal
statutory rate of 35% is reconciled below:
YEARS ENDED DECEMBER 31,
---------------------------
1996 1995 1994
----- ----- -----
Provision at federal statutory rate.................... 35.0% 35.0% 35.0%
Effect of Subchapter S income not subject to federal
income taxes......................................... (19.1) (32.3) (33.1)
Change in tax status................................... 13.7
Other.................................................. 4.5 1.1 2.5
----- ----- -----
Effective tax rate..................................... 34.1% 3.8% 4.4%
===== ===== =====
(12) STOCKHOLDERS' EQUITY
INITIAL PUBLIC OFFERING
On December 18, 1996, the Company completed the IPO in which it sold
4,000,000 shares of its common stock for $12.00 per share. The proceeds, net of
underwriter's discount, fees and expenses, of $43,340,000 were used to repay
subordinated debt outstanding to stockholders and loans payable to banks.
At December 31, 1996, the Company's authorized capital stock consisted of
5,000,000 shares of preferred stock, $0.10 par value, of which no shares were
issued or outstanding, and 50,000,000 shares of common stock, $0.10 par value,
of which 20,698,076 shares were issued and outstanding.
(13) LEASES
The Company is obligated under various capital leases for certain machinery
and equipment which expire on various dates through October 1, 2001 (see also
note (6)). At December 31, 1996 and 1995, the amount of machinery and equipment
and related accumulated amortization recorded under capital leases and included
with property, plant and equipment consisted of the following (dollars in
thousands):
1996 1995
------- ------
Machinery and equipment...................................... $ 6,452 $3,174
Less: accumulated amortization............................... (1,042) (564)
------- ------
$ 5,410 $2,610
======= ======
Amortization of assets held under capitalized leases is included with
depreciation expense.
The Company has several noncancelable operating leases with unaffiliated
third parties, primarily for office and manufacturing space, showrooms, and
warehouse equipment that expire
F-17
158
AMSCAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
over the next eight years. These leases generally contain renewal options and
require the Company to pay real estate taxes, utilities and related insurance.
At December 31, 1996, the Company also had noncancelable operating leases
with the Principal Stockholder and real estate entities owned either directly or
indirectly by the Principal Stockholder ("Unconsolidated Affiliates") for
warehouse and office space that expire over the next five years. Rent due to
Unconsolidated Affiliates represents future commitments associated with property
leased by the Company from the Principal Stockholder or such entities owned
directly or indirectly by the Principal Stockholder.
At December 31, 1996 future minimum lease payments under all operating
leases consisted of the following (dollars in thousands):
UNCONSOLIDATED
THIRD PARTIES AFFILIATES TOTAL
------------- -------------- -------
1997..................................... $ 3,831 $2,246 $ 6,077
1998..................................... 3,883 2,309 6,192
1999..................................... 2,713 2,374 5,087
2000..................................... 1,908 1,239 3,147
2001..................................... 1,908 167 2,075
2002-2006................................ 6,184 6,184
2007-2011................................ 4,631 4,631
2012-2016................................ 4,325 4,325
Thereafter............................... 505 505
------- ------ -------
$29,888 $8,335 $38,223
======= ====== =======
Rent expense for the years ended December 31, 1996, 1995 and 1994 was
$5,300,000, $2,547,000 and $2,245,000, respectively, of which $2,134,000,
$936,000 and $893,000, respectively, related to leases with Unconsolidated
Affiliates.
On April 5, 1996, the Company entered into an operating lease agreement
with a third party whereby the Company may lease up to $11,000,000 of machinery
and equipment. The agreement provides for equal monthly payments over 12 years,
including renewal options. In connection with this agreement, the Company has
entered into commitments for equipment with a fair value of approximately
$10,800,000 as of December 31, 1996. Assuming the entire lease facility is
utilized, future minimum lease payments will be increased as follows (dollars in
thousands):
1997......................................................... $ 1,305
1998......................................................... 1,305
1999......................................................... 1,305
2000......................................................... 1,305
2001......................................................... 1,305
Thereafter................................................... 9,135
-------
$15,660
=======
F-18
159
AMSCAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(14) SEGMENT INFORMATION
INDUSTRY SEGMENTS
The Company operates in one industry segment which involves the design,
manufacture, contract for manufacture and distribution of party and novelty
goods.
GEOGRAPHIC SEGMENTS
The Company's export sales, other than those intercompany sales reported
below as sales between geographic areas, are not material. Sales between
geographic areas primarily consist of sales of finished goods for distribution
in the foreign markets of Australia, Canada, Germany, Mexico, Sweden, and the
United Kingdom. No one single foreign operation is significant to the Company's
consolidated operations. Intersegment sales between geographic areas are made at
cost plus a share of operating profit.
The Company's geographic area data for each of the three fiscal years ended
December 31, 1996, 1995 and 1994 were as follows (dollars in thousands):
DOMESTIC FOREIGN ELIMINATIONS CONSOLIDATED
-------- -------- ------------ ------------
1996
Sales to unaffiliated customers....... $168,165 $ 24,540 $192,705
Sales between geographic areas........ 8,643 116 $ (8,759) --
-------- -------- -------- --------
Net sales............................. $176,808 $ 24,656 $ (8,759) $192,705
======== ======== ======== ========
Income from operations................ $ 10,643 $ 2,115 $ 12,758
======== ========
Interest expense, net................. 6,691
Other expense, net.................... 335
--------
Income before income taxes and
minority interests.................. $ 5,732
========
Identifiable assets................... $127,472 $ 12,802 $140,274
======== ======== ========
1995
Sales to unaffiliated customers....... $146,198 $ 21,205 $167,403
Sales between geographic areas........ 8,508 60 $ (8,568) --
-------- -------- -------- --------
Net sales............................. $154,706 $ 21,265 $ (8,568) $167,403
======== ======== ======== ========
Income from operations................ $ 22,782 $ 1,887 $ 24,669
======== ========
Interest expense, net................. 5,772
Other income, net..................... (309)
--------
Income before income taxes and
minority interests.................. $ 19,206
--------
Identifiable assets................... $ 99,123 $ 15,478 $114,601
======== ======== ========
F-19
160
AMSCAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DOMESTIC FOREIGN ELIMINATIONS CONSOLIDATED
-------- -------- -------- --------
1994
Sales to unaffiliated customers....... $115,196 $ 16,833 $132,029
Sales between geographic areas........ 5,645 89 $ (5,734) --
-------- -------- -------- --------
Net sales............................. $120,841 $ 16,922 $ (5,734) $132,029
======== ======== ======== ========
Income from operations................ $ 13,468 $ 1,048 $ 14,516
Interest expense, net................. 3,843
Other expense, net.................... 82
-------- -------- -------- --------
Income before income taxes and
minority interests.................. $ 10,591
Identifiable assets................... $ 80,117 $ 13,767 $ 93,884
======== ======== ======== ========
(15) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts for cash and cash equivalents, accounts receivables,
deposits and other current assets, loans and notes payable, accounts payable,
accrued expenses (non-derivatives) and other current liabilities approximates
fair value at December 31, 1996 because of the short term maturity of those
instruments or their variable rate of interest.
The carrying amounts for long term debt approximates fair value at December
31, 1996. Fair value has been estimated by discounting the future cash flow of
each instrument at rates currently offered for similar debt instruments of
comparable maturity.
The fair value of interest rate swaps is the estimated amount that the bank
would receive or pay to terminate the swap agreements at the reporting date,
taking into account current interest rates and the current creditworthiness of
the swap counterparties. Termination of the swap agreements at December 31, 1996
would require the Company to pay the bank $719,500.
(16) PRO FORMA DATA (UNAUDITED)
Pro forma net income for the years ended December 31, 1996, 1995 and 1994
give effect to pro forma income tax provisions at statutory rates (40.5%)
assuming Amscan Inc., Am-Source, Inc., JCS Realty Corp. and SSY Realty Corp. had
not elected Subchapter S corporation status for those periods.
For purposes of the pro forma net income per share calculation for the year
ended December 31, 1996, net income has been adjusted to give effect to (i) the
reduction in compensation expenses ($14,173,000) paid to an officer assuming the
officer was a stockholder as of the beginning of the period presented, (ii) the
reduction in interest expense related to bank debt and subordinated indebtedness
due to the Principal Stockholder assuming such debt was repaid from the net
proceeds of the IPO as of the beginning of the period presented ($2,228,000),
and (iii) additional pro forma income taxes calculated at 40.5% assuming Amscan
Inc., Am-Source, Inc., JCS Realty Corp. and SSY Realty Corp. had not elected
Subchapter S corporation status ($6,518,000).
The pro forma weighted average common shares outstanding represents the
number of common shares outstanding following the Effective Time (see note
(18)).
F-20
161
AMSCAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(17) SUBSEQUENT EVENT
On January 8, 1997, an additional 422,400 shares of common stock were sold
at $12.00 per share to cover the over-allotments as provided for in the
underwriting agreements between the Company and the underwriters associated with
the IPO. The proceeds, net of underwriter's discount, fees and expenses, of
$4,588,984 were used to repay borrowings outstanding to banks.
(18) MERGER TRANSACTION
On August 10, 1997, Amscan Holdings and Confetti Acquisition, Inc.
("Confetti"), a newly formed Delaware corporation affiliated with GS Capital
Partners II, L.P. and certain other private investment funds managed by Goldman,
Sachs & Co. (collectively, "GSCP"), entered into an Agreement and Plan of Merger
(the "Merger Agreement") providing for a recapitalization of Amscan Holdings in
which Confetti will be merged with and into Amscan Holdings (the "Merger"), with
Amscan Holdings as the surviving corporation.
On December 19, 1997 (the "Effective Time"), the Merger was consummated
pursuant to the Merger Agreement. Confetti was merged with and into the Company,
with the Company as the surviving corporation. At the Effective Time, each share
of the Common Stock, par value $0.10 per share, of the Company (the "Company
Common Stock"), issued and outstanding immediately prior to the Effective Time
(other than shares of Company Common Stock owned, directly or indirectly, by the
Company or by Confetti) were converted, at the election of each of the Company's
stockholders, into the right to receive from the Company either (A) $16.50 in
cash (the "Cash Consideration") or (B) $9.33 in cash plus a retained interest in
the Company equal to one share of Company Common Stock for every 150,000 shares
held by such stockholder (the "Mixed Consideration"), with fractional shares of
Company Common Stock paid in cash. The Estate of John A. Svenningsen (the
"Estate"), which owned approximately 72% of the outstanding Company Common Stock
immediately prior to the Effective Time, elected to retain almost 10% of the
outstanding shares of Company Common Stock. No stockholder other than the Estate
elected to retain shares. Also pursuant to the Merger Agreement, at the
Effective Time each outstanding share of Common Stock, par value $0.10 per
share, of Confetti ("Confetti Common Stock"), was converted into an equal number
of shares of Company Common Stock as surviving corporation in the Merger.
Pursuant to certain employment arrangements, certain employees of the Company
purchased an aggregate of 10 shares of Company Common Stock following the
Effective Time. Accordingly, in the Merger the 825 shares of Confetti Common
Stock owned by GSCP immediately prior to the Effective Time were converted into
825 shares of Company Common Stock, representing approximately 81.7% of the
1,010 issued and outstanding shares of the Company immediately following the
Effective Time.
The Merger was financed with an equity contribution of approximately $67.5
million (including contributions of Company Common Stock by certain employee
stockholders and including issuances of restricted stock), $117 million from a
senior term loan and $110 million from the issuance of senior subordinated
notes. The senior subordinated notes are guaranteed jointly and severally, fully
and unconditionally, by each of the Company's wholly-owned domestic
subsidiaries, which include Amscan Inc., Trisar, Inc., Am-Source, Inc., SSY
Realty Corp. and JCS Realty Corp.
F-21
162
AMSCAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Non-guarantor companies include the following:
- Amscan Distributors (Canada) Ltd.
- Amscan Holdings Limited
- Amscan (Asia-Pacific) Pty. Ltd.
- Amscan Partyartikel GmbH
- Amscan Svenska AB
- Amscan de Mexico, S.A. de C.V.
The following consolidating information presents consolidating balance
sheets as of December 31, 1996 and 1995, and the related consolidating
statements of income and cash flows for the years ended December 31, 1996, 1995,
and 1994 for the combined guarantors and the combined non-guarantors and
elimination entries necessary to consolidate the entities comprising the
combined companies.
F-22
163
AMSCAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
AMSCAN
HOLDINGS AND COMBINED
COMBINED NON-
GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------------ ---------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents................ $ 272 $ 1,317 $ 1,589
Accounts receivable, net................. 32,605 4,773 37,378
Inventories.............................. 40,101 5,592 45,693
Deposits and other....................... 10,749 611 11,360
--------- -------- --------- ---------
Total current assets................ 83,727 12,293 96,020
Property, plant and equipment, net......... 33,387 1,276 34,663
Intangible assets, net..................... 7,443 -- 7,443
Other assets, net.......................... 12,298 -- $(10,150) 2,148
--------- -------- --------- ---------
Total assets........................ $136,855 $ 13,569 $(10,150) $140,274
========= ======== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Loans and notes payable.................. $ 28,950 $ 378 $ 29,328
Subordinated debt and other due to
stockholders.......................... 1,392 1 1,393
Accounts payable......................... 6,843 285 7,128
Accrued expenses......................... 8,650 1575 10,225
Current installments of long-term
obligations........................... 2,472 69 2,541
--------- -------- --------- ---------
Total current liabilities........... 48,307 2,308 50,615
Long-term obligations, excluding current
portion.................................. 14,994 91 15,085
Deferred tax liabilities................... 5,605 57 5,662
Other...................................... 4,021 $ (3,058) 963
--------- -------- --------- ---------
Total liabilities................... 68,906 6,477 (3,058) 72,325
Stockholders' equity:
Preferred Stock..........................
Common Stock............................. 2,070 339 (339) 2,070
Additional paid-in capital............... 61,503 158 (158) 61,503
Retained earnings........................ 4,748..... 6,911 (6,911) 4,748
Foreign currency translation
adjustment............................ (372) (316) 316 (372)
--------- -------- --------- ---------
Total stockholders' equity.......... 67,949 7,092 (7,092) 67,949
--------- -------- --------- ---------
Total liabilities and stockholders'
equity........................... $136,855 $ 13,569 $(10,150) $140,274
========= ======== ========= =========
F-23
164
AMSCAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
AMSCAN
HOLDINGS AND COMBINED
COMBINED NON-
GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------------ ---------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents.............. $ 1,593 $ 899 $ 2,492
Accounts receivable, net............... 27,969 3,911 31,880
Inventories............................ 39,643 5,370 45,013
Deposits and other..................... 2,298 622 2,920
-------- ------- ------- --------
Total current assets.............. 71,503 10,802 82,305
Property, plant and equipment, net....... 28,059 1,114 29,173
Intangible assets, net................... 350 350
Other assets, net........................ 6,047 $ (3,274) 2,773
-------- ------- ------- --------
Total assets...................... $105,959 $ 11,916 $ (3,274) $114,601
======== ======= ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Loans and notes payable................ $ 37,060 $ 789 $ 37,849
Subordinated debt and other due to
stockholders........................ 18,174 279 18,453
Accounts payable....................... 4,511 1,344 5,855
Accrued expenses....................... 9,526 9,526
Current installments of long-term
obligations......................... 2,197 42 2,239
-------- ------- ------- --------
Total current liabilities......... 71,468 2,454 73,922
Long-term obligations, excluding current
portion................................ 12,218 66 12,284
Other.................................... 655 3,809 $ (3,274) 1,190
-------- ------- ------- --------
Total liabilities................. 84,341 6,329 (3,274) 87,396
Stockholders' equity:
Preferred Stock........................ --
Common Stock........................... 54 339 393
Additional paid-in capital............. 9,082 8 9,090
Retained earnings...................... 12,636 5,826 18,462
Foreign currency translation
adjustment.......................... (67) (586) (653)
Treasury stock, at cost................ (87) (87)
-------- ------- ------- --------
Total stockholders' equity............. 21,618 5,587 27,205
-------- ------- ------- --------
Total liabilities and
stockholders' equity........... $105,959 $ 11,916 $ (3,274) $114,601
======== ======= ======= ========
F-24
165
AMSCAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
AMSCAN
HOLDINGS AND COMBINED
COMBINED NON-
GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------------ ---------- ------------ ------------
Net sales................................ $176,808 $ 24,656 $ (8,759) $192,705
Cost of sales............................ 118,244 15,704 (10,035) 123,913
-------- ------- --------- --------
Gross profit...................... 58,564 8,952 1,276 68,792
Operating expenses:
Selling expenses....................... 9,723 2,173 (58) 11,838
General and administrative expenses.... 15,718 4,562 (1,014) 19,266
Art and development.................... 5,173 5,173
Non-recurring compensation in
connection with the IPO............. 15,535 15,535
Special bonuses..................... 4,222 4,222
-------- ------- --------- --------
Income from operations............ 8,193 2,217 2,348 12,758
Interest expense, net.................... 6,602 3 86 6,691
Other expense (income), net.............. (5,550) (38) 5,923 335
-------- ------- --------- --------
Income before income taxes and
minority interests............. 7,141 2,252 (3,661) 5,732
Income taxes............................. 1,035 917 1,952
Minority interests....................... 1,403 250 1,653
-------- ------- --------- --------
Net income........................ $ 4,703 $ 1,085 $ (3,661) $ 2,127
======== ======= ========= ========
Pro forma data (unaudited) (note(16)):
Income before income taxes............. $ 4,079
Pro forma income tax expense........... 1,827
--------
Pro forma net income.............. $ 2,252
========
F-25
166
AMSCAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
AMSCAN
HOLDINGS AND COMBINED
COMBINED NON-
GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------------ ---------- ------------ ------------
Net sales................................ $154,706 $ 21,265 $ (8,568) $167,403
Cost of sales............................ 107,009 13,447 (11,802) 108,654
------------ ---------- ------------ ------------
Gross profit...................... 47,697 7,818 3,234 58,749
Operating expenses:
Selling expenses....................... 10,273 1,968 12,241
General and administrative expenses.... 12,188 3,896 (1,082) 15,002
Art and development.................... 4,256 4,256
Special bonuses........................ 2,581 2,581
------------ ---------- ------------ ------------
Income from operations............ 18,399 1,954 4,316 24,669
Interest expense, net.................. 5,582 304 (114) 5,772
Other expense (income), net............ (3,170) (154) 3,015 (309)
------------ ---------- ------------ ------------
Income before income taxes and
minority interests............. 15,987 1,804 1,415 19,206
Income taxes............................. 83 648 731
Minority interests....................... 927 114 1,041
------------ ---------- ------------ ------------
Net income........................ $ 14,977 $ 1,042 $ 1,415 $ 17,434
========== ========= ========== ==========
Pro forma data (unaudited) (note(16)):
Income before income taxes............. $ 18,165
Pro forma income tax expense........... 7,403
------------
Pro forma net income.............. $ 10,762
==========
F-26
167
AMSCAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1994
(DOLLARS IN THOUSANDS)
AMSCAN
HOLDINGS AND COMBINED
COMBINED NON-
GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------------ ---------- ------------ ------------
Net sales................................ $120,841 $ 16,922 $ (5,734) $132,029
Cost of sales............................ 83,512 10,649 (7,413) 86,748
-------- ------- --------- --------
Gross profit...................... 37,329 6,273 1,679 45,281
Operating expenses:
Selling expenses....................... 9,427 1,882 11,309
General and administrative expenses 12,528.... 3,321 (1,389) 14,460
Art and development.................... 2,474 322 2,796
Special bonuses........................ 2,200 2,200
-------- ------- --------- --------
Income from operations............ 10,700 1,070 2,746 14,516
Interest expense, net.................... 3,775 68 3,843
Other expense (income), net.............. (2,593) 34 2,641 82
-------- ------- --------- --------
Income before income taxes and
minority interests............. 9,518 968 105 10,591
Income taxes............................. 73 391 464
Minority interests....................... 103 57 160
-------- ------- --------- --------
Net income........................ $ 9,342 $ 520 $ 105 $ 9,967
======== ======= ========= ========
Pro forma data (unaudited) (note(16)):
Income before income taxes............. $ 10,431
Pro forma income tax expense........... 4,238
--------
Pro forma net income.............. $ 6,193
========
F-27
168
AMSCAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
AMSCAN
HOLDINGS AND COMBINED
COMBINED NON-
GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------------ ---------- ------------ ------------
Cash flows from operating activities:
Net income................................. $ 4,703 $ 1,085 $ (3,661) $ 2,127
Adjustments to reconcile net income to net
cash provided by operating activities:
Stock compensation expense in connection
with the IPO.......................... 10,920 10,920
Depreciation and amortization........... 4,764 373 5,137
Loss on disposal of property and
equipment............................. 660 660
Provision for doubtful accounts......... 2,048 302 2,350
Changes in operating assets and
liabilities, net of acquisitions:
Accounts receivable................ (6,684) (1,164) (7,848)
Inventories........................ (1,574) (222) 1,116 (680)
Deposits and other, net............ (3,544) 496 (3,048)
Other assets....................... (1,670) (215) 2,568 683
Accounts payable and accrued
expenses......................... 1,508 516 (52) 1,972
--------- -------- -------- ---------
Net cash provided by operating
activities....................... 11,131 1,171 (29) 12,273
Cash flows from investing activities:
Capital expenditures....................... (7,076) (537) (7,613)
--------- -------- -------- ---------
Net cash used in investing
activities....................... (7,076) (537) (7,613)
Cash flows from financing activities:
Net proceeds from IPO...................... 43,340 43,340
Proceeds from loans, notes payable and
long-term indebtedness.................. 2,777 496 3,273
Repayment of loans, notes payable and long-
term indebtedness....................... (11,113) (855) (11,968)
Repayment of loans, notes and subordinated
indebtedness to Principal Stockholder... (16,900) (279) (17,179)
Subchapter S distributions and other....... (23,574) 150 (23,424)
--------- -------- -------- ---------
Net cash used in financing
activities....................... (5,470) (488) (5,958)
Effect of exchange rate changes on cash...... 94 272 29 395
--------- -------- -------- ---------
Net increase (decrease) in cash and
cash equivalents................. (1,321) 418 -- (903)
Cash and cash equivalents at beginning of
year....................................... 1,593 899 2,492
--------- -------- -------- ---------
Cash and cash equivalents at end of year..... $ 272 $ 1,317 -- $ 1,589
========= ======== ======== =========
F-28
169
AMSCAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
AMSCAN
HOLDINGS AND COMBINED
COMBINED NON-
GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------------ ---------- ------------ ------------
Cash flows from operating activities:
Net income................................... 14$,977.... $ 1,042 $ 1,415 $ 17,434
Adjustments to reconcile net income to net
cash provided by activities:
Depreciation and amortization.............. 4,029..... 303 4,332
Gain on disposal of property and
equipment................................ (5) (5)
Provision for doubtful accounts............ 1,570 11 1,581
Changes in operating assets and
liabilities:
Accounts receivable................... (8,769) (845) (9,614)
Inventories........................... (9,055) (1,493) (10,548)
Deposits and other, net............... 128 (229) (101)
Other assets.......................... (1,282) 1,525 (1,415) (1,172)
Accounts payable and accrued
expenses............................ 3,088 (274) 2,814
-------- ------- ------- --------
Net cash provided by operating
activities............................... 4,681 40 -- 4,721
Cash flows from investing activities:
Capital expenditures......................... (4,033) (489) (4,522)
Proceeds from disposal of property and
equipment.................................. 9 9
-------- ------- ------- --------
Net cash used in investing
activities.......................... (4,024) (489) (4,513)
Cash flows from financing activities:
Proceeds from loans, notes payable and
long-term indebtedness..................... 41,415 896 42,311
Repayment of loans, notes payable and
long-term indebtedness..................... (32,246) (67) (32,313)
Proceeds from loans, notes and subordinated
indebtedness to Principal Stockholder...... 4,000 4,000
Repayment of loans, notes and subordinated
indebtedness to Principal Stockholder...... (2,557) (285) (2,842)
Subchapter S distributions and other......... (11,009) (11,009)
-------- ------- ------- --------
Net cash (used in) provided by
financing activities................ (397) 544 147
Effect of exchange rate changes on cash........ (23) (69) (92)
-------- ------- ------- --------
Net increase in cash and cash
equivalents......................... 237 26 263
Cash and cash equivalents at beginning of
year......................................... 1,356 873 2,229
-------- ------- ------- --------
Cash and cash equivalents at end of year....... $ 1,593 $ 899 -- $ 2,492
======== ======= ======= ========
F-29
170
AMSCAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1994
(DOLLARS IN THOUSANDS)
AMSCAN
HOLDINGS AND COMBINED
COMBINED NON-
GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------------ ---------- ------------ ------------
Cash flows from operating activities:
Net income.............................. $ 9,342 $ 520 $ 105 $ 9,967
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization......... 3,522 150 3,672
Loss on disposal of property and
equipment........................... 35 35
Provision for doubtful accounts....... 2,676 2,676
Changes in operating assets and
liabilities:
Accounts receivable.............. (4,495) (546) (5,041)
Inventories...................... (4,904) (778) (5,682)
Deposits and other, net.......... (1,126) 1,076 (105) (155)
Other assets..................... (1,280) 15 (1,265)
Accounts payable and accrued
expenses....................... 969 (57) 912
------- ----- ---- -------
Net cash provided by operating
activities..................... 4,739 380 -- 5,119
Cash flows from investing activities:
Capital expenditures.................... (7,276) (116) (7,392)
Proceeds from disposal of property and
equipment............................. 98 98
------- ----- ---- -------
Net cash used in investing
activities..................... (7,178) (116) (7,294)
Cash flows from financing activities:
Proceeds from loans, notes payable and
long-term indebtedness................ 6,266 58 6,324
Repayment of loans, notes payable and
long-term indebtedness................ (2,434) (2,434)
Proceeds from loans, notes and
subordinated indebtedness to Principal
Stockholder........................... 6,316 6,316
Subchapter S distributions and other.... (7,450) (7,450)
------- ----- ---- -------
Net cash provided by financing
activities..................... 2,698 58 2,756
Effect of exchange rate changes on cash... 403 (133) 270
------- ----- ---- -------
Net increase in cash and cash
equivalents.................... 662 189 851
Cash and cash equivalents at beginning of
year.................................... 694 684 1,378
------- ----- ---- -------
Cash and cash equivalents at end of
year.................................... $ 1,356 $ 873 -- $ 2,229
======= ===== ==== =======
F-30
171
AMSCAN HOLDINGS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
(DOLLARS IN THOUSANDS)
BEGINNING ENDING
BALANCE WRITE-OFFS ADDITIONS BALANCE
--------- ---------- --------- -------
Allowance for Doubtful Accounts:
For the year ended:
December 31, 1994....................... $ 1,104 $1,855 $ 2,676 $ 1,925
December 31, 1995....................... 1,925 1,001 1,581 2,505
December 31, 1996....................... 2,505 717 2,350 4,138
BEGINNING ENDING
BALANCE WRITE-OFFS ADDITIONS BALANCE
--------- ---------- --------- -------
Inventory Reserves
For the year ended:
December 31, 1994....................... $ 609 $ 375 $ 600 $ 834
December 31, 1995....................... 834 406 800 1,228
December 31, 1996....................... 1,228 731 1,188 1,685
F-31
172
AMSCAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
DECEMBER 31,
1996
SEPTEMBER 30, ------------
1997 (NOTE)
-------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 684 $ 1,589
Accounts receivable, net of allowances..................... 56,276 37,378
Inventories................................................ 48,736 45,693
Deposits and other current assets.......................... 9,680 11,360
-------- --------
Total current assets.................................. 115,376 96,020
Property, plant and equipment, net........................... 37,157 34,663
Intangible assets, net....................................... 7,540 7,443
Other assets, net............................................ 2,687 2,148
-------- --------
Total assets.......................................... $ 162,760 $140,274
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Loans and notes payable.................................... $ 10,020 $ 29,328
Subordinated and other indebtedness due to stockholders.... 1,393
Accounts payable........................................... 11,153 7,128
Accrued expenses........................................... 7,317 9,403
Income taxes payable....................................... 6,458 822
Current portion of long-term obligations................... 5,556 2,541
-------- --------
Total current liabilities............................. 40,504 50,615
Long-term obligations, excluding current portion............. 24,828 15,085
Deferred tax liabilities..................................... 5,585 5,662
Other........................................................ 2,841 963
-------- --------
Total liabilities..................................... 73,758 72,325
Stockholders' equity:
Preferred Stock ($0.10 par value; 5,000,000 shares
authorized; none issued and outstanding) Common stock
($0.10 par value; 50,000,000 shares authorized; 21,120,476
and 20,698,076 shares issued, respectively)................ 2,112 2,070
Additional paid-in-capital................................... 65,985 61,503
Retained earnings............................................ 21,649 4,748
Foreign currency translation adjustment...................... (454) (372)
Treasury stock, at cost (21,691 shares)...................... (290)
-------- --------
Total stockholders' equity............................ 89,002 67,949
-------- --------
Total liabilities and stockholders' equity......... $ 162,760 $140,274
======== ========
Note: The balance sheet at December 31, 1996 has been derived from the audited
consolidated financial statements at that date.
See accompanying notes to consolidated financial statements.
F-32
173
AMSCAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1996
---------
1997 (NOTE)
-----------
(UNAUDITED)
Net sales....................................................... $ 161,286 $ 147,008
Cost of sales................................................... 103,460 92,861
---------- --------
Gross profit.................................................... 57,826 54,147
Operating expenses:
Selling expenses.............................................. 9,598 8,691
General and administrative expenses........................... 13,225 14,113
Art and development costs..................................... 3,891 3,671
Special bonuses............................................... 3,300
---------- --------
Total operating expenses................................. 26,714 29,775
---------- --------
Income from operations................................... 31,112 24,372
Interest expense, net........................................... 2,654 4,569
Other (income) expense, net..................................... (219) (301)
---------- --------
Income before income taxes and minority interests........ 28,677 20,104
Income taxes.................................................... 11,627 767
Minority interests.............................................. 149 1,242
---------- --------
Net income............................................... $ 16,901 $ 18,095
========== ========
Pro forma net income per common share (Note (5))......... $ 16,734
==========
Pro forma weighted average common shares outstanding
(Note (5))............................................ 1,010
==========
Pro forma data (Note(6)):
Income before income taxes.................................... $ 18,862
Pro forma income tax expense.................................. 7,888
--------
Pro forma net income.......................................... $ 10,974
========
Note: The statement of income for the nine months ended September 30, 1996 has
been derived from the audited consolidated financial statements at that
date.
See accompany notes to consolidated financial statements.
F-33
174
AMSCAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
FOREIGN
ADDITIONAL CURRENCY
COMMON PAID-IN RETAINED TRANSLATION TREASURY
STOCK CAPITAL EARNINGS ADJUSTMENT STOCK TOTAL
------ ---------- -------- ---------- -------- -------
(DOLLARS IN THOUSANDS)
Balance as of December 31, 1996... $2,070 $ 61,503 $ 4,748 $ (372) $67,949
Net income........................ 16,901 16,901
Net proceeds from sale of Common
Stock (Note 3).................. 42 4,482 4,524
Payments to acquire treasury
stock........................... $ (290) (290)
Net change in translation
adjustment...................... (82) (82)
------ ---------- -------- ---------- -------- -------
Balance as of September 30, 1997.. $2,112 $ 65,985 $ 21,649 $ (454) $ (290) $89,002
======= ======== ======== ========= ======= ========
See accompanying notes to consolidated financial statements.
F-34
175
AMSCAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1996
---------
1997 (NOTE)
-----------
(UNAUDITED)
Cash flows from operating activities:
Net income..................................................... $ 16,901 $ 18,095
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................... 4,505 3,579
Provision for doubtful accounts............................. 1,423 963
Gain on disposal of equipment............................... (29)
Changes in operating assets and liabilities:
Increase in accounts receivable............................. (24,310) (20,442)
Increase in inventories..................................... (3,043) (61)
Decrease in deposits and other current assets............... 2,469 262
Increase in accounts payable, accrued expenses and income
taxes payable............................................. 7,575 (1,029)
Other, net..................................................... 2,988 195
------- -------
Net cash provided by operating activities.............. 8,479 1,562
Cash flows from investing activities:
Capital expenditures........................................... (6,895) (5,574)
Proceeds from disposal of equipment............................ 140
-------
Net cash used in investing activities.................. (6,755) (5,574)
Cash flows from financing activities:
Net proceeds from sale of Common Stock......................... 4,524
Proceeds from loans, notes payable and long-term obligations... 15,620 10,242
Repayment of loans, notes payable and long-term obligations.... (22,208) (2,003)
Repayment of subordinated and other indebtedness due to
stockholders................................................ (182) (3,220)
Payments to acquire treasury stock............................. (290) --
------- -------
Net cash (used in) provided by financing activities.... (2,536) 5,019
Effect of exchange rate changes on cash and cash equivalents... (93) 31
------- -------
Net (decrease) increase in cash and cash equivalents........... (905) 1,038
Cash and cash equivalents at beginning of period............... 1,589 2,492
------- -------
Cash and cash equivalents at end of period..................... $ 684 $ 3,530
======= =======
SUPPLEMENTAL DISCLOSURE:
Interest paid.................................................. $ 2,622 $ 4,970
Taxes paid..................................................... $ 6,612 $ 546
Supplemental information on non-cash activities:
Capital lease obligations of $59 and $2,074 were incurred during the nine
months ended September 30, 1997 and 1996, respectively.
During September 1996, the Company declared the distribution of $7,600 of
previously provided capital and $13,067 of previously undistributed earnings.
Such amounts were included in subordinated and other indebtedness to
stockholders.
Note: The statement of cash flows for the nine months ended September 30, 1996
has been derived from the audited consolidated financial statements at
that date.
See accompanying notes to consolidated financial statements.
F-35
176
AMSCAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
NOTE (1) ORGANIZATION AND DESCRIPTION OF BUSINESS
Amscan Holdings, Inc. ("Amscan Holdings") was incorporated on October 3,
1996 for the purpose of becoming the holding company for Amscan Inc. and certain
affiliated entities (the "Affiliated Group"). An initial public offering of
4,000,000 shares of the Company's Common Stock at $12.00 per share (the "IPO")
was completed on December 18, 1996 pursuant to which the principal stockholder
(the "Principal Stockholder") and certain affiliates of the Principal
Stockholder exchanged shares in the Affiliated Group for 15,024,616 and 138,461
shares, respectively, in Amscan Holdings (the "Organization") and in the case of
the Principal Stockholder, $133,000 in cash. Prior to the IPO, certain members
of the Affiliated Group were operated as Subchapter S corporations for federal
and, where available, state income tax purposes. In connection with the IPO,
such members declared dividends representing distributions of accumulated
Subchapter S corporation profits and a return of capital. These amounts were
reflected as subordinated debt and repaid from the net proceeds of the IPO.
Amscan Holdings and its subsidiaries (collectively the "Company") design,
manufacture, contract for manufacture and distribute paper and plastic party
goods, accessories and novelty items principally in the United States, Canada
and Europe.
NOTE (2) BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Amscan
Holdings and its majority-owned subsidiaries. Investments in less than
majority-owned subsidiaries are accounted for on an equity basis. As a result of
the transfer of ownership between the former stockholders of the Affiliated
Group and Amscan Holdings, certain members of the Affiliated Group terminated
their Subchapter S election on December 18, 1996 and are being taxed as
Subchapter C corporations under federal and certain state income tax
requirements. Such transfer of ownership was accounted for in a manner similar
to a pooling of interests. For the period prior to December 18, 1996, financial
statements are presented on a combined basis. Certain reclassifications have
been made to conform to the current year's presentation.
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine month period ended September 30,
1997 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1997. The results of operations may be affected by
seasonal factors such as the timing of holidays or industry factors that may be
specific to a particular period, such as movement in and the general level of
raw material costs. For further information, see the financial statements and
footnotes thereto included in the Amscan Holdings annual report on Form 10-K for
the year ended December 31, 1996.
NOTE (3) COMMON STOCK
On January 8, 1997, an additional 422,400 shares of the Company's Common
Stock were sold at $12.00 per share to cover the over-allotment option as
provided for in the underwriting agreement between the Company and the
underwriters associated with the IPO. The proceeds, net of
F-36
177
AMSCAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
underwriters' discount, fees and expenses, of $4,523,984 were used to repay
outstanding bank borrowings.
NOTE (4) INVENTORIES
Inventories consisted of the following:
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(IN THOUSANDS)
Finished goods....................................... $45,357 $ 42,127
Raw materials........................................ 3,408 3,863
Work-in-process...................................... 1,708 1,388
------- -------
50,473 47,378
Less: reserve for slow moving and obsolete
inventory.......................................... (1,737) (1,685)
------- -------
$48,736 $ 45,693
======= =======
Substantially all inventories are valued at the lower of cost, determined
on a first in-first out basis, or market.
NOTE (5) PRO FORMA NET INCOME PER COMMON SHARE
Pro forma net income per common share is computed by dividing net income by
the number of common shares outstanding following the Effective Time (see Note
(7)).
NOTE (6) INCOME TAXES
The consolidated income tax provision for the nine months ended September
30, 1997 was determined based upon an estimate of the Company's consolidated
effective income tax rates for the year ending December 31, 1997. The
differences between the consolidated effective income tax rate and the U.S.
Federal statutory rate are primarily attributable to state income taxes and the
effects of foreign operations.
The amounts shown as income taxes for the nine months ended September 30,
1996 consisted principally of foreign income taxes as most of the members of the
Affiliated Group had elected Subchapter S Corporation status for such period.
Pro forma net income for the nine months ended September 30, 1996 gives effect
to pro forma income tax provisions at an estimated effective tax rate (40.5%)
assuming those members of the Affiliated Group had not elected Subchapter S
corporation status for such periods.
NOTE (7) MERGER TRANSACTION
On August 10, 1997, Amscan Holdings and Confetti Acquisition, Inc.
("Confetti"), a newly formed Delaware corporation affiliated with GS Capital
Partners II, L.P. and certain other private investment funds managed by Goldman,
Sachs & Co. (collectively, "GSCP"), entered into an Agreement and Plan of Merger
(the "Merger Agreement") providing for a recapitalization of Amscan Holdings in
which Confetti will be merged with and into Amscan Holdings (the "Merger"), with
Amscan Holdings as the surviving corporation.
On December 19, 1997 (the "Effective Time"), the Merger was consummated
pursuant to the Merger Agreement. Confetti was merged with and into the Company,
with the Company as the
F-37
178
AMSCAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
surviving corporation. At the Effective Time, each share of the Common Stock,
par value $0.10 per share, of the Company (the "Company Common Stock"), issued
and outstanding immediately prior to the Effective Time (other than shares of
Company Common Stock owned, directly or indirectly, by the Company or by
Confetti) were converted, at the election of each of the Company's stockholders,
into the right to receive from the Company either (A) $16.50 in cash (the "Cash
Consideration") or (B) $9.33 in cash plus a retained interest in the Company
equal to one share of Company Common Stock for every 150,000 shares held by such
stockholder (the "Mixed Consideration"), with fractional shares of Company
Common Stock paid in cash. The Estate of John A. Svenningsen (the "Estate"),
which owned approximately 72% of the outstanding Company Common Stock
immediately prior to the Effective Time, elected to retain almost 10% of the
outstanding shares of Company Common Stock. No stockholder other than the Estate
elected to retain shares. Also pursuant to the Merger Agreement, at the
Effective Time each outstanding share of Common Stock, par value $0.10 per
share, of Confetti ("Confetti Common Stock"), was converted into an equal number
of shares of Company Common Stock as surviving corporation in the Merger.
Pursuant to certain employment arrangements, certain employees of the Company
purchased an aggregate of 10 shares of Company Common Stock following the
Effective Time. Accordingly, in the Merger the 825 shares of Confetti Common
Stock owned by GSCP immediately prior to the Effective Time were converted into
825 shares of Company Common Stock, representing approximately 81.7% of the
1,010 issued and outstanding shares of the Company immediately following the
Effective Time.
The Merger was financed with an equity contribution of approximately $67.5
million (including contributions of Company Common Stock by certain employee
stockholders and including issuances of restricted stock), $117 million from a
senior term loan and $110 million from the issuance of senior subordinated
notes. The senior subordinated notes are guaranteed jointly and severally, fully
and unconditionally, by each of the Company's wholly-owned domestic
subsidiaries, which include Amscan Inc., Trisar, Inc., Am-Source, Inc., SSY
Realty Corp. and JCS Realty Corp.
Non-guarantor companies include the following:
- Amscan Distributors (Canada) Ltd.
- Amscan Holdings Limited
- Amscan (Asia-Pacific) Pty. Ltd.
- Amscan Partyartikel GmbH
- Amscan Svenska AB
- Amscan de Mexico, S.A. de C.V.
F-38
179
AMSCAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following consolidating information presents consolidating balance
sheets as of September 30, 1997, and the related consolidating statements of
income and cash flows for the nine-month periods ended September 30, 1997 and
1996 for the combined guarantors and the combined non-guarantors and the
elimination entries necessary to consolidate the entities comprising the
combined companies.
CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
AMSCAN
HOLDINGS AND COMBINED
COMBINED NON-
GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------------ ---------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents..................... $ 111 $ 573 $ 684
Accounts receivable, net...................... 50,253 6,023 56,276
Inventories................................... 40,396 8,340 48,736
Deposits and other current assets............. 8,697 983 9,680
------ ------ ------ ------
Total current assets...................... 99,457 15,919 115,376
Property, plant and equipment, net............ 35,470 1,687 37,157
Intangible assets, net........................ 7,254 286 7,540
Other assets, net............................. 14,490 $(11,803) 2,687
------ ------ ------ ------
Total assets.............................. $156,671 $ 17,892 $(11,803) $162,760
====== ====== ====== ======
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Loans and notes payable $ 9,550 $ 470 $ 10,020
Accounts payable.............................. 10,471 682 11,153
Accrued expenses.............................. 5,872 1,445 7,317
Income taxes payable.......................... 5,953 505 6,458
Current portion of long-term obligations...... 5,489 67 5,556
------ ------ ------ ------
Total current liabilities................. 37,335 3,169 40,504
Long-term obligations excluding current
portion....................................... 24,749 79 24,828
Deferred tax liabilities........................ 5,585 5,585
Other........................................... 6,915 $ (4,074) 2,841
------ ------ ------ ------
Total liabilities......................... 67,669 10,163 (4,074) 73,758
Stockholders' equity:
Preferred Stock............................... --
Common Stock.................................. 2,112 339 (339) 2,112
Additional paid-in capital.................... 65,985 458 (458) 65,985
Retained earnings............................. 21,649 7,322 (7,322) 21,649
Foreign currency translation adjustment....... (454) (390) 390 (454)
Treasury stock, at cost....................... (290) (290)
------ ------ ------ ------
Total stockholders' equity................ 89,002 7,729 (7,729) 89,002
------ ------ ------ ------
Total liabilities and stockholders'
equity............................... $156,671 $ 17,892 $(11,803) $162,760
====== ====== ====== ======
F-39
180
AMSCAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
AMSCAN
HOLDINGS AND COMBINED
COMBINED NON-
GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------------ ---------- ------------ ------------
Net sales................................ $151,378 $ 19,054 $ (9,146) $161,286
Cost of sales............................ 100,485 12,803 (9,828) 103,460
-------- ------- ------- --------
Gross profit........................... 50,893 6,251 682 57,826
Operating expenses:
Selling expenses....................... 7,257 2,341 9,598
General and administrative expenses.... 10,654 3,045 (474) 13,225
Art and development costs.............. 3,891 3,891
-------- ------- ------- --------
Total operating expenses.......... 21,802 5,386 (474) 26,714
-------- ------- ------- --------
Income from operations......... 29,091 865 1,156 31,112
Interest expense, net.................... 2,615 39 2,654
Other income, net........................ (1,312) (6) 1,099 (219)
-------- ------- ------- --------
Income before income taxes and
minority interests........... 27,788 832 57 28,677
Income taxes............................. 11,308 273 46 11,627
Minority interests....................... 149 149
-------- ------- ------- --------
Net income..................... $ 16,480 $ 410 $ 11 $ 16,901
======== ======= ======= ========
F-40
181
AMSCAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS)
(UNAUDITED)
AMSCAN
HOLDINGS AND COMBINED
COMBINED NON-
GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------------ ---------- ------------ ------------
Net sales................................ $136,816 $ 17,198 $ (7,006) $147,008
Cost of sales............................ 88,326 10,644 (6,109) 92,861
-------- ------- ------- --------
Gross profit........................... 48,490 6,554 (897) 54,147
Operating expenses:
Selling expenses....................... 7,168 1,523 8,691
General and administrative expenses.... 11,025 3,628 (540) 14,113
Art and development costs.............. 3,671 3,671
Special bonuses........................ 3,300 3,300
-------- ------- ------- --------
Total operating expenses....... 25,164 5,151 (540) 29,775
-------- ------- ------- --------
Income from operations......... 23,326 1,403 (357) 24,372
Interest expense, net.................... 4,528 41 4,569
Other income, net........................ (1,348) (22) 1,069 (301)
-------- ------- ------- --------
Income before income taxes and
minority interests........... 20,146 1,384 (1,426) 20,104
Income taxes............................. 268 499 767
Minority interests....................... 1,138 104 1,242
-------- ------- ------- --------
Net income..................... $ 18,740 $ 781 $ (1,426) $ 18,095
======== ======= ======= ========
Pro forma data (Note (6)):
Income before income taxes............. $ 18,862
Pro forma income tax expense........... 7,888
--------
Pro forma net income........... $ 10,974
========
F-41
182
AMSCAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
AMSCAN
HOLDINGS AND COMBINED
COMBINED NON-
GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------------ ---------- ------------ ------------
Cash flows from operating activities:
Net income.................................... $ 16,480 $ 410 $ 11 $ 16,901
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation and amortization............. 4,233 272 4,505
Provision for doubtful accounts........... 1,116 307 1,423
Gain on disposal of property and
equipment.............................. (29) (29)
Changes in operating assets and
liabilities, net of acquisitions:
Increase in accounts receivable........... (22,764) (1,546) (24,310)
Increase in inventories................... (232) (2,748) (63) (3,043)
Decrease (increase) in deposits and other
assets, net............................ 2,841 (372) 2,469
Increase in accounts payable and accrued
expenses............................... 6,757 772 46 7,575
Other, net...................................... 121 2,880 (13) 2,988
--------- -------- ----- --------
Net cash provided by (used in) operating
activities............................. 8,523 (25) (19) 8,479
Cash flows from investing activities:
Capital expenditures.......................... (6,216) (679) (6,895)
Proceeds from disposal of equipment........... 140 140
--------- -------- ----- --------
Net cash used in investing activities......... (6,076) (679) (6,755)
--------- -------- ----- --------
Cash flows from financing activities:
Net proceeds from sale of Common Stock........ 4,524 4,524
Proceeds from loans, notes payable and long
term obligations............................ 15,480 140 15,620
Repayment of loans, notes payable and long
term obligations............................ (22,154) (54) (22,208)
Repayment of subordinated and other
indebtedness to stockholder................. (181) (1) (182)
Payments to acquire treasury stock............ (290) (290)
--------- -------- ----- --------
Net cash provided by (used in) financing
activities............................. (2,621) 85 (2,536)
Effect of exchange rate changes on cash......... 13 (125) 19 (93)
--------- -------- ----- --------
Net decrease in cash and cash
equivalents............................ (161) (744) -- (905)
Cash and cash equivalents at beginning of
period........................................ 272 1,317 1,589
--------- -------- ----- --------
Cash and cash equivalents at end of period...... $ 111 $ 573 -- $ 684
========= ======== ===== ========
F-42
183
AMSCAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS)
(UNAUDITED)
AMSCAN
HOLDINGS AND COMBINED
COMBINED NON-
GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------------ ---------- ------------ ------------
Cash flows from operating activities:
Net income.................................... $ 18,740 $ 781 $ (1,426) $ 18,095
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation and amortization................. 3,313 266 3,579
Provision for doubtful accounts............... 808 155 963
Changes in operating assets and liabilities:
Increase in accounts receivable............... (18,826) (1,616) (20,442)
Increase in inventories....................... (244) (1,243) 1,426 (61)
Decrease (increase) in deposits and other
current assets.............................. 416 (154) 262
(Increase) decrease in other assets........... (263) 969 706
(Decrease) increase in accounts payable,
accrued expenses and income taxes payable... (1,586) 557 (1,029)
Other, net...................................... (511) (511)
-------- ------- ------- --------
Net cash provided by (used in) operating
activities............................. 1,847 (285) -- 1,562
Cash flows from investing activities:
Capital expenditures.......................... (5,166) (408) (5,574)
Proceeds from disposal of property and
equipment...................................
-------- ------- ------- --------
Net cash used in investing activities..... (5,166) (408) (5,574)
Cash flows from financing activities:...........
Proceeds from loans, notes payable and long
term obligations............................ 8,771 1,471 10,242
Repayment of loans, notes payable and long
term obligations............................ (1,819) (184) (2,003)
Repayment of subordinated and other
indebtedness to stockholder................. (2,941) (279) (3,220)
-------- ------- ------- --------
Net cash provided by financing
activities............................. 4,011 1,008 5,019
Effect of exchange rate changes on cash and cash
equivalents................................... 15 16 31
-------- ------- ------- --------
Net increase in cash and cash equivalents....... 707 331 1,038
Cash and cash equivalents at beginning of
period........................................ 1,593 899 2,492
-------- ------- ------- --------
Cash and cash equivalents at end of period...... $ 2,300 $ 1,230 -- $ 3,530
======== ======= ======= ========
F-43
184
AMSCAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE (8) OTHER MATTERS
On July 7, 1997, a customer accounting for approximately 2% of the
Company's consolidated sales for the nine months ended September 30, 1997 and
the year ended December 31, 1996, filed voluntary petitions for relief under
Chapter 11 of the United States Bankruptcy Code. According to publicly available
documents, the customer is currently operating as a debtor-in-possession and
plans to reorganize pursuant to the Bankruptcy Code. At September 30, 1997,
amounts receivable from the customer which totaled approximately $1.8 million,
have been substantially provided for in the Company's allowance for doubtful
accounts. The Company does not believe the potential loss of this customer will
have a material adverse effect on the Company's future results of operations or
its financial condition.
During September 1997, the Company entered into an agreement to convert
$4.0 million of trade accounts receivable from a customer into an equity
interest. The Company subsequently transferred this interest to the Estate for
(i) a cash payment of $1.0 million, (ii) satisfaction of approximately $2.0
million of certain debts and future lease obligations owed to the Estate, and
(iii) substantially all of the assets of Ya Otta Pinata ("Ya Otta"), a
California corporation 100% owned by the Estate, at a valuation of approximately
$1.0 million.
F-44
185
=========================================================
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH
SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS
OR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE
SUBSEQUENT TO THE DATE HEREOF.
------------------
TABLE OF CONTENTS
PAGE
------
Available Information.................... iv
Prospectus Summary....................... 1
Risk Factors............................. 20
The Exchange Offer....................... 27
Certain Federal Income Tax Consequences
of the Exchange Offer.................. 35
The Transaction.......................... 36
Capitalization........................... 38
Transaction Pro Forma Consolidated
Financial Data (Unaudited)............. 39
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. 52
Business................................. 67
Management............................... 77
Ownership of Capital Stock............... 89
Description of Senior Debt............... 91
Description of Exchange Notes............ 94
Description of Certain Federal Income Tax
Consequences of an Investment in the
Exchange Notes......................... 129
Plan of Distribution..................... 133
Experts.................................. 133
Validity of the Exchange Notes........... 133
Index to Financial Statements............ F-1
Independent Auditors' Report............. F-2
=========================================================
=========================================================
AMSCAN HOLDINGS, INC.
OFFER TO EXCHANGE
9 7/8% SENIOR SUBORDINATED NOTES
DUE 2007
($110,000,000 PRINCIPAL AMOUNT)
FOR
9 7/8% SENIOR SUBORDINATED NOTES
DUE 2007
($110,000,000 PRINCIPAL AMOUNT OUTSTANDING)
------------------------------
[AMSCAN LOGO]
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186
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General Corporation Law of the State of Delaware (the
"DGCL") provides that a corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that such person is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
in such capacity at another corporation, partnership, joint venture, trust or
other enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by such person
in connection with such action, suit or proceeding if such person acted in good
faith and in a manner such person reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe that such person's conduct was
unlawful.
Section 145 of the DGCL also provides that a corporation may indemnify any
person who was or is a party or threatened to be made a party to any threatened,
pending or completed action or suit by or in the right of the corporation to
procure a judgment in its favor by reason of the fact that such person acted in
any of the capacities set forth above, against expenses (including attorneys'
fees) actually and reasonably incurred by such person in connection with the
defense or settlement of such action or suit if such person acted under similar
standards, except that no indemnification shall be made in respect of any claim,
issue or matter as to which such person shall have been adjudged to be liable to
the corporation unless and only to the extent that the Court of Chancery or the
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all the circumstances
of the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery or such other court shall deem proper.
Section 145 of the DGCL also provides that to the extent that a director,
officer, employee or agent of a corporation is successful on the merits or
otherwise in the defense of any action referred to above, or in defense of any
claim, issue or matter therein, the corporation must indemnify such person
against expenses (including attorneys' fees) actually and reasonably incurred by
such person in connection therewith.
In accordance with Section 145 of the DGCL, the Registrant's By-laws
provide that the Registrant will indemnify, to the maximum extent permitted by
applicable law, any person who was or is a party, or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, including any action
by or in the right of the Registrant to procure a judgment in its favor, by
reason of the fact that such person is or was a director, officer, employee or
agent of the Registrant or is or was serving at the request of the Registrant as
a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding.
The Registrant's By-laws also provide that expenses incurred by an officer
or director in defending an action, suit or proceeding will be paid by the
Registrant in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such person seeking
indemnification to repay such amount in the event that it shall be ultimately
determined that such person is not entitled to be indemnified by the Registrant
by law or pursuant to the Registrant's By-laws. The Registrant's By-laws define
the term "expenses" to include, without limitation, costs of and expenses
incurred in connection with or in preparation for litigation,
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187
attorneys' fees, judgments, fines, penalties, amounts paid in settlement, excise
taxes in respect of any employee benefit plan of the Registrant, and interest on
any of the foregoing.
Section 102(b)(7) of the DGCL permits a corporation to provide in its
certificate of incorporation that a director of a corporation shall not be
personally liable to the corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability (i) for any
breach of the directors' duty of loyalty to the corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL
(regarding certain illegal distributions) or (iv) for any transaction from which
the director derived an improper personal benefit. The Registrant's Certificate
of Incorporation provides that the personal liability of the Registrant's
directors to the Registrant or any of its stockholders for monetary damages for
breach of fiduciary duty by such director as a director is limited to the
fullest extent permitted by Delaware law.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
2.1 Agreement and Plan of Merger, by and among Amscan Holdings, Inc. and Confetti
Acquisition, Inc., dated as of August 10, 1997.
3.1 Certificate of Incorporation of Amscan Holdings, Inc.
3.2 Amended By-Laws of Amscan Holdings, Inc.
3.3 Certificate of Incorporation of Amscan Inc.
3.4 By-Laws of Amscan Inc.
3.5 Restated Articles of Incorporation of Trisar, Inc.
3.6 By-Laws of Trisar, Inc.
3.7 Original Articles of Incorporation of Am-Source, Inc.
3.8 By-Laws of Am-Source Inc.
3.9 Certificate of Incorporation of SSY Realty Corp.
3.10 By-Laws of SSY Realty Corp.
3.11 Certificate of Incorporation of JCS Realty Corp.
3.12 By-Laws of JCS Realty Corp.
4.1 Indenture, dated as of December 19, 1997, by and among the Company, the Guarantors
named therein and IBJ Schroder Bank & Trust Company with respect to the Senior
Subordinated Notes.
5.1 Opinion of Wachtell, Lipton, Rosen & Katz.
10.1 Exchange and Registration Rights Agreement, dated as of December 19, 1997, by and
among the Company and Goldman, Sachs & Co.
*10.2 Revolving Loan Credit Agreement, dated as of December 19, 1997, among the Company,
Goldman, Sachs Credit Partners L.P., as Arranger and Syndication Agent, Fleet
National Bank as Administrative Agent and the respective lenders signatory thereto.*
*10.3 AXEL Credit Agreement, dated as of December 19, 1997, among the Company, Goldman,
Sachs Credit Partners L.P., as Arranger and Syndication Agent, Fleet National Bank
as Administrative Agent and the respective lenders signatory thereto.*
10.4 Stockholders' Agreement, dated as of December 19, 1997, by and among the Company and
the Stockholders thereto.
10.5 Employment Agreement, dated as of August 10, 1997, by and among the Company and
Gerald C. Rittenberg.
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188
10.6 Employment Agreement, dated as of August 10, 1997, by and among the Company and
James M. Harrison.
10.7 Amscan Holdings, Inc. 1997 Stock Incentive Plan (contained in Exhibit 10.4).
12.1 Statement re computation of ratios.
21.1 Subsidiaries of the Company.
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of Wachtell, Lipton, Rosen & Katz (contained in Exhibit 5.1).
24.1 Powers of Attorney.
25.1 Statement of Eligibility and Qualification of Trustee on Form T-1 of IBJ Schroder
Bank & Trust Company under the Trust Indenture Act of 1939.
99.1 Form of Letter of Transmittal for the 9 7/8% Senior Subordinated Notes due 2007.
99.2 Form of Notice of Guaranteed Delivery.
- ---------------
* To be filed by amendment.
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(a) (1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such posteffective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
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189
(b) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11 or 13 of this form,
within one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request.
(c) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in the registration statement when it became
effective.
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190
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on February 2, 1998.
AMSCAN HOLDINGS, INC.
By: /s/ JAMES M. HARRISON
------------------------------------
Name: James M. Harrison
Title: President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on February 2, 1998.
NAME TITLE
- ------------------------------------------ ------------------------------------------------
/s/ GERALD C. RITTENBERG Chief Executive Officer
- ------------------------------------------
Gerald C. Rittenberg
/s/ JAMES M. HARRISON President, Chief Financial Officer and Treasurer
- ------------------------------------------
James M. Harrison
/s/ MICHAEL A. CORREALE Secretary and Controller
- ------------------------------------------
Michael A. Correale
/s/ TERENCE M. O'TOOLE Chairman of the Board and Director
- ------------------------------------------
Terence M. O'Toole
/s/ SANJEEV K. MEHRA Director
- ------------------------------------------
Sanjeev K. Mehra
/s/ JOSEPH P. DISABATO Director
- ------------------------------------------
Joseph P. DiSabato
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on February 2, 1998.
AMSCAN INC.
By: /s/ JAMES M. HARRISON
------------------------------------
Name: James M. Harrison
Title: Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on February 2, 1998.
NAME TITLE
- ------------------------------------------ ------------------------------------------------
/s/ GERALD C. RITTENBERG President and Director
- ------------------------------------------
Gerald C. Rittenberg
/s/ JAMES M. HARRISON Treasurer, Secretary and Director
- ------------------------------------------
James M. Harrison
/s/ MICHAEL A. CORREALE Director
- ------------------------------------------
Michael A. Correale
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192
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on February 2, 1998.
TRISAR, INC.
By: /s/ JAMES M. HARRISON
------------------------------------
Name: James M. Harrison
Title: Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on February 2, 1998.
NAME TITLE
- ------------------------------------------ ------------------------------------------------
/s/ GERALD C. RITTENBERG President and Director
- ------------------------------------------
Gerald C. Rittenberg
/s/ JAMES M. HARRISON Treasurer, Secretary and Director
- ------------------------------------------
James M. Harrison
/s/ MICHAEL A. CORREALE Director
- ------------------------------------------
Michael A. Correale
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193
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on February 2, 1998.
AM-SOURCE, INC.
By: /s/ JAMES M. HARRISON
--------------------------------------
Name: James M. Harrison
Title: Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on February 2, 1998.
NAME TITLE
- ------------------------------------------ ------------------------------------------------
/s/ GERALD C. RITTENBERG President and Director
- ------------------------------------------
Gerald C. Rittenberg
/s/ JAMES M. HARRISON Treasurer, Secretary and Director
- ------------------------------------------
James M. Harrison
/s/ MICHAEL A. CORREALE Director
- ------------------------------------------
Michael A. Correale
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194
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on February 2, 1998.
SSY REALTY CORP.
By: /s/ JAMES M. HARRISON
------------------------------------
Name: James M. Harrison
Title: Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on February 2, 1998.
NAME TITLE
- ------------------------------------------ ------------------------------------------------
/s/ GERALD C. RITTENBERG President and Director
- ------------------------------------------
Gerald C. Rittenberg
/s/ JAMES M. HARRISON Treasurer, Secretary and Director
- ------------------------------------------
James M. Harrison
/s/ MICHAEL A. CORREALE Director
- ------------------------------------------
Michael A. Correale
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on February 2, 1998.
JCS REALTY CORP.
By: /s/ JAMES M. HARRISON
------------------------------------
Name: James M. Harrison
Title: Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on February 2, 1998.
NAME TITLE
- ------------------------------------------ ------------------------------------------------
/s/ GERALD C. RITTENBERG President and Director
- ------------------------------------------
Gerald C. Rittenberg
/s/ JAMES M. HARRISON Treasurer, Secretary and Director
- ------------------------------------------
James M. Harrison
/s/ MICHAEL A. CORREALE Director
- ------------------------------------------
Michael A. Correale
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196
EXHIBIT INDEX
SEQUENTIALLY
NUMBERED
PAGE
------------
2.1 Agreement and Plan of Merger, by and among Amscan Holdings, Inc. and
Confetti Acquisition, Inc., dated as of August 10, 1997. ...............
3.1 Certificate of Incorporation of Amscan Holdings, Inc. ..................
3.2 Amended By-Laws of Amscan Holdings, Inc. ...............................
3.3 Certificate of Incorporation of Amscan Inc. ............................
3.4 By-Laws of Amscan Inc. .................................................
3.5 Restated Articles of Incorporation of Trisar, Inc. .....................
3.6 By-Laws of Trisar, Inc. ................................................
3.7 Original Articles of Incorporation of Am-Source, Inc. ..................
3.8 By-Laws of Am-Source Inc. ..............................................
3.9 Certificate of Incorporation of SSY Realty Corp. .......................
3.10 By-Laws of SSY Realty Corp. ............................................
3.11 Certificate of Incorporation of JCS Realty Corp. .......................
3.12 By-Laws of JCS Realty Corp. ............................................
4.1 Indenture, dated as of December 19, 1997, by and among the Company, the
Guarantors named therein and IBJ Schroder Bank & Trust Company with
respect to the Senior Subordinated Notes. ..............................
5.1 Opinion of Wachtell, Lipton, Rosen & Katz. .............................
10.1 Exchange and Registration Rights Agreement, dated as of December 19,
1997, by and among the Company and Goldman, Sachs & Co. ................
*10.2 Revolving Loan Credit Agreement, dated as of December 19, 1997, among
the Company, Goldman, Sachs Credit Partners L.P., as Arranger and
Syndication Agent, Fleet National Bank as Administrative Agent and the
respective lenders signatory thereto.*..................................
*10.3 AXEL Credit Agreement, dated as of December 19, 1997, among the Com-
pany, Goldman, Sachs Credit Partners L.P., as Arranger and Syndication
Agent, Fleet National Bank as Administrative Agent and the respective
lenders signatory thereto.*.............................................
10.4 Stockholders' Agreement, dated as of December 19, 1997, by and among the
Company and the Stockholders thereto. ..................................
10.5 Employment Agreement, dated as of August 10, 1997, by and among the
Company and Gerald C. Rittenberg. ......................................
10.6 Employment Agreement, dated as of August 10, 1997, by and among the
Company and James M. Harrison. .........................................
10.7 Amscan Holdings, Inc. 1997 Stock Incentive Plan (contained in Exhibit
10.4). .................................................................
12.1 Statement re computation of ratios. ....................................
21.1 Subsidiaries of the Company. ...........................................
23.1 Consent of KPMG Peat Marwick LLP. ......................................
23.2 Consent of Wachtell, Lipton, Rosen & Katz (contained in Exhibit
5.1). ..................................................................
24.1 Powers of Attorney. ....................................................
197
SEQUENTIALLY
NUMBERED
PAGE
------------
25.1 Statement of Eligibility and Qualification of Trustee on Form T-1 of IBJ
Schroder Bank & Trust Company under the Trust Indenture Act of 1939. ...
99.1 Form of Letter of Transmittal for the 9 7/8% Senior Subordinated Notes
due 2007. ..............................................................
99.2 Form of Notice of Guaranteed Delivery. .................................
- ---------------
* To be filed by amendment.