As filed with the Securities and Exchange Commission on September 30, 1998.
Registration No. 333-45457
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
POST-EFFECTIVE AMENDMENT NO. 1
to
FORM S-4
REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1933
-----------------------
AMSCAN HOLDINGS, INC.*
(Exact name of Registrant as specified in its charter)
-----------------------
Delaware 5110 13-3911462
(State or other jurisdiction (Primary standard industrial (I.R.S. employer
of 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)
James M. Harrison
President
Amscan Holdings, Inc.
80 Grasslands Road
Elmsford, New York 10523
(914) 345-2020
(Name, address, including zip code and telephone number,
including area code, of agent for service)
Copies of all communication to:
Paul G. Hughes, Esq.
Cummings & Lockwood
P. O. Box 120, Four Stamford Plaza
Stamford, Connecticut 06904-0120
(203) 327-1700
-----------------------
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. [ ]
-----------------------
================================================================================
<PAGE>
* TABLE OF ADDITIONAL REGISTRANTS
<TABLE>
<CAPTION>
Primary
Standard
Industry I.R.S Employer
Name, Address and State or Other Jurisdiction of Classification Identification
Telephone Number Incorporation or Organization Number Number
- ---------------- ------------------------------ ------------ --------------
<S> <C> <C> <C>
Amscan Inc..................... New York 5110 13-1771359
Trisar, Inc.................... California 5110 95-3420659
Am-Source, Inc................. Rhode Island 5110 05-0471630
Anagram International, Inc..... Minnesota 5110 41-1372523
Anagram International Holdings,
Inc............................ Minnesota 5110 41-1755837
Anagram International, LLC..... Nevada 5110 41-1372523
SSY Realty Corp................ New York 6519 13-3500756
JCS Realty Corp................ New York 6519 13-3431738
Anagram Eden Prairie Property
Holdings LLC................... Delaware 6519 41-1918309
</TABLE>
- ----------
* The address of these additional registrants is 80 Grasslands Road, Elmsford,
New York 10523. Their telephone number is (914) 345-2020.
2
<PAGE>
EXPLANATORY NOTE
This Registration Statement originally related to 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
be"Company"). The Exchange Notes were exchanged for equal principal amounts of
Amscan's 9 7/8% Senior Subordinated Notes due 2007 (the "Notes"). This
Registration Statement also covers the registration of the Notes for resale by
Goldman, Sachs & Co. ("Goldman Sachs") in market-making transactions. The
complete Prospectus relating to the resale by Goldman Sachs of the Notes follows
immediately after this Explanatory Note.
3
<PAGE>
[AMSCAN LOGO]
AMSCAN HOLDINGS, INC.
9 7/8% SENIOR SUBORDINATED NOTES DUE 2007
(Guaranteed by certain Affiliated Companies as described herein)
----------------------------------------------------------------
The 9 7/8% Senior Subordinated Notes due 2007 (the "Notes"), which 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,
were issued in exchange for the 9 7/8% Senior Subordinated Notes due 2007 (the
"Original Notes") by Amscan Holdings, Inc. (the "Company"), a Delaware
corporation. The Notes are fully and unconditionally guaranteed on a senior
subordinated basis, jointly and severally, by each of the Company's domestic
subsidiaries (the "Guarantors"). See "Description of Notes."
The Notes are general, unsecured obligations of the Company, are
subordinated to all senior debt of the Company ("Senior Debt") and rank pari
passu with all senior subordinated debt of the Company and are senior in right
of payment to all future subordinated indebtedness, if any, of the Company. The
claims of holders of the Notes are effectively subordinated to the Senior Debt,
which, as of June 30, 1998, was approximately $126.0 million, $116.4 million of
which was fully secured borrowings under the Bank Credit Agreement (as defined
below). The claims of holders of the Notes are 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 $2 million as of June 30,
1998. See "The Transaction" and "Capitalization."
The Notes bear interest from December 19, 1997, the date of issuance of the
Original Notes that were tendered in exchange for the Notes, at a rate equal to
9 7/8% per annum. Interest on the Notes will be payable semiannually on June 15
and December 15 of each year, which payments commenced on June 15, 1998. The
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,
together with accrued and unpaid interest, if any, to the date of redemption.
See "Summary -- Summary of Terms of Notes."
In addition, at any time prior to December 15, 2000, up to an aggregate of
35% of the principal amount of the 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, 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 remains
outstanding immediately after each such redemption. At any time on or prior to
December 15, 2002, the 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 Notes upon a Change of
Control (as defined below), the Company will be obligated to make an offer to
purchase the Notes, in whole or in part, at a price equal to 101% of the
aggregate principal amount of the 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 under which the Company issued the Notes
(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 Notes."
SEE "RISK FACTORS," COMMENCING ON PAGE 14, FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NOTES.
---------------
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.
---------------
<PAGE>
This Prospectus has been prepared for and is to be used by Goldman, Sachs &
Co. ("Goldman Sachs") in connection with offers and sales in market-making
transactions of the Notes. The Company will not receive any of the proceeds of
such sales. Goldman Sachs may act as a principal or agent in such transactions.
The Notes may be offered in negotiated transactions or otherwise.
GOLDMAN, SACHS & CO.
---------------
The date of this Prospectus is [ ], 1998.
ii
<PAGE>
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 or Goldman Sachs. This Prospectus
does not constitute an offer to sell or the solicitation of an offer to buy any
security other than the Notes, nor does it constitute an offer to sell or the
solicitation of an offer to buy any of the 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.
AVAILABLE INFORMATION
The Company and the Guarantors (as defined herein) have 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 Notes (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 Notes, 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 public may obtain information on the operation of the
Public Reference Room by calling the Commission at 1-800-SEC-0330. 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.
Upon the effectiveness of the Registration Statement, each of the
Guarantors became 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
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
(as defined herein) and the holders of the 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 as if it were subject to such periodic
reporting requirements.
iii
<PAGE>
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, wedding cake
tops and accessories, 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 300 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 '50's rock-and-roll parties.
In September 1998, the Company acquired Anagram International, Inc. and its
affiliated companies (collectively "Anagram"). Anagram manufactures and
distributes metallic balloons. Except as otherwise specifically noted, the
information and the financial and statistics data included herein have not been
adjusted to include Anagram or the results of its operations. Such additional
information shall be included in the Company's next filing of Form 8-K which is
anticipated to be made on or about December 1, 1998.
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 49% of total sales
in 1997. While the number of party superstores that Amscan supplies has grown at
a compound annual growth rate in excess of 20% from 1994 to 1997, the Company's
sales to superstores have grown by a 38% compound annual growth rate 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. 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.
Amscan's sales and cash flows have grown substantially over the past five
years. From 1992 to 1997, sales and adjusted earnings before interest, income
taxes, depreciation and amortization ("Adjusted EBITDA") (adjusted for
non-recurring items relating to the Transaction (as defined herein), Amscan's
initial public offering in 1996 (the "IPO"), other income or expenses, and
minority interests) have grown at compound annual rates of 19% and 26%,
respectively. During the same period, Adjusted EBITDA margins increased from
approximately 14% to 19% due in part to the Company's 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-month period ended June 30, 1998 were approximately $212 million and $38
million, respectively, representing an Adjusted EBITDA margin of approximately
18%.
<PAGE>
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 300 different
ensembles, generally containing 30 to 150 coordinated stock keeping units
("SKU's") within each ensemble. With 15,500 SKU's, the Company is a single-s
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 26% compound annual growth rate in Adjusted EBITDA since
1991.1992. The management team and other key employees committed $6.4 million
(including restricted stock grants) to the Transaction. In addition, Garry
Kieves, the beneficial owner of all of the capital stock of Anagram, effectively
invested $13.0 million in Company Common Stock when the Company acquired
Anagram.
OPERATIONAL REVIEW
o Design. Amscan's design staff of approximately 80 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 75 new ensembles for 1998.
o Manufactured Products. The Company is a vertically integrated
manufacturer enabling it to control costs better, 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
Mexico 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 $58
million to support expansion and provide for future growth. In addition,
in September 1998, through the acquisition of Anagram the Company
acquired metallic balloon manufacturing and distribution facilities
located in Minnesota. Consequently, the Company believes it is able to
expand production by utilizing its current facilities and equipment.
o 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. The Company's business, however, is not dependent upon any
single source of supply for products manufactured for the Company by
third parties.
o 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 four catalogues annually,
three 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:
2
<PAGE>
o 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.
o 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.
o 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.
o Provide Superior Customer Service. The Company strives to achieve high
average fill rates in excess of 95% and ensure short turnaround times.
o 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.
o 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.
o 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. The Company believes that
its acquisition of Anagram represents an attractive acquisition of a
corporation in a complementary business.
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, $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 outstanding upon
consummation of the Transaction and approximately 72.9% of the total equity
investment following the acquisition of Anagram in September 1998
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
3
<PAGE>
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 the 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 shares of
Company Common Stock issued and outstanding immediately following the Effective
Time.
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
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 ............ 1,030
Transaction costs ................ 19,152
--------
Cash for working capital purposes 6,968
--------
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$4.5 million, and borrowings under a
revolving credit agreement of a subsidiary of the Company which is not a
Guarantor of approximately $0.6 million 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 with Goldman Sachs Credit Partners L.P. ("GS
Credit Partners") and certain other lenders, which agreement was substantially
amended and restated as of September 17, 1998 in connection with and upon
consummation of the Anagram acquisition (the "Bank Credit Agreement"). 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 sale
of the Original Notes is referred to as the "Transaction Financings."
4
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1998. The information set forth below should be read in conjunction with 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 June 30, 1998
-------------------
(Dollars in thousands)
----------------------
Cash and cash equivalents ..................... $ 19,833
Total debt (including current portion):
Revolving Credit Facility (1) ............... --
Term Loan ................................... 116,415
Notes ....................................... 110,000
Mortgages ................................... 5,402
Capital leases and other .................... 4,143
---------
Total debt ............................... 235,960
Stockholders' deficit (2) ..................... (93,130)
---------
Total capitalization ........................ $ 162,663
=========
- ----------
(1) The Company has the ability to borrow up to $50 million pursuant to its
Revolving Credit Facility (as defined below). 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, had an aggregate value of approximately
$13.1 million. Combined with GSCP's payment of $61.9 million, these holdings
had an aggregate value of approximately $75.0 million at December 19, 1997.
5
<PAGE>
SUMMARY OF TERMS OF NOTES
ISSUER........................... Amscan Holdings, Inc.
SECURITIES OUTSTANDING........... $110.0 million principal amount of 9 7/8%
Senior Subordinated Notes due December 15,
2007 (i.e., the Notes).
MATURITY DATE.................... December 15, 2007.
GUARANTEES....................... The Company's payment obligations under the
Notes is jointly and severally guaranteed on
a senior subordinated basis (the "Senior
Subordinated Guarantees") by the Guarantors.
The Senior Subordinated Guarantees will be
subordinated to the guarantees of Senior
Debt 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 ach year.
OPTIONAL REDEMPTION.............. Except as described below, the Notes are not
redeemable at the Company's option prior to
December 15, 2002. From and after December
15, 2002, the 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 the 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, 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 remains
outstanding immediately after each such
redemption.
CHANGE OF CONTROL................ At any time on or prior to December 15,
2002, the 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 (as defined herein) at a redemption
price equal to 100% of the principal amount
thereof plus the Applicable Premium (as
defined herein), together with accrued and
unpaid interest, if any, to the date of
redemption.
6
<PAGE>
If the Company does not redeem the Notes
upon a Change of Control, the Company will
be obligated to make an offer to purchase
the Notes, in whole or in part, at a price
equal to 101% of the aggregate principal
amount of the 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
Notes."
RANKING.......................... The Notes are general, unsecured obligations
of the Company, are subordinated in right of
payment to all Senior Debt of the Company,
rank pari passu with all senior subordinated
debt of the Company and are senior in right
of payment to all existing and future
subordinated debt of the Company. The claims
of holders of the Notes will be subordinated
to the Senior Debt, which, as of June 30,
1998 was approximately $126.0 million,
$116.4 million of which was fully secured
borrowings under the Bank Credit Agreement.
The claims of holders of the Notes are
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 $2
million as of June 30, 1998. See "The
Transaction," "Capitalization" and
"Description of 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 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 Notes."
7
<PAGE>
EXCHANGE OFFER;
REGISTRATION RIGHTS.............. If any holder of Transfer Restricted
Securities (as defined in the Registration
Rights Agreement entered into in connection
with the issuance of the Original Notes (the
"Registration Rights Agreement")) notifies
the Company that it (A) may not resell the
Notes acquired by it in the exchange offer
made in accordance with the Registration
Rights Agreement to the public without
delivering a prospectus and the prospectus
contained in the Exchange Offer Registration
Statement (as defined in the Registration
Rights Agreement) is not appropriate or
available for such resales or (B) 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,
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 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 (such event, 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.
RISK FACTORS
See "Risk Factors" beginning on page 14 for a discussion of certain factors
that should be considered in evaluating an investment in the Notes.
8
<PAGE>
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 five
most recent fiscal years have been audited. The selected historical income
statement data for each of the years in the three-year period ended December 31,
1997 and balance sheet data as of December 31, 1997 and 1996 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 unaudited historical
financial data for the six month periods ended June 30, 1998 and 1997 have been
derived from, and should be read in conjunction with, the consolidated 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 financial statements of the
Company. Results for the 1997six- month period ended June 30, 1998 are not
necessarily indicative of results that can be expected for the entire 1998
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 presentedoperations data for the year ended December
31, 1997 and for the twelve-month period ended June 30, 1998 give effect to the
Transaction as if it were consummated as of January 1, 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.
9
<PAGE>
<TABLE>
SELECTED HISTORICAL AND TRANSACTION PRO FORMA
CONSOLIDATED AND COMBINED FINANCIAL AND OTHER DATA
(Dollars in Millions)
<CAPTION>
Transaction
Six Months Ended Pro Forma
Years Ended December 31, June 30, Twelve Months Ended
----------------------------------------------- ---------------------- -------------------------
December 31, June 30,
1993 1994 1995 1996 1997 1997 1998 1997 1998
-------- -------- -------- -------- ------- ---------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales................ $108.9 $132.0 $167.4 $192.7 $209.9 $102.4 $104.2 $209.9 $211.8
Cost of sales............ 72.6 86.7 108.7 123.9 136.5 66.0 67.0 136.5 137.6
------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit............. 36.3 45.3 58.7 68.8 73.4 36.4 37.2 73.4 74.2
Selling expenses......... 9.8 11.3 12.2 11.8 13.7 6.2 7.1 13.7 14.7
General and
administrative
expenses................ 11.1 14.5 15.0 19.3 20.8 8.3 9.8 21.1 22.1
Art and development
costs................... 2.6 2.8 4.3 5.2 5.3 2.6 3.2 5.3 5.9
Restructuring
charges (a)............. -- -- -- -- -- -- 2.4 -- 2.4
Non-recurring expenses
in connection with
the Transaction(b)...... -- -- -- -- 22.1 -- -- 22.1 22.1
Non-recurring
compensation in
connection with the
IPO(c).................. -- -- -- 15.5 -- -- -- -- --
Special bonuses(d)....... 1.1 2.2 2.5 4.2 -- -- -- -- 7.0
------- ------- ------- ------- ------- ------- ------- ------- -------
Income from
operations.............. 11.7 14.5 24.7 12.8 11.5 19.3 14.7 11.2 7.0
Interest expense,
net..................... 2.3 3.8 5.8 6.7 3.9 1.9 10.8 22.6 21.9
Other expense (income),
net...................... 0.3 0.1 (0.3) 0.4 (0.1) (0.1) (0.1) (0.1) (0.1)
------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before
income taxes and minority
interests............... 9.1 10.6 19.2 5.7 7.7 -- 4.0 11.3 (14.8)
Income tax expense
(benefit).............. 0.3 0.4 0.7 2.0 7.7 7.1 1.7 -- (1.6)
Minority interests....... 0.3 0.2 1.1 1.6 0.2 0.1 -- 0.2 0.2
------- ------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)........ $8.5 $10.0 $17.4 $2.1 $(0.2) $10.3 $2.3 $(11.5) $(13.4)
======= ======= ======= ======= ======= ======= ======= ======= =======
Pro Forma Data
(relating to change
in tax status prior
to Organization and
IPO):
Income before income
taxes................... $8.8 $10.4 $18.2 $4.1
Pro forma income
taxes(e)................ 3.6 4.2 7.4 1.8
------- ------- ------- -------
Pro forma net
income(e)............... $5.2 $ 6.2 $10.8 $2.3
======= ======= ======= =======
Non-GAAP Financial
Data:
Adjusted EBITDA(f)....... $15.5 $20.4 $31.6 $37.7 $39.8 $22.3 $20.5 $39.6 $38.2
Adjusted EBITDA
margin................ 14.2% 15.4% 18.9% 19.5% 19.0% 21.8% 19.7% 18.9% 18.0%
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Transaction
Six Months Ended Pro Forma
Years Ended December 31, June 30, Twelve Months Ended
----------------------------------------------- ---------------------- -------------------------
December 31, June 30,
1993 1994 1995 1996 1997 1997 1998 1997 1998
-------- -------- -------- -------- ------- ---------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Adjusted EBITDA to
cash interest
expense................. -- -- -- -- -- -- -- -- 1.8x
Adjusted EBITDA minus
cash capital
expenditures to cash
interest expense........ -- -- -- -- -- -- -- -- 1.4x
Total debt to Adjusted
EBITDA.................. -- -- -- -- -- -- -- -- 6.2x
Other Financial
Data:
Gross margin............. 33.3% 34.3% 35.1% 35.7% 34.9% 35.6% 35.7% 34.9% 35.0%
Depreciation and
amortization............ $2.6 $3.7 $4.3 $5.1 $6.3 $3.0 $3.4 $6.3 $6.7
Cash capital
expenditures............ 4.7 7.4 4.5 7.6 10.2 3.7 2.5 10.2 9.0
Earnings to fixed
charges(g).............. 3.7x 3.2x 3.8x 1.7x 2.2x 6.8x 1.3x 0.6x 0.4x
Cash Flow Statement
Data:
Cash flows from
operations.............. $9.9 $5.1 $4.7 $12.3 $4.2 $5.6 $6.1 -- --
Cash flows from
investing............... (6.9) (7.3) (4.5) (7.6) (10.1) (3.7) (2.5) -- --
Cash flows from
financing............... (1.9) 2.8 0.1 (6.0) 116.0 (2.5) (94.8) -- --
</TABLE>
<TABLE>
<CAPTION>
At December 31, At June 30,
----------------------------------------------- -----------------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet
Data:
Working capital.......... $4.7 $(0.4) $8.4 $45.4 $96.8 $70.2 $99.2
Total assets............. 80.1 93.9 114.6 140.3 269.3 146.8 170.0
Total debt............... 49.1 59.7 70.8 48.3 237.3 40.4 236.0
Stockholders' equity
(deficit)............... 18.5 20.8 27.2 67.9 (95.2) 82.7 (93.1)
</TABLE>
11
<PAGE>
NOTES TO SELECTED HISTORICAL AND TRANSACTION PRO FORMA CONSOLIDATED
AND COMBINED FINANCIAL AND OTHER DATA
(Dollars in millions)
(a) The Company recorded charges of approximately $2.4 during the six months
ended June 30, 1998 in connection with the restructuring of its distribution
operations. The Company will close two facilities located in California and
Canada. The restructuring charges include the non-cash write-down of $1.3
relating to property, plant and equipment, the accrual of future lease
obligations of $0.5, severance and related costs of $0.3, and other costs of
$0.3.
(b) In connection with the Transaction in 1997, the Company recorded
non-recurring expenses of $22.1, comprised of $11.7 in transaction costs,
$7.5 of compensation to an officer, $1.9 for the redemption of Company Stock
Options (as defined below) and $1.0 of debt retirement costs.
(c) 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 and the payment of stock
bonuses to certain of such employees.
(d) In each of the four years ended December 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 Company's performance.
(e) 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
"Code"). The pro forma net income amounts give effect to pro forma income
tax amounts for each of the four years ended December 31, 1996 shown at
statutory rates (40.5%) assuming these subsidiaries had not elected S
corporation status.
(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, investorspurchasers 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.
12
<PAGE>
<TABLE>
<CAPTION>
Transaction
Six Months Ended Pro Forma
Years Ended December 31, June 30, Twelve Months Ended
----------------------------------------------- ------------------- ------------------------
December 31, June 30,
1993 1994 1995 1996 1997 1997 1998 1997 1998
------- -------- -------- -------- -------- -------- -------- ------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EBITDA................. $13.8 $17.9 $28.3 $15.9 $17.6 $22.2 $18.2 $17.4 $13.7
Adjustments-increase
(decrease):
Special bonuses and
non-recurring
expenses............ 1.1 2.2 2.5 19.8 22.1 -- 2.4 22.1 24.5
Other expense
(income), 0.3 0.1 (0.3) 0.4 (0.1) -- (0.1) (0.1) (0.1)
net.................
Minority interests... 0.3 0.2 1.1 1.6 0.2 0.1 - 0.2 0.1
------- ------- ------- ------- ------- ------- ------- -------- -------
Adjusted EBITDA....... $15.5 $20.4 $31.6 $37.7 $39.8 $22.3 $20.5 $39.6 $38.2
======= ======= ======= ======= ======= ======= ======= ======== =======
</TABLE>
(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.
13
<PAGE>
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 and
its acquisition of Anagram in September 1998. As of June 30, 1998, the Company
(i) had approximately $236 million of consolidated indebtedness and (ii) had a
deficit of approximately $93 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 stockholders of the Company
immediately before the Effective Time retaining almost 10% of the Company. After
giving pro forma effect to the Transaction, the Company's ratio of earnings to
fixed charges would have been 1.3x for the twelve month period ended June 30,
1998. Pro forma interest expense for the twelve month period ended June 30, 1998
would have been approximately $21.9 million. In addition, the Company borrowed
$60 million to pay for Anagram. The Company also funded part of the cost of
Anagram with cash on hand, and by issuing new equity of approximately $13
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 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
the maturity of the Notes may require refinancing. The Company's business may
not generate sufficient cash flow from operations future borrowings may not be
available in an amount sufficient to enable the Company to service its
indebtedness, including the Notes, or to make necessary or desirable capital
expenditures or acquisitions, and any refinancing may not 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, among
other things, to borrow additional funds and to 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 Notes tendered to it upon the occurrence of a Change of
Control (as defined in the Bank Credit Agreement). See "Description of Senior
Debt" and "Description of Notes."
14
<PAGE>
SUBORDINATION; ASSET ENCUMBRANCES
The Notes are 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 June
30, 1998, there was outstanding approximately $126.0million of Senior Debt,
$116.4 million of which was secured borrowings under the Bank Credit Agreement.
In addition, the Notes are 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 $2 million as of June 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 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 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 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 Notes. See "Description of 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.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 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 material assets other than the common stock of its subsidiaries.
As a result of the holding company structure of the Company, holders of the
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
funds available to pay to holders of the Notes in respect of 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 the Company may not 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, James M. Harrison, President,
Chief Financial Officer and Treasurer, or William S. Wilkey, Senior Vice
President -- Sales and Marketing, 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
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 a Vice President 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
15
<PAGE>
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 Original 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."
Approximately 72.9% of the outstanding shares of Company Common Stock is
held by GSCP after taking into account the issuance of shares in connection with
the acquisition of Anagram. 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. The interests of GSCP may conflict with the interests of holders of the
Notes. See "Management," "Ownership of Capital Stock" and "Certain
Transactions".Transactions."
PAYMENT UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of Notes may
require the Company to repurchase all or a portion of such holder's Notes at
101% of the principal amount of the 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.
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.
During each of the years in the three year period ended December 31, 1997,
combined sales to the Company's two largest customers, Party City Corporation, 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 17%, 21% and 24% of the Company's
sales. In January 1998, Party Stores Holdings filed a voluntary petition for
relief under Chapter 11 of the United States Bankruptcy Code. At June 30, 1998,
Party City Corporation, its largest customer, accounted for approximately 17% of
the Company's accounts receivable.
Although the Company believes its relationship with its largest customer is
good, should it significantly reduce its 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. 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. Anagram, however, controls
several licenses which are used in the production of balloons.
16
<PAGE>
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 increase 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 the possible
acquisition by the Company of other entities. As of the date of this Prospectus,
no acquisitions are pending; 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.
Businesses acquired by the Company also may not generate sufficient revenues or
profits or satisfy the Company's strategic objectives. Moreover, suitable
acquisition candidates may not be available, acquisitions may not be able to be
completed on reasonable terms, the Company may not be able to integrate the
operations of any acquired entities or the Company may not 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.
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".Results."
TRADING MARKET FOR THE NOTES
The trading market for the Notes has been limited. This could adversely
affect the ability of the holders of the Notes to sell their Notes or the price
at which such holders may be able to sell their Notes. The Notes could trade at
prices that may be higher or lower than their initial offering price depending
on many factors, including prevailing interest rates, the Company's operating
results and the market for similar securities. Although it is not obligated to
do so, Goldman Sachs intends to make a market in the Notes. Any such
market-making activity may be discontinued at any time, for any reason, without
notice at the sole discretion of Goldman Sachs. No assurance can be given as to
the liquidity of or the trading market for the Notes.
Goldman Sachs may be deemed to be an affiliate of the Company and, as such,
may be required to deliver a prospectus in connection with its market-making
activities in the 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 transactions in the Notes. Subject to
certain exceptions set forth in the Registration Rights Agreement, the
registration statement will remain effective for as long as Goldman Sachs may be
required to deliver a prospectus in connection with market-making transactions
in misleading.Notes. 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
Senior Subordinated Guarantees and the Notes was incurred for proper purposes
and in good faith, and that as a result of, and after giving effect to, the
offerings of the
17
<PAGE>
Original Notes and of the Notes in exchange for the Original Notes, 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
Notes, the effect of which would be that holders of the Notes may not be repaid
in full and/or (b) subordinate the Company's or the Guarantors' obligations to
Holdersholders of the 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 Notes or the Senior Subordinated Guarantees.
NOTE RESALE PROCEDURES
Each broker-dealer that received Notes for its own account in exchange for
Original Notes, where such Original 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 Notes.
ACCOUNTING TREATMENT
The Notes were recorded at the same carrying value as the Original 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 was recognized in connection with the offer to
exchange the Notes for the Original Notes. The expenses of such offer are being
amortized over the term of the Notes.
RESALE OF 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 the Notes
may be offered for resale, resold and otherwise transferred by any holder of
such 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 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
Notes. Any holder who acquired Notes in exchange for Original Notes with the
intention to participate, or for the purpose of participating, in a distribution
of the Notes may not rely on the position of the staff of the Commission
enunciated in Exxon Capital Holdings Corporation (available April 13, 1989),
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 the resale of the Notes.
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 Commission.
By tendering Original Notes in exchange for Notes, each Holder (as defined in
the Indenture) represented to the Company that, among other things, (i) the
Notes acquired in exchange for Original Notes were obtained in the ordinary
course of business of the person receiving such Notes, whether or not such
person is a holder, (ii) neither the Holder nor any such other person was
engaged or intends to engage in, or had an arrangement or understanding with any
person to participate in, the distribution of such Notes and (iii) the Holder
and such other person acknowledged that if they were participating in the offer
to exchange Original Notes for Notes for the purpose of distributing the 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 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 or such other person incurring liability
under the Securities Act for which such persons are not indemnified by the
Company. Further, each Holder or person receiving the Notes acquired pursuant to
the offer to exchange Original Notes for Notes that may be deemed an "affiliate"
(as defined under Rule 405 of the Securities Act) of the Company represented to
the Company that such Holder understands and acknowledges that the Notes may not
be offered for resale, resold or otherwise transferred by that Holder or such
other person without registration under the Securities Act or an exemption
therefrom.
18
<PAGE>
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 Notes without compliance with the registration and prospectus
delivery requirements of the Securities Act. In connection with the offering of
the Original Notes, the Company entered into the Registration Rights Agreement
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. 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.
19
<PAGE>
THE TRANSACTION
CERTAIN AGREEMENTS
Pursuant to the Transaction Agreement, MergerCo was merged with and into
the Company on December 19, 1997 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 IPO. 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".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, the Estate
and certain employees of the Company listed as parties thereto (including the
Estate, the "Non-GSCP Investors"). See "Ownership of Capital Stock."
20
<PAGE>
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
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 ............ 1,030
Transaction costs ................ 19,152
Cash for working capital purposes 6,968
--------
Total............................. $288,875
========
- --------------
(a) In addition to the GSCP equity contribution, certain employees 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$4.5 million, and borrowings under a
revolving credit agreement of a Non-Guarantor Subsidiary of approximately
$0.6 million as of December 19, 1997. All other outstanding debt of the
Company was extinguished at or prior to the completion of the Transaction.
USE OF PROCEEDS
This Prospectus is delivered in connection with the sale of Notes by Goldman
Sachs in market-making transactions. The Company will not receive any of the
proceeds from such transactions.
21
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1998. The information set forth below should be read in conjunction with 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 June 30, 1998
---------------------
(Dollars in thousands)
----------------------
Cash and cash equivalents ............. $ 19,833
Total debt (including current portion):
Revolving Credit Facility (1) ....... --
Term Loan ........................... 116,415
Notes ............................... 110,000
Mortgages ........................... 5,402
Capital leases and other ............ 4,143
----------
Total debt ....................... 235,960
Stockholders' (deficit) (2) ........... (93,130)
----------
Total capitalization ............. $ 162,663
==========
- ----------
(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, had an aggregate value of approximately
$13.1 million. Combined with GSCP's payment of $61.9 million, these holdings
had an aggregate value of approximately $75.0 million as of December 19,
1997.
22
<PAGE>
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 Operations for the year
ended December 31, 1997 and the twelve-month period ended June 30, 1998 give
effect to the Transaction as if it were consummated as of January 1, 1997. The
adjustments are described in the accompanying notes. The Transaction Pro Forma
Consolidated Statements of Operations should not be considered indicative of
actual results that would have been achieved had the Transaction been
consummated January 1, 1997 and do not purport to indicate results of operations
for any future period. The Transaction Pro Forma Consolidated Statements of
Operations 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 $28.0 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 $5.9 million. The
Company 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 and earned substantially less in
the year ended December 31, 1997 than in the prior year. 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 affect
materially 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 affected by the
Transaction.
The Transaction Pro Forma Financial Data has not been adjusted to give
effect to the Company's acquisition of Anagram in September 1998.
23
<PAGE>
TRANSACTION PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1997
(Dollars in thousands)
(Unaudited)
Pro Forma
adjustments to
give effect to
the Transaction
Historical Transaction Pro Forma
---------- ----------- ---------
Net sales.............................. $ 209,931 -- $ 209,931
Cost of sales.......................... 136,571 -- 136,571
--------- ---------
Gross profit........................... 73,360 -- 73,360
Operating expenses:
Selling expenses....................... 13,726 -- 13,726
General and administrative expenses.... 20,772 $ 238(a) 21,010
Art and development costs.............. 5,282 -- 5,282
Non-recurring expenses in connection
with the Transaction................... 22,083 22,083
--------- ---------
Income from operations................. 11,497 -- 11,259
Interest expense, net.................. 3,892 18,723(b) 22,615
Other income, net...................... (71) -- (71)
---------- ---------
Income (loss) before taxes and
minority interest...................... 7,676 -- (11,285)
Income tax expense (benefit)........... 7,665 (7.679)(c) (14)
Minority interests..................... 193 -- 193
---------- ---------- ---------
Net loss .............................. $ (182) -- $ (11,464)
========= =========
Non-GAAP financial data:
Adjusted EBITDA(d)..................... $ 39,825 -- $ 39,587
Adjusted EBITDA margin................. 19.0% -- 18.9%
Other financial data:
Gross margin........................... 34.9% -- 34.9%
Depreciation and amortization.......... $ 6,245 -- $ 6,245
Cash capital expenditures.............. 10,237 -- 10,237
Earnings to fixed charges(e)........... 2.2x -- 0.6x
See Notes to Transaction Pro Forma Consolidated Statement of Operations.
24
<PAGE>
Notes to Transaction Pro Forma Consolidated Statement of Operations
For the Year Ended December 31, 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, 1997. Non-recurring expenses incurred
in connection with the Transaction have not been eliminated. The non-recurring
expenses of $22,083 incurred in connection with the Transaction was comprised of
$11,652 in transaction costs, $7,500 of compensation to an officer, $1,901 for
the redemption of Company Stock Options, and $1,030 of debt retirement costs.
The transaction costs incurred in connection with the Transaction included (i)
professional, advisory and investment banking fees and expenses, (ii)
compensation costs and (iii) miscellaneous fees and expenses, such as printing
and filing fees. The non-recurring compensation expense reflects a one-time
compensation charge of $7,500 paid by the Estate and certain trusts created by
Mr. Svenningsen (the "Svenningsen Trusts") to Gerald C. Rittenberg under the
terms of a Stock Agreement among Mr. Svenningsen, the Svenningsen Trusts and Mr.
Rittenberg. The non-recurring compensation expense for the redemption of 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. The Transaction has been accounted for
as a recapitalization, which had no impact on the historical basis of the
Company's assets and liabilities.
(a) To reflect the amortization over a ten-year period of restricted shares of
Company Common Stock valued at $1,125 issued to an officer of the Company in
connection with the Transaction. See "The Transaction -- Interests of
Certain Persons in the Transaction."
(b) To adjust interest expense to reflect the following:
Interest on historical debt repaid in Transaction ......... $ (2,337)
Incremental interest expense on the Term Loan (8.5% (rate) 9,611
Incremental interest expense on the Notes (9.875% rate) ... 10,501
Commitment fees on Revolving Credit Facility .............. 250
Amortization of deferred financing costs (7-10 years)on new
indebtedness 698
========
Total adjustment .......................................... $ 18,723
========
For the year ended December 31, 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.
(c) To reflect the tax effects of the Transaction pro forma adjustments at a
40.5% statutory income tax rate.
(d) "Adjusted EBITDA" represents earnings before interest, income taxes,
depreciation and amortization adjusted for non-recurring expenses, 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.
(e) 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.
25
<PAGE>
TRANSACTION PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Twelve Months Ended June 30, 1998
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma
adjustments to
give effect to
the Transaction
Historical Transaction Pro Forma
---------- ----------- ---------
<S> <C> <C> <C>
Net sales.................................. $211,777 -- $211,777
Cost of sales.............................. 137,619 -- 137,619
---------- ----------- ----------
Gross profit............................... 74,158 -- 74,158
Operating expenses:
Selling expenses........................... 14,659 -- 14,659
General and administrative expenses........ 22,234 $ (166)(a) 22,068
Art and development costs.................. 5,931 -- 5,931
Non-recurring expenses in connection with 22,083 22,083
the Transaction..........................
Restructuring charges...................... 2,400 -- 2,400
---------- ----------- ----------
Income from operations..................... 6,851 -- 7,017
Interest expense, net...................... 12,789 9,135(b) 21,924
Other income, net.......................... (91) (91)
---------- ----------- ----------
Loss before taxes and minority interest.... (5,847) (14,816)
Income tax expense (benefit)............... 2,174 (3,722)(c) (1,548)
Minority interests......................... 138 -- 138
---------- ----------- ----------
Net loss .................................. $ (8,159) -- $(13,406)
========== =========== ==========
Non-GAAP Financial data:
Adjusted EBITDA(d)......................... $ 38,043 -- $ 38,209
Adjusted EBITDA margin..................... 18.0% -- 18.0%
Other financial data:
Gross margin............................... 35.0% -- 35.0%
Depreciation and amortization.............. $ 6,709 -- $ 6,709
Cash capital expenditures.................. 9,000 -- 9,000
Earnings to fixed charges(e)............... 0.6x -- 0.4x
See Notes to Transaction Pro Forma Consolidated Statement of Operations
</TABLE>
26
<PAGE>
Notes to Transaction Pro Forma Consolidated Statement of Operations
For the Twelve Months Ended June 30, 1998
(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, 1997. Non-recurring expenses incurred
in connection with the Transaction have not been eliminated. To reflect the
elimination of non-recurring expenses of $22,083 incurred in connection with the
Transaction which were comprised of $11,652 in transaction costs, $7,500 of
compensation to an officer, $1,901 for the redemption of Company Stock Options
and $1,030 of debt retirement costs. The non-recurring compensation expense
reflects a one-time compensation charge of $7,500 paid by the Estate and the
Svenningsen Trusts to Gerald C. Rittenberg under the terms of a Stock Agreement
among Mr. Svenningsen, the Svenningsen Trusts and Mr. Rittenberg. The
transaction costs incurred in connection with the Transaction
included (i) professional, advisory and investment banking fees and expenses,
(ii) compensation costs and (iii) miscellaneous fees and expenses, such as
printing and filing fees. The non-recurring compensation expense for the
redemption of 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. he Transaction has
been accounted for as a recapitalization, which had no impact on the historical
basis of the Company's assets and liabilities.
(a) To reflect the amortization over a ten-year period of restricted shares of
Company Common Stock valued at $1,125 issued to an officer of the Company in
connection with the Transaction. See "The Transaction - Interests of Certain
Persons in the Transaction."
(b) To adjust interest expense to reflect the following:
Interest on historical debt repaid in Transaction............ $(1,039)
Incremental interest expense on the Term Loan (8.5% rate).... 4,631
Incremental interest expense on the Notes (9.875% rate)...... 5,069
Commitment fees on Revolving Credit Facility................. 125
Amortization of deferred financing costs ------
(7-10 years) on new indebtedness........................... 349
------
Total adjustment............................................. $9,135
======
For the twelve month period ended June 30, 1998, 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.
(c) To reflect the tax effects of the Transaction pro forma adjustments at a
41.5% statutory income tax rate.
(d) "Adjusted EBITDA" represents earnings before interest, income taxes,
depreciation and amortization adjusted for non-recurring expenses, 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.
27
<PAGE>
(e) 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.
28
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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 $167.4 million in 1995 to $209.9
million in 1997, a compound annual growth rate of approximately 12%. 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 1995
and 1997, sales to party superstore customers increased from $38.5 million to
$102.3 million, a 38.5% compound annual growth rate.
Revenues are generated from sales of approximately 15,500 SKU's 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 1997. 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 7,800 SKU's
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 1997 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.
RESULTS OF OPERATIONS
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
- -------------------------------------------------------------------------
Percentage of Net Sales
Six Months Ended June 30,
-------------------------
1998 1997
------- -------
Net sales............................. 100.0% 100.0%
Cost of sales......................... 64.3 64.4
------- -------
Gross profit...................... 35.7 35.6
Operating expenses:
Selling expenses...................... 6.9 6.1
General and administrative expenses... 9.4 8.1
Art and development costs............. 3.0 2.5
Restructuring charges................. 2.3 -
------- -------
Total operating expenses.......... 21.6 16.7
------- -------
Income from operations............ 14.1 18.9
Interest expense, net................. 10.3 1.8
Other income, net..................... (0.1) -
Income before income taxes and minority
interests............................. 3.9 17.1
Income tax expense.................... 1.6 7.0
Minority interests.................... 0.1 0.1
------- -------
Net income.......................... 2.2% 10.0%
======= =======
------- -------
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NET SALES
Net sales for the six months ended June 30, 1998 were $104.2 million, as
compared to $102.4 million for the six months ended June 30, 1997. The increase
in net sales for the six months ended June 30, 1998 of 1.8% is attributable to
growth in sales to party superstores and international customers which more than
offset the reduction in sales attributable to the recent bankruptcies of two
national accounts and the timing of shipments of seasonal goods to customers
which will be shipped in the third quarter of 1998 versus the second quarter in
1997.
GROSS PROFIT
The Company maintained a consistent gross profit margin of approximately
36% between the comparative periods ended June 30, 1998 and 1997 reflecting its
effective management of product and distribution costs.
SELLING EXPENSES
Selling expenses of $7.2 million for the six months ended June 30, 1998
were $0.9 million higher than those of the corresponding period in 1997. Selling
expenses increased as a percentage of net sales from 6.1% to 6.9% principally
due to the addition of a new seasonal catalogue, expansion of the "everyday"
catalogue, and higher advertising costs.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses of $9.8 million increased by $1.5
million for the six months ended June 30, 1998 as compared to the corresponding
period in 1997 and increased as a percentage of net sales from 8. 1 % to 9.4%
principally due to a $0.7 million increase in the Company's provision for bad
debts.
ART AND DEVELOPMENT COSTS
Art and development costs of $3.2 million for the six months ended June 30,
1998 increased by $0.6 million compared to the corresponding period in 1997. As
a percentage of net sales, art and development costs increased from 2.5% to
3.0%. The increase in costs is attributable to the Company's investment in
additional art and product development staff associated with the development of
new product lines.
RESTRUCTURING CHARGES
In the second quarter of 1998, the Company commenced a restructuring of its
distribution operations to reduce costs and improve operating efficiencies. The
Company will close two distribution facilities located in California and Canada
which will result in the elimination of approximately 100 positions. The
restructuring will be substantially completed by the end of 1998. The Company
has recorded restructuring charges of approximately $2.4 million, or 2.3% of
sales for the six-month period ended June 30, 1998. The restructuring charges
include the non-cash writedown of $1.3 million relating to property, plant and
equipment (the majority of which has been classified as assets held for
disposal), the accrual of future lease obligations of $0.5 million, severance
and related costs of $0.3 million, and other costs of $0.3 million. Management
is currently evaluating the further consolidation of its domestic distribution
facilities which may result in additional restructuring charges in subsequent
periods.
INTEREST EXPENSE, NET
Interest expense, net of $10.8 million for the six months ended June 30,
1998 increased by $8.9 million as compared to the corresponding period in 1997
due to the Company's increased borrowings in connection with the Transaction
(see "Liquidity and Capital Resources"), offset in part by reduced levels of
working capital.
INCOME TAXES
Income taxes for the six months ended June 30, 1998 and 1997 were based
upon estimated consolidated effective income tax rates of 41.5% and 40.5% for
the years ending December 31, 1998 and 1997, respectively. The higher effective
income tax rate for the year ending December 31, 1998 is attributable to an
increase in estimated state income taxes.
30
<PAGE>
MINORITY INTERESTS
Minority interests represent the portion of income of the Company's
subsidiaries attributable to equity ownership not held by the Company.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
- ---------------------------------------------------------------------
Percentage of Net Sales
- -----------------------
Years Ended December 31,
------------------------
1997 1996
------- -------
Net sales............................................ 100.0% 100.0%
Cost of sales........................................ 65.1 64.3
------- -------
Gross profit...................................... 34.9 35.7
Operating expenses:
Selling expenses.................................. 6.5 6.1
General and administrative expenses............... 9.9 10.0
Art and development costs ....................... 2.5 2.7
Non-recurring expenses in connection with the
Transaction..................................... 10.5 -
Non-recurring compensation in connection with the IPO - 8.1
Special bonuses................................... - 2.2
------- -------
Total operating expenses............................. 29.4 29.1
------- -------
Income from operations............................ 5.5 6.6
Interest expense, net................................ 1.9 3.4
Other (income) expense, net.......................... (0.1) 0.2
------- -------
Income before income taxes and minority interests. 3.7 3.0
Income tax expense................................... 3.7 1.0
Minority interests................................... 0.1 0.9
------- -------
Net (loss) income................................. (0.1)% 1.1%
======= =======
NET SALES
Net sales for the year ended December 31, 1997 were $209.9 million, an increase
of 8.9% over the year ended December 31, 1996. Sales to national accounts
totaled $106.3 million, or 15.9% 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 $1.9 million, accounting for 1.0% of
the increase in net sales. 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 year ended December 31,
1997, the Company added approximately 600 SKU's to its product line.
GROSS PROFIT
Gross profit for the year ended December 31, 1997 was $73.4 million, an increase
of $4.6 million over the year 1996. As a percent of net sales, gross profit
decreased for the year ended December 31, 1997 to 34.9% from 35.7% for the year
ended December 31, 1996 as a result of excess capacity due to increases in
manufacturing capacity and the addition of a new distribution facility during
the first half of 1997.
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<PAGE>
SELLING EXPENSES
Selling expenses for the year ended December 31, 1997 increased by $1.9 million
to $13.7 million and, as a percentage of net sales, to 6.5% from 6.1%, primarily
due to the expansion of foreign operations.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses of $20.8 million for the year ended December
31, 1997 increased $1.5 million as compared to the year ended December 31, 1996.
General and administrative expenses for 1997 included a $3.8 million or 61.0%
increase in bad debt expense as two national customers (Party Stores Holdings,
Inc. and Party America, Inc.) filed voluntary petitions for relief under Chapter
11 of the United States Bankruptcy Code during the year (see Note 2 of the Notes
to the Consolidated Financial Statements). General and administrative expenses
for 1996 were 10.0% of net sales and included non-recurring costs associated
with the Company's move to new corporate offices and additional personnel costs,
including relocation and recruitment.
ART AND DEVELOPMENT COSTS
Art and development costs of $5.3 million for the year ended December 31, 1997
were comparable to those of 1996 and decreased slightly to 2.5% of net sales
from 2.7%, reflecting the 8.9% increase in 1997 net sales over the prior year.
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.
NON-RECURRING EXPENSES
In connection with the Transaction, the Company has recorded non-recurring
expenses of $22.1 million, comprised of $11.7 million in transaction costs, $7.5
million of compensation to an officer, $1.9 million for the redemption of
Company Stock Options and $1.0 million of debt retirement costs.
SPECIAL BONUSES
The employment agreements which gave rise to special bonuses during the first
eleven 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 $4.2 million or 2.2% of net sales for the year ended December
31, 1996.
INTEREST EXPENSE, NET
Interest expense, net, of $3.9 million for the year ended December 31, 1997
decreased by $2.8 million as compared to 1996, as the net proceeds received from
the issuance of Company Common Stock in December 1996 and January 1997 were used
to reduce indebtedness under the Company's line of credit and to repay
subordinated debt, prior to the Transaction. In addition to the lower debt, the
Company experienced generally lower interest rates during 1997 as compared to
1996. See "Liquidity and Capital Resources."
INCOME TAXES
Income tax expense for the year ended December 31, 1997 was $7.7 million or
nearly 100% of income before taxes and minority interests. Non-deductible
expenses related to the Transaction had the effect of increasing the 1997
effective income tax rate by 51.2% of income before income taxes and minority
interests.
During 1996, prior to the IPO, Amscan Inc., Am-Source, Inc., and certain other
subsidiaries of the Company were taxed as S corporations for federal and, where
available, 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 for the year ended December 31, 1996 consisted 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 of $0.2 million and $1.7 million for the years ended
December 31, 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
32
<PAGE>
minority interests of certain foreign entities, the minority interest amount for
the year ended December 31, 1996 includes 50% minority interest in Am-Source,
Inc. through December 18, 1996, the date the Company acquired the 50% not
previously owned.
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 SKU's compared with approximately 13,400 SKU's 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.
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
33
<PAGE>
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
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.
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.
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 the Company. 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.
LIQUIDITY AND CAPITAL RESOURCES
On December 19, 1997 the Company and Confetti consummated the Transaction,
providing for a recapitalization of the Company in which Confetti was merged
into the Company with the Company as the surviving corporation. Upon
consummation of the Transaction, the Company's then existing loan arrangements
were repaid and terminated and 90% of the then outstanding Company Common Stock
was converted into the right to receive cash. The Transaction was financed with
an equity contribution of approximately $67.5 million (including contributions
of Company Common Stock by certain employee
34
<PAGE>
stockholders and including issuances of restricted Common Stock), $117 million
from a senior term loan (the "Term Loan") provided under a bank credit agreement
(the "Bank Credit Facilities") and $110 million from the issuance of the
Original Notes (collectively, the "Transaction Financings"). The Transaction has
been accounted for as a recapitalization and, accordingly, the historical basis
of the Company's assets and liabilities has not been affected by the
Transaction.
In addition to the Term Loan, the Bank Credit Facilities provide for
revolving loan borrowings of up to $50 million pursuant to an amended and
restated revolving loan credit agreement dated as of September 17, 1998 (the
"Revolving Credit Facility"). The Revolving Credit Facility has a term of five
years and bears 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 outstanding
under the Revolving Credit Facility are subject to adjustment in the future
based on the Company's performance. At June 30, 1998, the Company had borrowing
capacity of approximately $46.1 million under the Revolving Credit Facility.
On August 6, 1998, the Company entered into a stock purchase agreement (the
"Stock Purchase Agreement") with the stockholders of Anagram, a metallic balloon
manufacturer and distributor, providing for the acquisition of Anagram by the
Company. The Company paid approximately $87 million for Anagram through the
issuance of equity and the payment or assumption of debt.
Anagram expects that its revenue for calendar year 1998 will be
approximately $65 to $70 million with an earnings margin (before interest,
taxes, depreciation and amortization) of approximately 13%. The Company expects
to realize a number of operational synergies, of both a revenue and cost nature,
from its combination with Anagram. The Company estimates that these synergies
will be in the range of $1 million to $2 million for 1999.
The acquisition of Anagram will be accounted for under the purchase method,
whereby the purchase price will be allocated to the underlying assets and
liabilities based on their estimated fair values.
The Company financed the acquisition of Anagram with $40.0 million of
senior term debt, $20.0 million of additional borrowings under the Revolving
Credit Facility, cash on hand, and the issuance of approximately $13.0 million
of equity. The Company amended its existing credit agreements when it acquired
Anagram, including an amendment to permit the senior debt.
Based upon the current level of operations and anticipated growth,
including giving effect to the acquisition of Anagram, and the amendments to the
Company's credit agreements, 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 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.
The Transaction Financings, the acquisition of Anagram, and the amendments
to the Company's credit agreements may affect the Company's ability to make
future capital expenditures. However, 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 June 30, 1998, the
Company did not have material commitments for capital expenditures.
CASH FLOW DATA - SIX MONTHS ENDED JUNE 30,1998 COMPARED TO SIX MONTHS ENDED JUNE
30, 1997
During the six months ended June 30, 1998, net cash provided by operating
activities increased by $0.5 million to $6.1 million from $5.6 million during
the same period in 1997 as a result of lower accounts receivable and inventory
balances attributable to management's efforts to reduce working capital. The
impact of lower accounts receivable and inventory levels was partially offset by
reduced earnings and decreased accounts payable.
Net cash used in investing activities during the six months ended June 30,
1998 of $2.5 million decreased by $1.3 million from 1997 reflecting lower levels
of capital expenditures.
During the six months ended June 30, 1998, net cash used in financing
activities of $94.8 million consisted principally of payments to former
shareholders whose investment in Company Common Stock was converted into the
right to receive cash in connection with the Transaction and the scheduled
repayment of debt offset by the net proceeds received from short-term
35
<PAGE>
borrowings and the issuance of Company Common Stock to employees as well as
payments received applicable to notes receivable from officers. During the
comparable period in 1997, net cash used in financing activities of $2.5 million
reflected the repayment of borrowings under its then existing revolving credit
line of $22.2 million which was principally financed by advances under the
Company's uncommitted facilities and the then existing term loan of $15.6
million, repayments of indebtedness to stockholders of $0.2 million and payment
of $0.3 million to acquire treasury stock, offset by the net proceeds of $4.5
million from the issuance of Company Common Stock to cover the overallotment
provided for in the IPO.
CASH FLOW DATA -- YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER
31, 1996
Net cash provided by operating activities decreased by $8.1 million to $4.2
million during the year ended December 31, 1997 from $12.3 million during the
year ended December 31, 1996 as a result of expenses incurred in connection with
the recapitalization of the Company, the change in the Company's tax status in
December 1996 and growth in the Company's inventories and accounts receivable.
Net cash used in investing activities of $10.1 million increased by $2.5 million
from 1996, reflecting increased capital expenditures. During the year ended
December 31, 1997, net cash provided by financing activities of $116.0 million
included net proceeds of $4.5 million from the issuance of Company Common Stock
to cover the over-allotments provided for in the IPO underwriting agreement, a
contribution to capital by the Estate of $7.5 million and proceeds of $61.9
million from the issuance of Company Common Stock in connection with the
Transaction, proceeds of the Transaction Financings of $237.8 million and
related payments to repurchase Company Common Stock of $142.7 million. In
addition, during 1997, the Company repaid indebtedness of $51.8 million. During
the year ended December 31, 1996, net cash used in financing activities of $6.0
million included increased distributions to stockholders of $17.2 million,
repayment of bank debt and indebtedness to Mr. Svenningsen of $29.1 million,
partially offset by net proceeds of $43.3 million from the IPO.
During 1996, the Company used net proceeds from the IPO to repay debt owed to
banks and to Mr. Svenningsen. 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.
During 1996, the Company distributed $23.4 million to Mr. Svenningsen.
Approximately $1.4 million of the distributions in 1996 were 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 1997 and 1996, the Company acquired machinery and equipment totaling $10.3
million and $11.0 million, respectively. The Company financed the acquisitions
using long-term debt, borrowings under the Company's then available revolving
credit facility and capital leases.
BALANCE SHEET DATA -- DECEMBER 31, 1997 COMPARED TO DECEMBER 31, 1996
The increase in cash and the amount due to stockholders at December 31, 1997,
represents $93.2 million cash consideration owed to stockholders for their
shares of Company Common Stock which is subject to payment in accordance with
the exchange provisions in the Transaction Agreement. Substantially all the
consideration was paid subsequent to December 31, 1997.
Accounts receivable, net, increased $7.5 million to $44.8 million at December
31, 1997 from $37.4 million at December 31, 1996. The increase in accounts
receivable is primarily attributable to the growth in third and fourth quarter
sales of seasonal merchandise which customarily have extended payment terms.
Inventories, net, increased $6.0 million to $51.7 million at December 31, 1997
from $45.7 million at December 31, 1996, reflecting the expansion of the
Company's product line as well as increased inventory levels considered
necessary to meet anticipated sales growth.
Deposits and other current assets decreased $3.3 million to $8.1 million at
December 31, 1997 from December 31, 1996, as deposits placed in 1996 for the
acquisition and lease of various manufacturing, warehouse and office equipment
and computer software were utilized in 1997.
Property, plant and equipment, net increased $4.2 million to $38.9 million at
December 31, 1997 from $34.7 million at December 31, 1996. This increase is
primarily due to manufacturing, warehouse and computer equipment acquired,
partially offset by depreciation.
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Other assets increased $4.3 million to $6.5 million at December 31, 1997 from
$2.2 million at December 31, 1996 as a result of the deferral of financing costs
of $5.5 million related to the Transaction Financings, which was partially
offset by a reduction in a note receivable from a supplier.
The changes in the loans and notes payable, long-term obligations and
stockholders' equity account balances from December 31, 1996 to December 31,
1997 reflect the recapitalization of the Company as a result of the Transaction.
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.
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.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting
Comprehensive Income. SFAS No. 130 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. The Company does not believe any substantial changes
to its disclosures will be made at the time SFAS No. 130 is adopted.
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 February 1998, the FASB issued SFAS No. 132, Employers' Disclosures about
Pensions and Other Postretirement Benefits. The Statement supercedes the
disclosure requirements in SFAS No. 87, Employers' Accounting for Pensions, SFAS
No. 88, Accounting for Settlements and Curtailments of Defined Benefit Pension
Plans and for Termination Benefits, and SFAS No. 106, Employers' Accounting for
Postretirement Benefits Other Than Pensions. SFAS No. 132 addresses disclosure
issues only and does not change the measurement or recognition provisions
specified in those Statements. SFAS No. 132 is effective for fiscal years
beginning after December 15, 1997. The Company does not believe any substantial
changes to its disclosures will be made at the time SFAS No. 132 is adopted.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging
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<PAGE>
activities. The statement requires all derivatives to be recognized on the
balance sheet at fair value and establishes standards for the recognition of
changes in such fair value. SFAS No. 133 is effective for fiscal years beginning
after June 15, 1999. The Company expects to adopt SFAS No. 133 effective January
1, 2000. Because of the Company's limited use of derivatives, management does
not anticipate the adoption of SFAS No. 133 will have a significant effect on
earnings or the financial position of the Company.
IMPACT OF YEAR 2000
Several of the Company's older computer programs have time sensitive software
that will not recognize the year 2000 and, if not addressed, could cause
disruptions to the Company's normal business operations. The Company has
completed an assessment of its software and has begun to upgrade its
time-sensitive software to be Year 2000 compliant. Management expects that the
cost to upgrade its software will not be significant and that substantially all
of the cost will be recognized over the life of the new software. To date, the
Company has not incurred significant expenses associated with the Year 2000
issue.
The Company expects to complete the upgrade of its principal software by
December 31, 1998 and believes that the Year 2000 issues will not pose
significant operational problems for its computer systems. However, there can be
no guarantee that the estimated cost and completion will be achieved and the
actual results could differ materially from those anticipated.
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 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 1996, 1997 and 1998 by
quarter.
Quarter Ended
-----------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
1996
Net sales $ 47,258 $ 45,714 $ 54,036 $ 45,697
Income (loss) from operations 7,586 7,563 9,223 (11,614)(a)
1997
Net sales $ 53,176 $ 49,225 $ 58,885 $ 48,645
Income (loss) from operations 10,029 9,306 11,777 (19,615)(b)
1998
Net sales $ 55,561 $ 48,686 -- --
Income from operations 9,235 5,454(c) -- --
(a) 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 the ESOP for the benefit of the employees of Amscan Inc. and
the payment of stock bonuses to certain of such employees.
(b) Included in fourth quarter results in 1997 are non-recurring expenses
relating to the Transaction of $22.1 million comprised of $11.7 million in
transaction costs, $7.5 million compensation payment to an officer, $1.9 million
for the redemption of Company Stock Options and $1.0 million of debt retirement
costs.
(c) Included in second quarter results in 1998 are restructuring charges of
$2.4 million which relate to the closure of two distribution facilities located
in California and Canada. The restructuring charges consist of the non-cash
write-down of $1.3 million relating to property, plant and equipment, the
accrual of future lease obligations of $0.5 million, severance and related costs
of $0.3 million and other costs of $0.3 million.
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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 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 the actual results or developments anticipated by the Company may not be
realized or, even if substantially realized, willmay not have the expected
consequences to or effects on the Company and its Subsidiariessubsidiaries 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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<PAGE>
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, wedding cake tops and accessories, 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 300 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 '50's 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 49% of total sales
in 1997. While the number of party superstores that Amscan supplies has grown at
a compound annual growth rate in excess of 20% from 1994 to 1997, the Company's
sales to superstores have grown by a 38% compound annual growth rate 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 1996,1992 to 1997, sales and Adjusted EBITDA (adjusted for
non-recurring items, other income or expenses, and minority interests) have
grown at compound annual rates of 19% and 26%, respectively. During the same
period, Adjusted EBITDA margins increased from approximately 14% to 20%19% due
in part to the Company's 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 month period ended June 30, 1998
were approximately $212 million and $38 million, respectively, representing an
Adjusted EBITDA margin of approximately 18.0%.
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REVENUE AND ADJUSTED EBITDA GROWTH
[GRAPHIC OMITTED]
Revenues Adjusted EBITDA
-------- ---------------
($ millions)
1992 $86.9 1992 $12.6
1993 $108.9 1993 $15.5
1994 $132.0 1994 $20.4
1995 $167.4 1995 $31.6
1996 $192.7 1996 $37.7
1997 $209.9 1997 $39.8
LTM $211.8 LTM $38.2
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:
o the creation of new product ensembles both in response to consumer demand
and as a means of stimulating customer purchases;
o the broadening of product lines through the addition of new items and new
accessories within ensembles;
o larger retail environments allowing retailers to employ marketing
techniques which result in increased average sales per customer; and
o the celebration of an increased number of party themes and events, such as
Hawaiian luaus, Mardi Gras and '50's rock-and-roll parties.
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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
o 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, Big Party Corporation, The Paper
Factory, The Half-Off Card Shop, Paper Warehouse Inc. and Factory Card
Outlet Corp. Approximately 49% of the Company's sales were generated from
superstores in 1997. 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.
o 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 300
different ensembles, generally containing 30 to 150 coordinated SKU's
within each ensemble. With 15,500 SKU's, 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.
o Strong Customer Relationships. The Company has built strong relationships
with its customer base which operate 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.
o 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.
o 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 26% compound annual growth rate in Adjusted EBITDA
since 1992. The management team and other key employees committed $6.4
million (including restricted stock grants) to the Transaction. In
addition, Garry Kieves, chief executive officer of Anagram effectively
invested $13 million in Company Common Stock when the Company acquired
Anagram. The Company paid a portion of the purchase price for Anagram in
Company Common Stock.
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:
o 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.
o 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.
o 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.
o Provide Superior Customer Service. The Company strives to achieve high
average fill rates in excess of 95% and ensure short turnaround times.
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o 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.
o 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.
o 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. Consistent with this
strategy, the Company acquired Anagram in September 1998. Anagram
manufactures and distributes metallic balloons.
BUSINESS OPERATIONS
PRODUCT DESIGN
The Company's 80 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 1997,1998, the
Company introduced approximately 75 new ensembles.
PRODUCT LINE
The categories of products which the Company offers are tableware,
accessories and novelties. The percentages of sales for each product category
for, 1995, 1996 and 1997 are set forth in the following table:
1995 1996 1997
---- ---- ----
Tableware 60% 59% 59%
Accessories 24 25 26
Novelties 16 16 15
---- ---- ----
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 Banners Cocktail Picks
Paper Napkins Caketops Games
Paper Tablecovers Cascades Candles
Paper Cups Confetti Mugs
Solid Color Crepe Noise Makers
-----------
Paper and Plastic Plates Cutouts Party Favors
Paper Napkins Decorative Tissues Party Hats
Paper and Plastic Flags Pinatas
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
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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 $1.10 and $11.25.
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 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 1996.1997. 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. The Company,
through Anagram, manufactures balloons at its facility in Minnesota. This
vertically integrated manufacturing capability for many of its key products
allows the Company the opportunity to control costs better and to 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
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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 four separate product catalogues
annually, twothree for seasonal products and one for everyday products.
From 1992 to 1997, the Company significantly reduced selling, general and
administrative expenses as a percentage of sales, largely because of a
proportionate decrease in selling expenses.
SG&A and Adjusted EBITDA as % of Revenues
SG&A Adjusted EBITDA Margin
1992 20.8% 14.5%
1993 19.1% 14.2%
1994 19.5% 15.4%
1995 16.3% 18.9%
1996 16.1% 19.5%
1997 16.4% 19.0%
LTM 17.4% 18.0%
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 control inventory investment
better, 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. The Company has begun a
restructuring of its distribution operations. As part of the restructuring, the
Company will close its distribution facilities in California and Canada and will
sell the facility in Canada.
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.
45
<PAGE>
Revenue Breakdown by Retail Channel
1997 Revenue of $209.9 million
Other Distributors 5%
Superstores and National Accts. 52%
Mass Market 2%
Independents 41%
The Company has a diverse customer base. Only one customer, Party City
Corporation, accounted for more than 10% of the Company's sales in 1997. Sales
to Party City Corporation accounted for 15% and 19% of the Company's sales in
1996 and 1997, respectively. Although the Company believes its relationship with
Party City Corporation is good, if it were to reduce its volume of purchases
from the Company significantly, 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, no acquisitions are pending; 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. Anagram, however, controls several licenses
which is uses for its production of balloons.
46
<PAGE>
EMPLOYEES
As of August 31, 1998, the Company had approximately 1,150 employees, none
of whom is represented by a labor union. The Company considers its relationship
with its employees to be good. In addition, Anagram had approximately 400
employees at the time of its acquisition.
FACILITIES
The Company maintains its corporate headquarters in Elmsford, New York and
conducts its principal design, manufacturing and distribution operations at the
following facilities:
<TABLE>
<CAPTION>
Owned or Leased
Location Principal Activity Square Feet (with Expiration Date)
- -------- ------------------ ----------- ----------------------
<S> <C> <C> <C>
Elmsford, New York (1) Executive Offices; design and 53,575 square feet Leased (expiration date:
art production of paper party January 1, 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 189,000 square feet Leased (expiration date:
of paper plates March 31, 1999)
Tijuana, Mexico Manufacture and distribution of 50,000 square feet Leased (expiration date:
party products May 14, 2001)
Newburgh, New York Manufacture and distribution 167,000 square feet Leased (expiration date:
of solid color party products November 30, 1999)
Eden Prairie, Minnesota Manufacture and distribution 115,600 square feet Owned
of balloons and accessories
Brooklyn, New York Manufacture and distribution 12,200 square feet Leased (expiration date:
of wedding cake tops July 20, 2003)
and accessories
Temecula, California (2) Distribution of party 212,000 square feet Leased (expiration date:
products and decorations December 31, 2000)
Goshen, New York Distribution of seasonal 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
Stevenage, United Kingdom Distribution of balloons and 30,000 square feet Leased (expiration date:
accessories June 23, 2009)
Saint Denis, France Distribution of balloons and 6,800 square feet Leased (expiration date:
accessories March 31, 2005)
Madrid, Spain Distribution of balloons and 6,700 square feet Leased (expiration date:
accessories February 24, 2004)
Silverwater, Australia Distribution of balloons and 4,700 square feet Leased (expiration date:
accessories December 31, 2000)
Granada, Mexico Distribution of balloons and 6,600 square feet Leased (expiration date:
accessories November 10, 1998)
Ontario, Canada Distribution of balloons and 7,200 square feet Leased (expiration date:
accessories May 31, 2000)
</TABLE>
47
<PAGE>
(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 June
30, 1998 was approximately $3,703,100.
(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 June 30, 1998 was approximately
$1,698,700. As part of the restructuring of its distribution operations,
the Company intends to sell this facility.
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 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 IPO. The Company 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 its 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.
Except for Anagram, the Company does not depend on licenses to any material
degree in its business. Anagram holds approximately 190 licenses allowing it to
use various cartoon and other characters on its balloons. None of Anagram's
licenses is individually material to its business. Anagram paid royalties of
$3.6 million in 1997 and $2.1 million in the first six months of 1998.
LEGAL PROCEEDINGS
Neither the Company nor any of its subsidiaries is a party to any material
pending legal proceedings.
48
<PAGE>
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 40 Director, Chairman of the Board
Sanjeev K. Mehra 39 Director
Joseph P. DiSabato 32 Director
Gerald C. Rittenberg 46 Chief Executive Officer
James M. Harrison 46 President, Chief Financial Officer and Treasurer
William S. Wilkey 42 Senior Vice President -- Sales and Marketing
Garry Kieves 50 Senior Vice President
Terence M. O'Toole is a Managing Director of Goldman Sachs 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., 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 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 several 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 a Vice President of Goldman Sachs 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. Mr. DiSabato serves on the
Board of Directors of several privately held companies on behalf of Goldman
Sachs. 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.
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.
Garry Kieves became Senior Vice President of the Company in September 1998
when the Company acquired Anagram. He has served as Chief Executive Officer of
Anagram for more than five years.
EXECUTIVE COMPENSATION AND RELATED INFORMATION
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning the compensation
earned for the past three years for the Company's former and current Chief
Executive Officer and each other executive officer of the Company as of December
31, 1997 whose aggregate salary and bonus for 1997 exceeded $100,000. The
amounts shown include compensation for services in all capacities
49
<PAGE>
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.
<TABLE>
<CAPTION>
Long Term
Compensation
No. of Securities Under- All Other
Name and Principal Position Year Salary Bonus (a) Other lying Options Granted Compensation (c)
- --------------------------- ---- ------ --------- ----- --------------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
John A. Svenningsen 1997 $126,953 $ 4,219
Former Chief Executive 1996 315,609 (d) 5,939
Officer and Chairman 1995 289,399 (d) 10,614
Gerald C. Rittenberg 1997 $220,000 16.648(j) $ 3,763
Chief Executive Officer 1996 211,000 $2,800,000(e) 21,895
1995 200,269 1,682,000(e) 4,317
James M. Harrison 1997 $215,000 $255,000 $176,041(h) 16.268(k) $ 3,763
President, Chief 1996(g) 62,500 50,000 50,000(b)
Financial Officer
and Treasurer
William S. Wilkey 1997 $200,000 $ 210,000 $352,082(i) 16.441(l) $ 3,763
Senior Vice President 1996 181,000 1,036,000(f) 100,000(b) 21,679
and Marketing 1995 172,500 757,000(f) 4,317
</TABLE>
- ----------
(a) Represents amounts earned with respect to the years indicated, whether paid
or accrued.
(b) Reflects 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 shareholderstockholder
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.
(g) Mr. Harrison became an employee and Chief Financial Officer of Amscan Inc.
on August 1, 1996.
(h) Represents a cash bonus paid to Mr. Harrison at the Effective Time in
connection with the conversion by Mr. Harrison of his 50,000 Company Stock
Options into the options ("Rollover Options") to purchase 2.394 shares of
Company Common Stock.
(i) Represents a cash bonus paid to Mr. Wilkey at the Effective Time in
connection with the conversion by Mr. Wilkey of his 100,000 Company Stock
Options into the Rollover Options to purchase 4.787 shares of Company
Common Stock.
(j) Represents additional options ("New Options") granted to Mr. Rittenberg
immediately following the Effective Time.
50
<PAGE>
(k) Represents the New Options and the Rollover Options granted to Mr. Harrison
immediately following the Effective Time.
(l) Represents the New Options and the Rollover Options granted to Mr. Wilkey
immediately following the Effective Time.
OPTION GRANTS TABLE
The following table sets forth information concerning stock options which were
granted during 1997 to the executive officers named in the Summary Compensation
Table. The options were granted in connection with the Transaction pursuant to
the terms of the Options Documents (as defined in "Employment Agreements"
below). No options were granted pursuant to the Prior Stock Plan. Information
with respect to options relates to options on the Company Common Stock at
December 31, 1997.
<TABLE>
<CAPTION>
Potential Realizable Value
at Assumed Annual Rates of
Stock Price Appreciation for
Option Term
------------------------------
Number of % of Total
Securities Options Market
Underlying Granted to Price at
Options Employees in Exercise Date of
Name Granted (1) Fiscal Year Price Grant (2) Expiration Date 5% 10%
---- ----------- ------------ ----- --------- --------------- -- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Gerald C. Rittenberg 16.648 16.5 $75,000 $75,000 December 19, 2007 $785,236 $1,989,952
James M. Harrison 13.874 13.7 $75,000 $75,000 December 19, 2007 $654,395 $1,658,373
2.394 2.4 $54,545 $75,000 December 19, 2007 $161,887 $335,126
William S. Wilkey 11.654 11.5 $75,000 $75,000 December 19, 2007 $549,684 $1,393,014
4.787 4.7 $54,545 $75,000 December 19, 2007 $323,707 $670,113
</TABLE>
(1) All New Options and Rollover Options listed in this column become
exercisable ratably over five years beginning one year from the date of
grant and expire ten years after the date of grant. To the extent permitted
under the Code, such options are incentive stock options.
(2) Assumes a fair market value of the Company Common Stock underlying the New
Options and the Rollover Options of $75,000 according to the per share
price paid by GSCP for the Company Common Stock in connection with the
Transaction.
Fiscal 1997 Year End Option Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised In the Money
Underlying Unexercised Options Options at Fiscal Year End
---------------------------------- ------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Gerald C. Rittenberg 0 16.648 $0 $ 0
James M. Harrison 0 13.874 0 0
0 2.394 0 48,969
William S. Wilkey 0 11.654 0 0
0 4.787 0 97,918
</TABLE>
51
<PAGE>
At December 31, 1997, the market price of the Company Common Stock was $75,000
per share, an amount equal to the exercise price of each of the New Options
granted to Mr. Rittenberg, Mr. Harrison and Mr. Wilkey. As a result, none of the
New Options was "in the money" at December 31, 1997. The exercise price of each
of the Rollover Options granted to Mr. Harrison and Mr. Wilkey was $54,545 per
share. As a result, all of the Rollover Options were "in the money" at December
31, 1997. No Company Stock Options were exercised in the most recent fiscal
year.
For a further description of the New Options and Rollover Options granted to the
executives named in the Summary Compensation Table in connection with the
Transaction, see "Employment Arrangements" below.
EMPLOYMENT ARRANGEMENTS
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 (the "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 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
52
<PAGE>
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 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. Mr. Harrison received a bonus payment of $105,000 on
March 15, 1998.
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 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
53
<PAGE>
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 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's termination of 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"). 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
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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"."cause."
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 upon surrender 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.
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.
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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1996, the Company had no compensation committee. During 1996, John
A. 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 1997, the Company leased certain of its facilities fromthe Estate or
from entities that the Estate 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.
During 1997, the Company leased 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. 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. Rent expense related to that facility was $948,000 for the year ended
December 31, 1997.
During 1997, the Company leased a 212,000 square foot warehouse in
Temecula, California from the Estate. Rent expense related to this warehouse was
$1,168,000 for the year ended December 31, 1997. During December 1997, this
lease was amended to reduce the area under lease to approximately 100,000 square
feet. The lease, as amended, requires future rent payments of $350,000 per year
through December 31, 1999, $204,000 for the year 2000 and $146,000 for the
ten-month period ending October 2001. The Company has options to renew the lease
at market rates through December 2002.
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 an 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 1997, the Company converted $4.0 million of trade accounts
receivable from a customer into an equity interest in that customer. 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 of the Company in 1996,
the Company's sales force continued to sell pinatas manufactured by Ya Otta and,
on any sales after the that date, the Company received a 5% sales commission.
For the year ended December 31, 1997, sales by Ya Otta were approximately $3.2
million.
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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, 1997, the Company paid
Nupaq approximately $194,000 for such services.
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 Original
Notes. Messrs. O'Toole and Mehra are Managing Directors of Goldman Sachs, Mr.
DiSabato is a Vice President of Goldman Sachs and each of them is a director of
the Company. GSCP currently owns approximately 72.9% 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 Capital Stock." Goldman Sachs received
an underwriting discount of approximately $3.3 million in connection with its
purchase and resale of the Original 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. Pursuant to the
Stockholders' Agreement, Goldman Sachs has the exclusive right (if it so elects)
to perform certain investment banking and similar services for the Company on
customary terms. 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. Goldman Sachs received a
fee of approximately $2.5 million plus reimbursement of certain expenses in
connection with such services.
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<PAGE>
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 5.3%
James M. Harrison........................ 15.0 1.3
William S. Wilkey........................ 6.7 *
Garry Kieves, Garry Kieves Retained
Annuity Trust and Garry Keives
Irrevocable Trust, in aggregate........ 120.0 10.6
Terence M. O'Toole(b).................... -- --
Sanjeev K. Mehra(c)...................... -- --
Joseph P. DiSabato(d).................... -- --
Estate of John A. Svenningsen............ 100.0 8.8
c/o Kurzman & Eisenberg LLP
One North Broadway, Suite 1004
White Plains, New York 10601
GS Capital Partners II, L.P.(e).......... 825.0 72.9
and other GSCP funds
85 Broad Street
New York, New York 10004
All directors and executive officers as
a group (7 persons).................... 201.7 17.8%
- ------------
(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 1,132.41 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 are owned by
GSCP and its affiliates except to the extent of his pecuniary interest, if
any, therein.
(c) Mr. Mehra, who is a Managing Director of Goldman Sachs, disclaims beneficial
ownership of the shares of Company Common Stock that are owned by GSCP and
its affiliates except to the extent of his pecuniary interest, if any,
therein.
(d) Mr. DiSabato, who is a Vice President of Goldman Sachs, disclaims beneficial
ownership of the shares of Company Common Stock that are owned by GSCP and
its affiliates except to the extent of his pecuniary interest, if any,
therein.
(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 are 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 have full dispositive power with respect to the
holdings of such partnerships.
* Less than 1%
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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. 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-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.
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
Original 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%
============ =====
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The scheduled amortization payments shown in the preceding table will be
higher than shown because of the debt incurred to buy Anagram.
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.
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 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 outstanding 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, amended for the acquisition of Anagram, 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 $46.8 million for the four Fiscal Quarter (as
defined in the Bank Credit Agreements) period ending March 31, 1999 to $64.1
million for the four Fiscal Quarter period ending March 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, 1999
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 ended 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 to 1.0 through the last fiscal quarter of 1999 and lower ratios
thereafter decreasing to 3.7 to 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.
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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."
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 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
The Company has approximately $9.5 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 June 30, 1998 was approximately $3,703,100.
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 June 30, 1998 was approximately $1,698,700. 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 NOTES
GENERAL
The Original Notes and the Notes (which were issued in exchange for all of
the Original Notes) were issued by the Company pursuant to the same Indenture
among the Company, the Guarantors and IBJ Schroder Bank & Trust Company, as
trustee (the "Trustee"). The discussion below summarizes the terms of the Notes
that the Company believes are material to an investor in 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."
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 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 is outstanding. Notes issued hereafter
("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 Notes.
The Notes will mature on December 15, 2007. Interest on the 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 to holders of record on the immediately
preceding June 1 and December 1. Interest on the Notes will accrue from the
later of the issue date (in the case of newly issued Notes) or the most recent
date to which interest has been paid . 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 Notes is payable at the
office or agency of the Company maintained for such purpose within the City and
State of New York or, at the option of the Company, payment of interest may be
made by check mailed to the holders of Notes at their respective addresses set
forth in the register of holders of Notes; provided, however, that all payments
with respect to Global Notes and 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 Notes
were, and, to the extent applicable, shall be issued in minimum denominations of
$1,000 and integral multiples thereof.
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SETTLEMENT AND PAYMENT
Payments by the Company in respect of the Notes (including principal,
premium, if any, and interest) will be made in immediately available funds as
provided above. The Notes are trading in the Depository's settlement system, and
any secondary market trading activity is, therefore, 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
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 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 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 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 Notes are 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
Notes are 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 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 Notes would be entitled
will be made to the holders of Senior Debt (except that holders of Notes may
receive payments made from the trust described under " -- Legal Defeasance and
Covenant Defeasance").
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 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 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 a 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.
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The Indenture further requires that the Company promptly notify holders of
Senior Debt if payment of the 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 Notes may recover less
ratably than creditors of the Company who are holders of Senior Debt. See "Risk
Factors." The amount of Senior Debt outstanding at June 30, 1998 was
approximately $126 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.
"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 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 Notes) on account of the principal of (and premium, if any) or interest on
the Notes or on account of the purchase or redemption or other acquisition of or
satisfaction of obligations with respect to 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 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 and its Affiliates, including GS Credit Partners) (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 and (8) Capital Stock.
SENIOR SUBORDINATED GUARANTEES
The Company's payment obligations under the Notes are 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
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satisfactory to the Trustee, under the 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.
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 Notes.
The Notes are 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 $2 million
(excluding inter-company payables to the Company) at June 30, 1998. 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
Notes to participate in those assets) is 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 Notes are not redeemable at the Company's
option prior to December 15, 2002. From and after December 15, 2002, the 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,
Percentage of
Principal
Year Amount
---- ------
2002 104.937%
2003 103.292
2004 101.646
2005 and 100.000
thereafter
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 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 Company Common Stock, or contributions to the common
equity capital of the Company; provided that at least $65 million in aggregate
principal amount of Notes (or if Additional Notes have been issued, a
correspondingly higher amount) remains outstanding immediately after the
occurrence of each such redemption; and provided, further, that such redemption
shall occur within 120 days of the date of the closing of the related sale of
Company Common Stock, 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 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 Notes pursuant to this paragraph
shall be mailed to holders of the Notes not more than 30 days following the
occurrence of a Change of Control.
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"Applicable Premium" means, with respect to a Note, the greater of (i) 1.0%
of the then outstanding principal amount of such Note and (ii)(a) the present
value of all remaining required interest and principal payments due on such 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 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 Notes are to be redeemed at any time, selection of
such 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
Notes are listed, or, if the 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 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 Notes to be
redeemed at such holder's registered address. If any Note is to be redeemed in
part only, the notice of redemption that relates to such Note shall state the
portion of the principal amount thereof to be redeemed. A new 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 Note. On and after the
redemption date, unless the Company defaults in payment of the redemption price,
interest ceases to accrue on 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 Notes.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of 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 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 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 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 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 Notes or portions thereof so
tendered and (3) deliver or cause to be delivered to the Trustee for
cancellation the Notes so accepted together with an Officers' Certificate
stating the aggregate principal amount of Notes or portions thereof being
purchased by the Company. The Paying Agent will promptly mail to each holder of
Notes so tendered the Change of Control Payment for such Notes, and the Trustee
will promptly authenticate and mail (or cause to be transferred by book entry)
to each holder a new Note equal in principal amount to any unpurchased portion
of the
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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 Notes to require that the Company
repurchase or redeem the Notes in the event of a takeover, recapitalization or
similar transaction. Such a transaction could occur, and could have an effect on
the 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 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 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 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 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 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
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 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
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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 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 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 Notes tendered pursuant to any Asset Sale Offer exceeds the
amount of Excess Proceeds allocated thereto, the 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 as a result of an Asset Sale.
The Bank Credit Agreement prohibits the Company from purchasing any 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 Notes, the Company could seek the consent
of its lenders to the purchase of 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 Notes. In such case, while the Company's failure to purchase tendered
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 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 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
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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);
(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.
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As of June 30, 1998, 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.
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 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;
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(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) 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 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
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 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
Notes to the same extent that such Subordinated Indebtedness is subordinated to
the 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)
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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
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 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 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 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
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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 the Notes 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 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 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 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 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 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
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.
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REPORTS
The Indenture provides that, whether or not required by the rules and
regulations of the Commission, so long as any Notes are outstanding, the Company
will, commencing after consummation of the Transaction, furnish to the Holders
of the 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 remain outstanding, they
will furnish to the holders of the 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.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default with respect to the Notes: (i) default for 30 days in the payment when
due of interest, including Liquidated Damages, if any, on the 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 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 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 Notes to comply with any of its other agreements in the Indenture or
the 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 hereafter, 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 Notes may
declare all the 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 Notes will become due and payable without further
action or notice. Holders of the Notes may not enforce the Indenture or the
Notes except as provided in the Indenture. Subject to certain limitations,
holders of a majority in principal amount of the then outstanding Notes may
direct the Trustee in its exercise of any trust or power. The Trustee may
withhold from holders of the 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 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 the acceleration of the
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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 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 Notes.
The holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the holders of all of the
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 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 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 Notes by
accepting a Note waives and releases all such liability. The waiver and release
were part of the consideration for issuance of the 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 Notes and the Senior Subordinated Guarantees ("Legal Defeasance")
except for (i) the rights of holders of outstanding Notes to receive payments in
respect of the principal of and premium, if any, and interest on such Notes when
such payments are due from the trust referred to below, (ii) the Company's
obligations with respect to the Notes concerning issuing temporary Notes,
registration of Notes, mutilated, destroyed, lost or stolen 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 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 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 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 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 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
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 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 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
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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 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 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 Note selected
for redemption. Also, the Company is not required to transfer or exchange any
Note for a period of 15 days before a selection of Notes to be redeemed.
The registered holder of a Note will be treated as the owner of it for all
purposes.
BOOK-ENTRY, DELIVERY AND FORM
The Notes generally are represented by one or more fully-registered global
notes (collectively, the "Global Note"). The Global Note was deposited upon
issuance with the Depository and registered in the name of the Depository or a
nominee of the Depository (the "Global Note Registered Owner"). Except as set
forth below, the Global 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.
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 Goldman Sachs),
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, ownership of interests in the Global 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 Notes is limited to that extent.
Except as described below, owners of interests in the Global Note will not
have Notes registered in their names, will not receive physical delivery of
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 Notes registered in the name of the Global Note Registered Owner will be
payable by the Trustee to the Global 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 Notes,
including the Global 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 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 Note or (ii) any other matter relating to the actions and practices of
the Depository or any of its Participants. The Company
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believes, however, that it is the current practice of the Depository, upon
receipt of any payment in respect of securities such as the 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
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 Notes, and
the Company and the Trustee may conclusively rely on and will be protected in
relying on instruction from the Global Note Registered Owner for all purposes.
The Global Note is exchangeable for definitive Notes if (i) the Depository
notifies the Company that it is unwilling or unable to continue as Depository of
the Global 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 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 Notes or (iv) as provided in the following paragraph. Such
definitiveNotes shall be registered in the names of the owners of the beneficial
interests in the Global Note as provided by the Participants. 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 Notes
in definitive form, the Trustee is required to register the Notes in the name
of, and cause the Notes to be delivered to, the person or persons (or the
nominee thereof) identified as the beneficial owners as the Depository shall
direct.
A Note in definitive form will be issued upon the resale, pledge or other
transfer of any Note or interest therein to any person or entity that does not
participate in the Depository. Transfers of certificated Notes may be made only
by presentation of 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 Notes
evidenced by registered, definitive certificates ("Certificated Securities")
under the Indenture, then, upon surrender by the Global Note Holder of its
Global Notes, Notes in such form will be issued to each person that the Global
Note Holder and the Depository identify as being the beneficial owner of the
related Note.
Neither the Company nor the Trustee will be liable for any delay by the
Global Note Holder or the Depository in identifying the beneficial owners of
Notes and the Company and the Trustee may conclusively rely on, and will be
protected in relying on, instructions from the Global Note Holder or the
Depository for all purposes.
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
If any holder of Transfer Restricted Securities notifies the Company that
it (A) may not resell the Notes acquired by it in the exchange offer made in
accordance with the Registration Rights Agreement to the public without
delivering a prospectus and the prospectus (as hereby amended after filing)
contained in the Exchange Offer Registration Statement is not appropriate or
available for such resales or (B) 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 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. 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 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, (ii) the date
on which such Note has been effectively registered under the Securities Act and
disposed of in accordance with the Shelf Registration Statement and (iii) the
date on which such Note is distributed to the public pursuant to Rule 144 under
the Securities Act. Notwithstanding the foregoing, 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
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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 if the Shelf Registration
Statement or the Exchange Offer Registration Statement ceases to be effective or
usable in connection with resales of Transfer Restricted Securities during the
periods specified in the Registration Rights Agreement (such event 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.
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.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture and
the Notes may be amended or supplemented with the consent of the holders of at
least a majority in principal amount of the Notes then outstanding (including,
without limitation, consents obtained in connection with a purchase of, or
tender offer or exchange offer for, such Notes), and any existing default or
compliance with any provision of the Indenture or the Notes may be waived with
the consent of the holders of a majority in principal amount of the then
outstanding Notes (including consents obtained in connection with a purchase of,
or tender offer or exchange offer for, such Notes).
Without the consent of each holder affected, an amendment or waiver may not
(with respect to any Notes held by a nonconsenting holder): (i) reduce the
principal amount of Notes whose holders must consent to an amendment, supplement
or waiver, (ii) reduce the principal of or change the fixed maturity of any Note
or alter the provisions with respect to the redemption of the 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 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 Notes (except a
rescission of acceleration of the 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 Note payable in money other than
that stated in the Notes, (vi) make any change in the provisions of the
Indenture relating to waivers of past Defaults or the rights of holders of Notes
to receive payments of principal of or premium, if any, or interest, including
Liquidated Damages, if any, on the Notes, (vii) waive a redemption payment with
respect to any 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 Notes,
the Company and the Trustee may amend or supplement the Indenture or the Notes
to cure any ambiguity, defect or inconsistency, to provide for uncertificated
Notes in addition to or in place of certificated Notes, to provide for the
assumption of the Company's obligations to holders of 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 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.
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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 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.
"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","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
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(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.
"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 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
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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 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).
"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
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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.
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), (ii) the consolidated interest expense of such Person
and its Restricted Subsidiaries that was capitalized during such period, (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
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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.
"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.
"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
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to consist of (a) the aggregate maximum 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.
"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 and any of its Affiliates.
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"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 Notes, such Permitted Refinancing
Indebtedness has a final maturity date later than the final maturity date of the
Notes, and is subordinated in right of payment to the Notes, on terms at least
as favorable to the holders of Notes as those contained in the documentation
governing the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded; and (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 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."
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"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 Notes.
"Senior Subordinated Indebtedness" means the Notes and any other
indebtedness which ranks pari passu in right of payment to the 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 Securities 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.
"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
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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 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.
87
<PAGE>
DESCRIPTION OF CERTAIN FEDERAL INCOME TAX
CONSEQUENCES OF AN INVESTMENT IN THE NOTES
The following is a summary of certain federal income tax consequences
associated with the acquisition, ownership, and disposition of the Notes by
holders who acquire the Notes as an investment. 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 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 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 a 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 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 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 Notes which are different from those discussed herein.
PERSONS CONSIDERING THE PURCHASE, OWNERSHIP OR DISPOSITION OF 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 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 Notes. In addition, under
certain circumstances, each holder of Notes will have the right to require the
Company to repurchase all or any part of such holder's 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 Notes or to the holders' rights to require the
Company to repurchase Notes. Therefore, the Company has no present intention of
treating such redemption and repurchase provisions of the Notes as affecting the
computation of the yield to maturity or maturity date of the Notes.
Sale or other Taxable Disposition of the Notes. The sale, exchange,
redemption, retirement or other taxable disposition of a 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 Note.
A U.S. Holder's basis in a Note acquired in exchange for an Original Note
should be the same as such U.S. Holder's basis in the Original Notes exchanged
therefor. Otherwise, a U.S. Holder's initial tax basis in a Note purchased by
such holder will be equal to the price paid for the Note.
88
<PAGE>
Any gain or loss on the sale or other taxable disposition of a 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 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
theExchange Notes of such holder. A "reportable payment" includes, among other
things, amounts paid in respect of interest on a 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 a Note has a tax basis in the 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, a
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 Note (or the Original Note for which the 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.
If a U.S. Holder purchases a Note (or purchased the Original Note for which
the 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 Note (or such Original 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 Note in such year. A U.S. Holder
that elects to amortize bond premium must reduce its tax basis in the 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
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 a 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 a Note will not be subject to
U.S. income or withholding tax if the interest qualifies as "portfolio
interest". Generally, interest on 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
89
<PAGE>
the 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 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 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 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 Notes. Any gain realized by a Non-U.S.
Holder on the sale, exchange or retirement of the 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 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. Backup withholding
generally will not apply to a 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
U.S. 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
a 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 Notes are paid to
the beneficial owner of a 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.
90
<PAGE>
PLAN OF DISTRIBUTION
This Prospectus is to be used by Goldman Sachs in connection with offers
and sales of the Notes in market-making transactions effected from time to time.
Goldman Sachs may act as a principal or agent in such transactions, including as
agent for the counterparty when acting as principal or as agent for both
counterparties, and may receive compensation in the form of discounts and
commissions, including from both counterparties when it acts as agent for both.
Such sales will be made at prevailing market prices at the time of sale, at
prices related thereto or at negotiated prices.
Affiliates of Goldman Sachs currently own approximately 72.9% of the
Company Common Stock. See "Ownership of Capital Stock." Goldman Sachs has
informed the Company that it does not intend to confirm sales of the Notes to
any accounts over which it exercises discretionary authority without the prior
specific written approval of such transactions by the customer.
The Company has been advised by Goldman Sachs that, subject to applicable
laws and regulations, Goldman Sachs currently intends to make a market in the
Notes. However, Goldman Sachs is not obligated to do so and any such
market-making may be interrupted or 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. There can be no assurance that an
active trading market will develop or be sustained. See "Risk Factors -- Trading
Market for the Notes."
Goldman Sachs has provided investment banking services to the Company in
the past and may provide such services and financial advisory services to the
Company in the future. Goldman Sachs acted as purchaser in connection with the
initial sale of the Original Notes and received an underwriting discount of
approximately $3.3 million in connection therewith. See "Management -- Certain
Relationships and Related Transactions."
Goldman Sachs and the Company have entered into a registration rights
agreement with respect to the use by Goldman Sachs of this Prospectus. Pursuant
to such agreement, the Company agreed to bear substantially all registration
expenses incurred under such agreement, and the Company agreed to indemnify
Goldman Sachs against certain liabilities, including liabilities under the
Securities Act.
EXPERTS
The financial statements and schedule of the Company as of December 31,
1996 and 1997 and for the years ended December 31, 1995, 1996 and 1997, 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 NOTES
The validity of the Notes was passed upon for the Company by Wachtell,
Lipton, Rosen & Katz, New York, New York, counsel to the Company in connection
with the offer and sale of the Original Notes and the Notes.
91
<PAGE>
AMSCAN HOLDINGS, INC
INDEX TO FINANCIAL STATEMENTS
Page
----
Audited Financial Statements and Schedule:
Report of Independent Auditors ...................................... F-2
Consolidated Balance Sheets -- December 31, 1997 and 1996 ........... F-3
Consolidated Statements of Operations for the Years
Ended December 31, 1997, 1996 and 1995 ............................ F-4
Consolidated Statements of Stockholders' (Deficit)
Equity for the Years Ended December 31, 1997, 1996 ................ F-5
and 1995
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1997, 1996 and 1995 ............................ F-6
Notes to Consolidated Financial Statements .......................... F-8
Schedule -- Valuation and Qualifying Accounts ....................... F-34
Unaudited Financial Statements:
Consolidated Balance Sheets June 30, 1998 and December 31, 1997...... F-35
Consolidated Statements of Operations for the Six
Months Ended June 30, 1998 and 1997 ............................... F-36
Consolidated Statement of Stockholders' Deficit for the
Six Months Ended June 30, 1998 .................................... F-37
Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 1998 and 1997 ............................... F-38
Notes to Consolidated Financial Statements .......................... F-39
Supplemental Information ............................................ F-43
F-1
<PAGE>
AMSCAN HOLDINGS, INC.
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, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, 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 13, 1998
Stamford, Connecticut
F-2
<PAGE>
<TABLE>
<CAPTION>
AMSCAN HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31,
------------------
1997 1996
---- ----
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents.............................................. $111,539 $ 1,589
Accounts receivable, net of allowances of $5,693 and $4,138,
respectively...................................................... 44,838 37,378
Inventories............................................................ 51,742 45,693
Deposits and other current assets...................................... 8,073 11,360
----------- ----------
Total current assets.............................................. 216,192 96,020
Property, plant and equipment, net........................................ 38,860 34,663
Intangible assets, net.................................................... 7,762 7,443
Other assets, net ....................................................... 6,462 2,148
----------- -----------
Total assets...................................................... $269,276 $140,274
======== ========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Loans and notes payable................................................ $ 424 $ 29,328
Due to stockholders.................................................... 93,243 1,393
Accounts payable....................................................... 12,152 7,128
Accrued expenses....................................................... 10,502 9,403
Income taxes payable................................................... 167 822
Current portion of long-term obligations............................... 2,911 2,541
---------- ---------
Total current liabilities......................................... 119,399 50,615
Long-term obligations, excluding current portion.......................... 234,422 15,085
Deferred tax liabilities.................................................. 6,893 5,662
Other..................................................................... 3,781 963
---------- -----------
Total liabilities................................................. 364,495 72,325
Stockholders' (deficit) equity:
Common Stock........................................................... - 2,070
Additional paid-in capital............................................. - 61,503
Unamortized restricted Common Stock award.............................. (835) -
Notes receivable from officers......................................... (750) -
(Deficit) retained earnings............................................. (92,912) 4,748
Foreign currency translation adjustment................................ (722) (372)
----------- ------------
Total stockholders' (deficit) equity.............................. (95,219) 67,949
--------- ----------
Total liabilities and stockholders' (deficit) equity.............. $269,276 $140,274
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
AMSCAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
For the Years Ended December 31,
--------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net sales..................................................... $209,931 $192,705 $167,403
Cost of sales 136,571 123,913 108,654
-------- -------- --------
Gross profit......................................... 73,360 68,792 58,749
Operating expenses:
Selling expenses........................................... 13,726 11,838 12,241
General and administrative expenses........................ 20,772 19,266 15,002
Art and development costs.................................. 5,282 5,173 4,256
Non-recurring expenses in connection with the Merger....... 22,083 -- --
Non-recurring compensation in connection with the IPO...... -- 15,535 --
Special bonuses............................................ -- 4,222 2,581
-------- -------- --------
Total operating expenses............................. 61,863 56,034 34,080
-------- -------- --------
Income from operations............................... 11,497 12,758 24,669
Interest expense, net......................................... 3,892 6,691 5,772
Other (income) expense, net................................... (71) 335 (309)
-------- -------- --------
Income before income taxes and minority interests............. 7,676 5,732 19,206
Income tax expense............................................ 7,665 1,952 731
Minority interests............................................ 193 1,653 1,041
-------- -------- --------
Net (loss) income.................................... $ (182) $ 2,127 $ 17,434
======== ======== ========
Pro forma data (unaudited) (Note 11 ):
Income before income taxes.................................. $ 4,079 $ 18,165
Pro forma income tax expense................................ 1,827 7,403
-------- --------
Pro forma net income................................... $ 2,252 $ 10,762
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
AMSCAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
For the Years Ended December 31, 1997, 1996 and 1995
(Dollars in thousands)
<CAPTION>
Unamortized
Restricted Notes Foreign
Additional Common Receivable Retained Currency
Common Paid-in Stock Award, from Earnings Translation Treasury
Stock Capital Net Officers (Deficit) Adjustment Stock Total
----- ------- --- -------- --------- ---------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at 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 at 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 at December 31, 1996 . 2,070 61,503 -- -- 4,748 (372) -- 67,949
Net loss....................... -- -- -- -- (182) -- -- (182)
Net proceeds from sale of
Common Stock................ 42 4,482 -- -- -- -- -- 4,524
Purchase of treasury stock..... -- (290) ( 290)
Capital contribution........... -- 7,500 -- -- -- -- -- 7,500
Distribution to the Estate..... -- -- -- -- (619) -- -- (619)
Issuance of Common Stock
in the Merger, net.......... -- 63,750 $(1,125) $ (750) -- -- -- 61,875
Repurchase of Common Stock
in the Merger...............(2,112)(137,235) -- -- (96,859) -- 290 (235,916)
Amortization of restricted
Common Stock award.......... -- -- 290 -- -- -- -- 290
Net change in cumulative
translation adjustment .... -- -- -- -- -- (350) -- (350)
------ ------- --------- -------- -------- ------- ------ --------
Balance at December 31, 199 $ -- $ -- $ (835) $ (750) $(92,912) $ (722) $ -- $(95,219)
======= ======= ========= ======= ========= ======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
AMSCAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income ....................................................... $ (182) $ 2,127 $ 17,434
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization .......................................... 6,245 5,137 4,332
(Gain) loss on disposal of property and equipment ................... (31) 660 (5)
Provision for doubtful accounts ..................................... 3,775 2,350 1,581
Amortization of Restricted Common Stock award ....................... 290 -- --
Deferred income tax provision ....................................... 1,565 748 --
Stock compensation expenses in connection with the IPO ................. -- 10,920 --
Changes in operating assets and liabilities, net of acquisitions:
Increase in accounts receivable ...................................... (15,869) (7,848) (9,614)
Increase in inventories .............................................. (5,871) (680) (10,548)
Decrease (increase) in deposits and other, net ....................... 6,289 (3,796) (101)
Decrease (increase) in other assets .................................. 2,863 683 (1,172)
Increase in accounts payable, accrued expenses and income
taxes payable ..................................................... 5,095 1,972 2,814
-------- -------- --------
Net cash provided by operating activities ......................... 4,169 12,273 4,721
Cash flows from investing activities:
Capital expenditures .................................................... (10,237) (7,613) (4,522)
Proceeds from disposal of property and equipment ........................ 140 9
-------- -------- --------
Net cash used in investing activities ............................. (10,097) (7,613) (4,513)
Cash flows from financing activities:
Net proceeds from sale of Common Stock .................................. 4,524 43,340 --
Capital contributions ................................................... 7,500 -- --
Issuance of Common Stock in connection with the Merger .................. 61,875 -- --
Payments to acquire treasury stock ...................................... (290) -- --
Payments to acquire Common Stock in the Merger .......................... (142,673) -- --
Proceeds from loans, notes payable and long-term obligations
net of debt issuance costs of $5,500 in 1997 .......................... 237,062 3,273 42,311
Repayment of loans, notes payable and long-term obligations ............. (51,811) (11,968) (32,313)
Proceeds from loans, notes payable and subordinated
indebtedness to Principal Stockholder ................................. -- -- 4,000
Repayment of indebtedness to Principal Stockholder ...................... (182) (17,179) (2,842)
Subchapter S distributions and other .................................... -- (23,424) (11,009)
-------- -------- --------
Net cash provided by (used in) financing activities ............... 116,005 (5,958) 147
Effect of exchange rate changes on cash ................................. (127) 395 (92)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents .............. 109,950 (903) 263
Cash and cash equivalents at beginning of year ............................. 1,589 2,492 2,229
-------- -------- --------
Cash and cash equivalents at end of year ................................... $111,539 $ 1,589 $ 2,492
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest .......................................................... $ 3,598 $ 7,826 $ 4,486
Taxes ............................................................. $ 6,604 $ 1,085 $ 601
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
AMSCAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(Dollars in thousands)
Supplemental information on noncash activities (dollars in thousands):
Cash consideration due to stockholders as a result of the Merger totaled
$235,916, of which $93,243 was payable at December 31, 1997.
In conjunction with the Merger, 15 shares of Common Stock aggregating $1,125
were issued to an officer and are subject to future vesting provisions. In
addition, subsequent to the Merger, 10 shares of Common Stock were issued to
certain officers of the Company in exchange for notes aggregating $750.
Capital lease obligations of $59 and $3,395 were incurred in 1997 and 1996,
respectively. There were no capital lease obligations incurred in 1995.
In conjunction with the IPO in 1996, the Principal Stockholder (see Note 1) 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 in 1996, 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 in 1996, 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
<PAGE>
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
Initial Public Offering
- -----------------------
Amscan Holdings, Inc. ("Amscan Holdings" and, together with its
subsidiaries, the "Company") 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 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 Amscan Holdings (the "Organization") and,
in the case of the Principal Stockholder, $133,000 in cash. 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.
Prior to the IPO, certain subsidiaries of Amscan Holdings were operated
as Subchapter S corporations for federal and, where available, state income tax
purposes. In connection with the IPO in 1996, 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.
Recapitalization
- ----------------
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 would 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. 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 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,
with fractional shares of Company Common Stock paid in cash. The Estate of John
A. Svenningsen (the "Estate"), which owned approximately 71.2% 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 the
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.
F-8
<PAGE>
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1997
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 (see Note 6). The Merger has been accounted for as a
recapitalization and, accordingly, the historical basis of the Company's assets
and liabilities has not been impacted by the Merger.
Amscan Holdings and its subsidiaries 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.
<TABLE>
<CAPTION>
Subsidiary Ownership Principal Activity
---------- --------- ------------------
<S> <C> <S>
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....... 100% 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
</TABLE>
Acquisitions
- ------------
During 1997, the Company transferred an equity interest in a customer to
the Estate for (i) cash of $1,000,000, (ii) satisfaction of approximately
$2,000,000 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
$1,015,000. Ya Otta manufactures pinatas which historically had been sold by the
Company's sales force with no commissions charged to Ya Otta. The assets
transferred were recorded at a historical cost of $396,000 resulting in a
distribution to the Estate of $619,000.
F-9
<PAGE>
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1997
The results of operations of Ya Otta are included in the accompanying
financial statements from the date of transfer. The results of operations of Ya
Otta for periods prior to the transfer are not significant.
In conjunction with the IPO in 1996, 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, and 1995 had the acquisition occurred at the
beginning of 1995, are not significant.
NOTE 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 of
cost or market (principally on the first-in, first-out method).
Long-Lived Assets
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 of $7,762,000 and $7,443,000 at December 31, 1997 and
1996, respectively, are comprised principally 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 to thirty years.
Accumulated amortization was $1,315,000 and $1,050,000 at December 31, 1997 and
1996, respectively.
The Company systematically reviews the recoverability of its long-lived
and intangible 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.
Deferred Financing Costs
Deferred financing costs are amortized to interest expense using the
interest method over the lives of the related debt.
F-10
<PAGE>
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1997
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.
Interest Rate Swap Agreements
The Company may enter into interest rate swap agreements to limit the
effect of increases in the interest rates on any floating rate debt. The
differential is accrued as interest rates change and is recorded in interest
expense.
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 and, where
available, 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, 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 Expenses
In connection with the Merger in 1997, the Company has recorded
non-recurring expenses of $22,083,000, comprised of $11,652,000 in transaction
costs, $7,500,000 of compensation to an officer, $1,901,000 for the redemption
of Company Stock Options and $1,030,000 of debt retirement costs.
In conjunction with the IPO in 1996, the Company has recorded
non-recurring compensation expenses of $15,535,000 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 adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," ("SFAS No. 123") effective January 1,
1996. SFAS No. 123 permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
F-11
<PAGE>
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1997
Alternatively, SFAS No. 123 allows entities to apply the provisions of
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" ("APB No, 25"), which requires the recognition of compensation
expense at the date of grant only if the current market price of the underlying
stock exceeds the exercise price, and to provide pro forma net income
disclosures for employee stock option grants made in 1995 and subsequent 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 No. 25 and will provide the
pro forma disclosure provisions of SFAS No. 123.
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 dispersed 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, 1997
and 1996, the Company's two largest customers, Party City and Party Stores
Holdings, Inc., with approximately 347 stores, accounted for 17% and 22%,
respectively, of consolidated accounts receivable, net. For the years ended
December 31, 1997, 1996 and 1995, sales to the Company's two largest customers
represented 24%, 21% and 17%, respectively, of consolidated net sales. Of such
amount, sales to the Company's largest customer represented 19%, 15% and 11%,
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 reclassified certain amounts in prior financial
statements 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-12
<PAGE>
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1997
NOTE 3 - INVENTORIES
Inventories at December 31, 1997 and 1996 consisted of the following
(dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Finished goods............................................. $47,704 $42,127
Raw materials.............................................. 3,570 3,863
Work-in process............................................ 1,630 1,388
-------- --------
52,904 47,378
Less: reserve for slow moving and obsolete inventory...... (1,162) (1,685)
-------- --------
$51,742 $45,693
======== ========
</TABLE>
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Major classifications of property, plant and equipment at December 31,
1997 and 1996 consisted of the following (dollars in thousands):
<TABLE>
<CAPTION>
Estimated
1997 1996 Useful Lives
--------- --------- ------------
<S> <C> <C> <C>
Machinery and equipment............................... $ 38,105 $ 31,621 3-15
Buildings............................................. 12,585 12,702 31-40
Data processing equipment............................. 11,737 9,259 5
Leasehold improvements................................ 1,188 900 2-20
Furniture and fixtures................................ 3,547 3,071 10
Land.................................................. 1,917 1,917 -
--------- ---------
69,079 59,470
Less: accumulated depreciation and amortization...... (30,219) (24,807)
--------- ---------
$ 38,860 $ 34,663
========= =========
</TABLE>
Depreciation and amortization expense was $5,980,000, $4,787,000 and
$3,982,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
NOTE 5 - LOANS AND NOTES PAYABLE
Loans and notes payable outstanding at December 31, 1997 and 1996
consisted of the following (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Revolving credit line with interest at LIBOR plus 0.875%
(6.75%, at December 31,1996)................................... -- $ 5,000
Revolving credit line with interest at the prime rate (8.25%
at December 31, 1996)......................................... -- 23,950
Revolving credit line denominated in Canadian dollars with interest
at the Canadian prime rate (6.0% and 4.75% at
December 31, 1997 and 1996, respectively)...................... $ 424 378
------ -------
$ 424 $29,328
====== =======
</TABLE>
F-13
<PAGE>
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1997
Upon consummation of the Merger on December 19, 1997, the Company's
existing domestic revolving credit arrangements terminated and the Company
entered into Bank Credit Facilities (see Note 6) which include a $50,000,000
revolving credit facility (the "Revolving Credit Facility"). At December 31,
1997, there were no amounts borrowed under the Revolving Credit Facility.
The Revolving Credit Facility has a term of five years and bears 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 outstanding 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
guaranteed by the Company's domestic subsidiaries and are subject to mandatory
prepayments upon the occurrence of certain events (see Note 6).
In addition to the Revolving Credit Facility, the Company has a
$1,000,000 Canadian dollar denominated revolving facility which bears interest
at the Canadian prime rate and expires on April 30, 1998 and a $1,000,000
British pound sterling denominated revolving credit facility which bears
interest at the U.K. base rate plus 1.75% and expires on May 12, 1998. No
borrowings were outstanding under the British pound sterling denominated
revolving credit facility at December 31, 1997.
The weighted average interest rates on loans and notes payable
outstanding at December 31, 1997 and 1996 were 6.0% and 7.95%, respectively.
Prior to the Merger, the Company maintained three interest rate swap
contracts covering $25,000,000 of its outstanding obligation under its LIBOR
based variable rate revolving credit agreement. The contracts fixed the interest
rates as indicated below and entitled 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 rate differed from the fixed rate.
The contracts were terminated on December 19, 1997, in conjunction with the
Merger, at a cost of $1,030,000, which is reported as a non-recurring expense
(see Note 2). Net payments to the counterparty under the swap contracts for the
years ended December 31, 1997, 1996 and 1995, which have been recorded as
additional interest expense, were as follows (dollars in thousands):
<TABLE>
<CAPTION>
Additional Interest
Expense
Notional -------------------
Date of contract amount Term Fixed rate 1997 1996 1995
---------------- ------ ---- ---------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
September 28, 1994.. $ 5,000 10 years 7.945% $109 $122 $ 94
May 12, 1995 ....... $10,000 5 years 6.590% 70 105 42
July 20, 1995....... $10,000 10 years 6.750% 102 122 38
---- ---- ----
$281 $349 $174
==== ==== ====
</TABLE>
F-14
<PAGE>
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1997
NOTE 6 - LONG-TERM INDEBTEDNESS
Long-term indebtedness at December 31, 1997 and 1996 consisted of the following
(dollars in thousands):
1997 1996
--------- ---------
Senior Subordinated Notes (a)...................... $110,000 --
Term loans (b)..................................... 117,000 $ 5,778
Mortgage obligations (c)........................... 5,869 6,654
Capital lease obligations (d)...................... 4,464 5,194
------- -------
Total long-term obligations................. 237,333 17,626
Less: current portion............................. (2,911) (2,541)
------- -------
Long-term obligations, excluding current portion... $234,422 $15,085
======== =======
On December 19, 1997, the Company issued $110,000,000 aggregate
principal amount of 9 7/8% Senior Subordinated Notes due in 2007 (the "Notes")
and entered into a bank credit agreement (the "Bank Credit Facilities")
providing for borrowings in the aggregate principal amount of approximately
$117,000,000 under a term loan (the "Term Loan") and revolving loan borrowings
of up to $50,000,000 under a revolving credit facility (the "Revolving Credit
Facility", see Note 5) (collectively, the "Merger Financings"). The proceeds of
the Merger Financings were used to fund the payment of the cash portion of the
Merger consideration, to refinance certain existing outstanding indebtedness of
the Company, to pay transaction costs incurred in connection with the Merger,
and for general corporate purposes. The Company is 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. 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 certain mandatory prepayments of borrowings
under the Term Loan. The Company may prepay borrowings under or reduce
commitments for the Revolving Credit Facility, in whole or in part, without
penalty. The Bank Credit Facilities are guaranteed by the Company's domestic
subsidiaries (the "Guarantors" see Note 16). 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 and leasehold interests of the Company and
the Guarantors. The guarantees are joint and several guarantees, irrevocable and
full and unconditional, limited to the largest amount that would not render such
guarantee obligations under the guarantee subject to avoidance under any
applicable federal or state fraudulent conveyance or similar law.
(a) The Senior Subordinated Notes were sold by the Company on December 19, 1997,
and were subsequently resold to qualified institutional buyers in reliance
upon Rule 144A and Regulation S under the Securities Act of 1933 (the "Note
Offering"). In connection with the Note Offering, the Company entered into a
Registration Rights Agreement, which granted holders of the Notes certain
exchange and registration rights. In February 1998, the Company filed with
the Securities and Exchange Commission a Registration Statement on Form S-4
offering to exchange registered notes
F-15
<PAGE>
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1997
(the "Exchange Notes") for the Notes issued in connection with the Note
Offering. The terms of the Notes and the Exchange Notes are substantially
identical.
The Notes bear and Exchange Notes will bear interest at a rate equal to 9
7/8% per annum. Interest is payable semi-annually on June 15 and December 15
of each year, commencing June 15, 1998. The Notes and 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 redemption prices ranging from 104.937% to
100%, plus accrued and unpaid interest 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
$65,000,000 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 Notes and 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, as defined in the note indenture, at a
redemption price equal to 100% of the principal amount thereof plus the
Applicable Premium, as defined in the note indenture, together with accrued
and unpaid interest, if any, to the date of redemption. If the Company does
not redeem the Notes and Exchange Notes upon a Change of Control, the
Company will be obligated to make an offer to purchase the Notes and
Exchange Notes, in whole or in part, at a price equal to 101% of the
aggregate principal amount of the Notes and 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 note indenture and
the other indebtedness that would become payable upon the occurrence of such
Change of Control.
(b) The $117,000,000 Term Loan at December 31, 1997 matures seven years after
funding and provides 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 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. At December 31, 1997, the Company has entered into
a three year interest rate swap contract with a financial institution
pursuant to which it has exchanged its floating interest obligation on
$58,500,000 notional principal amount of the Term Loan for an effective
fixed interest obligation of 8.36%. The interest rate swap contract requires
the Company to settle the difference in interest obligations quarterly. At
December 31, 1997, the floating interest rate on the Term Loan was 8.28%. At
December 31, 1996, the Company had various term loans payable to financial
institutions due through April 1, 2002. The loans were collateralized by
specific assets of the Company and carried interest rates which ranged from
8.01% to 9.5%. These term loans were repaid in conjunction with the Merger
Financing.
F-16
<PAGE>
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1997
(c) The Company has mortgage obligations payable to financial institutions
relating to certain distribution facilities due through September 13, 2004.
The mortgages are collateralized by specific real estate assets of the
Company and carry interest rates ranging from the Canadian prime rate plus
0.5% (6.50% and 5.25% as of December 31, 1997 and 1996, respectively) to
8.51%. At December 31, 1997 and 1996, $1,820,000 and $2,100,000 of mortgage
obligations, respectively, are denominated in Canadian dollars.
(d) 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% (9.5% and 9.25% at December 31, 1997 and 1996, respectively) which
extend to 2003.
At December 31, 1997, principal maturities of long-term obligations
consisted of the following (dollars in thousands):
<TABLE>
<CAPTION>
Mortgages, Notes Capital
and Loans Lease Obligations Total
--------- ----------------- -----
<S> <C> <C> <C>
1998................................. $ 1,935 $1,311 $ 3,246
1999................................. 1,922 1,234 3,156
2000................................. 1,922 1,168 3,090
2001................................. 1,922 1,350 3,272
2002................................. 1,922 110 2,032
Thereafter........................... 223,246 37 223,283
-------- -------- --------
232,869 5,210 238,079
Amount representing interest......... - (746) (746)
-------- -------- --------
Long-term obligations................ $232,869 $4,464 $237,333
======== ====== ========
</TABLE>
NOTE 7 - DUE TO STOCKHOLDERS
At December 31, 1997, the Company owed stockholders cash consideration
of $93,243,000 for their shares of Company Common Stock in connection with the
Merger.
At December 31, 1996, the Company owed the Principal Stockholder
$1,274,000 under a subordinated note bearing interest at the prime rate plus
0.5% (8.75% at December 31, 1996). This note was subject to a subordination
agreement among the Principal Stockholder, Amscan Inc., and the lenders involved
with the revolving credit agreement in effect prior to the Merger Financing.
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.
F-17
<PAGE>
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1997
NOTE 8 - EMPLOYEE BENEFIT PLANS
Certain subsidiaries of the Company maintain a profit-sharing plan for
eligible employees providing for annual discretionary contributions to a trust.
Eligible employees are full-time domestic employees who have completed six
months of service and attained the age of 18. Effective January 1, 1995, the
plan requires the subsidiaries to match 25% to 50% of the first 6% of an
employee's annual salary voluntarily contributed to the plan. Benefit expense
for the years ended December 31, 1997, 1996 and 1995 totaled $1,432,000,
$731,000 and $558,000, respectively.
In connection with the IPO in 1996, 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. During
the year ended December 31, 1996, there was a special one-time issuance of
250,000 shares of Company Common Stock valued at $1,898,000 for the
establishment of the ESOP and $1,102,000 for payment of stock bonuses. No shares
of Company Common Stock were issued under the ESOP during the year ended
December 31, 1997. In connection with the Merger, the ESOP shares were converted
to cash and the ESOP plan and assets were merged into the profit-sharing plan.
NOTE 9 - SPECIAL BONUSES
During 1996 and 1995, 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 did not receive such special
bonuses after 1996. At December 31, 1996, $1,584,000 was accrued for such
bonuses and included in accrued expenses.
NOTE 10 - STOCK OPTION PLAN
The Company adopted the Amscan Holdings, Inc. Stock Incentive Plan (the
"1997 Stock Incentive Plan") in conjunction with the Merger in 1997. The 1997
Stock Incentive Plan is administered by the Board of Directors. Under the terms
of the 1997 Stock Incentive Plan, the Board may award Company Common Stock,
stock options and stock appreciation rights to certain directors, officers,
employees and consultants of the Company and its affiliates. The vesting periods
for awards are determined by the Board at the time of grant. The total number of
shares of Company Common Stock initially reserved and available for grant under
the 1997 Stock Incentive Plan is 120 shares. The 1997 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.
On December 19, 1997, the Company granted stock options to purchase
99.894 shares of Common Stock under the terms of the 1997 Stock Incentive Plan,
at an exercise price of $75,000 per share which represented the estimated fair
market value of the Company's Common Stock at the grant date. The options vest
in equal installments on each of the first five anniversaries of the grant date.
The options are non-transferable (except under certain limited circumstances)
and have a term of ten years.
F-18
<PAGE>
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1997
In addition, on December 19, 1997, the Company converted 512,000 stock
options granted in 1997 and 1996, under the terms of the 1996 Stock Option Plan
for Key Employees (the "1996 Stock Option Plan"), with exercise prices of
$12.00, $13.00 and $13.125, into cash of $1,901,000 and 16.03 stock options
("Rollover Options") issued under the terms of the 1997 Stock Incentive Plan,
with exercise prices of $54,545, $59,091 and $59,659. The terms of the Rollover
Options are the same as the $75,000 option grant. The cash paid upon conversion
of the stock options is reported as a non-recurring expense of the Merger (see
Note 2).
All options issued under the 1997 Stock Incentive Plan were outstanding
and none was exercisable at December 31, 1997.
During 1996, options to purchase 425,000 shares of Company Common Stock at
the fair market value at the date of grant ($12.00) were granted under the terms
of the 1996 Stock Option Plan. All options issued were outstanding and none was
exercisable as of December 31, 1996.
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 either stock option plan as all options were granted
with exercise prices equal to estimated fair market value on the date of grant.
Had the Company determined stock-based compensation based on the fair value of
the options granted at the grant date consistent with the method prescribed
under SFAS No. 123, the Company's net (loss) income would have been reduced to
the SFAS No. 123 pro forma amounts indicated below:
Years Ended December 31,
------------------------
1997 1996
---- ----
Net (loss) income:
As reported .......................... $(182) $2,127
SFAS No. 123 pro forma ............... $(249) $2,113
It has been assumed that the estimated fair value of the options granted
in 1997 under the 1997 Stock Incentive Plan is amortized on a straight line
basis to compensation expense, net of taxes, over the vesting period of the
grant, which is approximately five years. The estimated fair value of each
option on the date of grant is $26,737 using the Minimum Value Method with the
following assumptions; dividend yield of 0%; risk-free interest rate of 6.50%,
and expected lives of seven years.
It has been assumed that the estimated fair value of the options granted
in 1997 and 1996 under the 1996 Stock Option Plan is amortized on a straight
line basis to compensation expense, net of taxes, 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 seven years.
NOTE 11 - INCOME TAXES
Prior to the consummation of the IPO in 1996, 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.
F-19
<PAGE>
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1997
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 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.
Pro forma income tax expense for 1996 and 1995 of $1,827,000 and $7,404,000,
respectively, is calculated 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.
A summary of domestic and foreign pre-tax income follows (dollars in
thousands):
Years Ended December 31,
------------------------
1997 1996 1995
---- ---- ----
Domestic .......................... $6,655 $3,137 $17,750
Foreign ........................... 1,021 2,595 1,456
------- ------- --------
Total ............................. $7,676 $5,732 $19,206
====== ====== =======
The provision for income taxes consisted of the following (dollars in
thousands):
Years Ended December 31,
------------------------
1997 1996 1995
---- ---- ----
Current:
Federal ...................... $ 4,222 -- --
State ........................ 1,174 $ 212 --
Foreign ...................... 704 992 $ 731
-------- -------- ------
Total current provision .... 6,100 1,204 731
Deferred:
Federal........................ 1,250 (113) --
State.......................... 375 (25) --
Foreign........................ (60) 100 --
Change in tax status........... 786 --
-------- ------- ------
Total deferred provision..... 1,565 748 --
-------- ------- ------
Income tax expense.................. $7,665 $1,952 $ 731
====== ====== ======
F-20
<PAGE>
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1997
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. Deferred income tax
assets and liabilities consisted of the following (dollars in thousands):
1997 1996
---- ----
Current deferred tax assets:
Provision for doubtful accounts................... $2,858 $1,692
Accrued liabilities............................... 340 1,568
Inventories....................................... 976 1,438
Other............................................. 365 175
------- -------
Current deferred tax assets.................... $4,539 $4,873
====== ======
Non-current deferred tax liabilities:
Property, plant and equipment..................... $6,275 $4,484
Future taxable income resulting from a change
in accounting method for tax purposes.......... 618 823
Other............................................. -- 355
------- -------
Non-current deferred tax liabilities........... $6,893 $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 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 income tax rate and the
federal statutory income tax rate of 35.0% is reconciled below:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Provision at federal statutory income tax rate........... 35.0% 35.0% 35.0%
Effect of non-deductible expenses related
to the Merger ...................................... 51.2 -- --
Effect of Subchapter S income not subject
to federal income taxes ............................ -- (19.1) (32.3)
State income tax, net of federal tax benefit ........... 20.2 4.3 --
Change in tax status..................................... 13.7 --
Other ................................................... (6.5) 0.2 1.1
----- ---- ------
Effective income tax rate ............................... 99.9% 34.1% 3.8%
==== ==== ======
</TABLE>
F-21
<PAGE>
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1997
NOTE 12 - CAPITAL STOCK
At December 31, 1997 and 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 1,010 shares were issued and outstanding at December 31,
1997 and 20,698,076 shares were issued and outstanding at December 31, 1996.
In connection with the Merger, several employee stockholders entered
into a stockholders' agreement ("Stockholders' Agreement") that provides, among
other things, that the Company can purchase, and that the employee stockholders
can require the Company to purchase, all of the shares held by the employee
stockholders under certain circumstances. At December 31, 1997 there were 85
employee shares subject to the buy-back provisions of the Stockholders'
Agreement of which 10 shares were not yet fully paid and 15 shares were subject
to future vesting provisions. The purchase price as prescribed in the
Stockholders' Agreement is to be determined through a market valuation of the
minority-held shares. At December 31, 1997, the aggregate amount that may be
payable to employee stockholders is not significant.
NOTE 13 - LEASES
The Company is obligated under various capital leases for certain
machinery and equipment which expire on various dates through October 1, 2003
(see Note 6). At December 31, 1997 and 1996, 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):
1997 1996
---- ----
Machinery and equipment ......................... $6,494 $6,452
Less: accumulated amortization ................. (1,798) (1,042)
------ ------
$4,696 $5,410
====== ======
Amortization of assets held under capitalized leases is included with
depreciation expense.
The Company has several noncancelable operating leases with unaffiliated
third parties, principally for office and manufacturing space, showrooms, and
warehouse equipment, that expire on various dates though 2017. These leases
generally contain renewal options and require the Company to pay real estate
taxes, utilities and related insurance.
At December 31, 1997, the Company also had a non-cancelable operating
lease with a real estate entity owned by the Estate of the Principal Stockholder
("Unconsolidated Affiliate") for warehouse space that expires in December 2000.
The lease requires monthly rental payments through October 2001 which are
subject to reduction under certain circumstances. The Company has options to
renew the lease at market rates for two additional one year periods.
F-22
<PAGE>
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1997
At December 31, 1997, future minimum lease payments under all operating
leases consisted of the following (dollars in thousands):
Unconsolidated
Third Parties Affiliate Total
------------- --------- -----
1998 ................................ $ 6,667 $178 $ 6,845
1999 ................................ 5,488 350 5,838
2000 ................................ 4,662 204 4,866
2001 ................................ 4,492 146 4,638
2002 ................................ 4,395 -- 4,395
Thereafter .......................... 24,779 -- 24,779
------- ---- ------
$50,483 $878 $51,361
======= ==== =======
Rent expense for the years ended December 31, 1997, 1996 and 1995 was
$6,844,000, $5,300,000 and $2,547,000, respectively, of which $2,089,000,
$2,134,000 and $936,000, respectively, related to leases with the Unconsolidated
Affiliate and other related parties.
NOTE 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. 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, 1997, 1996 and 1995 were as follows (dollars in thousands):
<TABLE>
<CAPTION>
Domestic Foreign Eliminations Consolidated
-------- ------- ------------ ------------
1997
<S> <C> <C> <C> <C>
Sales to unaffiliated customers......... $183,536 $26,395 -- $209,931
Sales between geographic areas.......... 11,556 308 $ (11,864) -
-------- ------- ---------- --------
Net sales............................... $195,092 $26,703 $ (11,864) $209,931
======== ======= ========== ========
Income from operations.................. $ 9,575 $ 1,922 -- $ 11,497
======== =======
Interest expense, net................... -- -- -- 3,892
Other income, net....................... -- -- -- (71)
--------
Income before income taxes and minority
interests............................ -- -- -- $ 7,676
========
Identifiable assets..................... $255,644 $13,632 -- $269,276
======== ======= ========
</TABLE>
F-23
<PAGE>
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1997
<TABLE>
<CAPTION>
Domestic Foreign Eliminations Consolidated
-------- ------- ------------ ------------
1996
<S> <C> <C> <C> <C>
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
======== ======= ========
</TABLE>
NOTE 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, 1997 because of the short term maturity of those
instruments or their variable rate of interest.
The carrying amount of the Company's Senior Subordinated Notes
approximates fair value at December 31, 1997, based on the quoted market price
of similar debt instruments. The carrying amounts of the Company's borrowings
under its Bank Credit Facilities and other revolving credit facilities
approximate fair value because such obligations generally bear interest at
floating rates. The carrying amounts for other long term debt approximates fair
value at December 31, 1997, based on the discounted 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, 1997 would result in a charge to expense of $360,000.
F-24
<PAGE>
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1997
NOTE 16 - CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The Notes, Exchange Notes and borrowings under the Bank Credit
Facilities are guaranteed jointly and severally, fully and unconditionally, by
the Guarantors (see Notes 5 and 6).
Non-guarantor companies include the following:
o Amscan Distributors (Canada) Ltd.
o Amscan Holdings Limited
o Amscan (Asia-Pacific) Pty. Ltd.
o Amscan Partyartikel GmbH
o Amscan Svenska AB
o Amscan de Mexico, S.A. de C.V.
The following consolidating information presents consolidating balance
sheets as of December 31, 1997 and 1996, and the related consolidating
statements of operations and cash flows for each of the years in the three year
period ended December 31, 1997 for the combined Guarantors and the combined
non-guarantors and elimination entries necessary to consolidate the entities
comprising the combined companies.
F-25
<PAGE>
<TABLE>
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1997
CONSOLIDATING BALANCE SHEET
December 31, 1997
(Dollars in thousands)
(Unaudited)
<CAPTION>
Amscan
Holdings and Combined
Combined Non-
Guarantors Guarantors Eliminations Consolidated
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $110,704 $ 835 -- $111,539
Accounts receivable, net.......................... 39,457 5,381 -- 44,838
Inventories....................................... 44,052 7,690 -- 51,742
Deposits and other................................ 7,284 789 -- 8,073
-------- ------- -------- --------
Total current assets.............................. 201,497 14,695 -- 216,192
Property, plant and equipment, net..................... 37,189 1,671 -- 38,860
Intangible assets, net................................. 7,479 283 -- 7,762
Other assets, net...................................... 17,076 1 $(10,615) 6,462
-------- ------- -------- --------
Total assets...................................... $263,241 $16,650 $(10,615) $269,276
======== ======= ======== ========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Loans and notes payable........................... -- $ 424 -- $ 424
Due to stockholders ............................. $ 93,243 -- -- 93,243
Accounts payable ................................ 11,798 354 -- 12,152
Accrued expenses ................................ 9,162 1,340 -- 10,502
Income taxes payable ............................. (150) 317 -- 167
Current portions of long-term
obligations..................................... 2,863 48 -- 2,911
-------- ------- -------- --------
Total current liabilities ....................... 116,916 2,483 -- 119,399
Long-term obligations, excluding
current portion .................................... 234,344 78 -- 234,422
Deferred tax liabilities ............................. 6,893 -- -- 6,893
Other .............................................. 307 6,711 $ (3,237) 3,781
-------- ------- -------- --------
Total liabilities................................. 358,460 9,272 (3,237) 364,495
Stockholders' (deficit) equity:
Common Stock...................................... -- 339 (339) --
Additional paid-in capital........................ -- 458 (458) --
Unamortized restricted Common Stock
award ......................................... (835) -- -- (835)
Notes receivable from officers.................... (750) -- -- (750)
(Deficit) retained earnings ...................... (92,912) 7,232 (7,232) (92,912)
Foreign currency translation
adjustment .................................... (722) (651) 651 (722)
-------- ------- -------- --------
Total stockholders' (deficit) equity ......... (95,219) 7,378 (7,378) (95,219)
-------- ------- -------- --------
Total liabilities and
stockholders' (deficit) equity ........... $263,241 $16,650 $(10,615) $269,276
======== ======= ======== ========
</TABLE>
F-26
<PAGE>
<TABLE>
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1997
CONSOLIDATING BALANCE SHEET
December 31, 1996
(Dollars in thousands)
(Unaudited)
<CAPTION>
Amscan
Holdings and Combined
Combined Non-
Guarantors Guarantors Eliminations Consolidated
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
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 ................................ 8,452 951 -- 9,403
Income taxes payable ............................ 198 624 -- 822
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:
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
======== ======= ======== ========
</TABLE>
F-27
<PAGE>
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1997
CONSOLIDATING STATEMENT OF OPERATIONS
For the Year Ended December 31, 1997
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Amscan
Holdings and Combined
Combined Non-
Guarantors Guarantors Eliminations Consolidated
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Net sales ........................ $ 195,092 $26,703 $(11,864) $ 209,931
Cost of sales .................... 130,785 18,469 (12,683) 136,571
--------- ------- -------- ---------
Gross profit ............ 64,307 8,234 819 73,360
Operating expenses:
Selling expenses ............. 10,549 3,177 -- 13,726
General and administrative
expenses ................... 17,298 3,930 (456) 20,772
Art and development costs .... 5,282 -- -- 5,282
Non-recurring expenses in
connection with the Merger 22,083 -- -- 22,083
--------- ------- -------- ---------
Income from operations... 9,095 1,127 1,275 11,497
Interest expense, net ............ 3,828 64 3,892
Other (income) expense, net ...... (1,717) 51 1,595 (71)
--------- ------- -------- ---------
Income before income taxes
and minority interests .... 6,984 1,012 (320) 7,676
Income taxes ..................... 7,166 499 -- 7,665
Minority interests ............... -- 193 -- 193
--------- ------- -------- ---------
Net (loss) income ....... $ (182) $ 320 $ (320) $ (182)
========= ======= ======== =========
</TABLE>
F-28
<PAGE>
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1997
CONSOLIDATING STATEMENT OF OPERATIONS
For the Year Ended December 31, 1996
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Amscan
Holdings and Combined
Combined Non-
Guarantors Guarantors Eliminations Consolidated
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Net sales .......................... $ 176,808 $ 24,656 $ (8,759) $ 192,705
Cost of sales ...................... 117,707 15,704 (9,498) 123,913
--------- --------- --------- ---------
Gross profit ............... 59,101 8,952 739 68,792
Operating expenses:
Selling expenses ............... 9,723 2,115 -- 11,838
General and administrative
expenses ..................... 15,424 4,562 (720) 19,266
Art and development costs ...... 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 ..... 9,024 2,275 1,459 12,758
Interest expense, net .............. 6,688 3 -- 6,691
Other (income) expense, net ........ (2,229) 20 2,544 335
--------- --------- --------- ---------
Income before income taxes
and minority interests... 4,565 2,252 (1,085) 5,732
Income taxes ....................... 1,035 917 -- 1,952
Minority interests ................. 1,403 250 -- 1,653
--------- --------- --------- ---------
Net income ................. $ 2,127 $ 1,085 $ (1,085) $ 2,127
========= ========= ========= =========
Pro forma data (unaudited)
(Note 11):
Income before income taxes ..... $ 4,079
Pro forma income tax expense ... 1,827
---------
Pro forma net income ....... $ 2,252
=========
</TABLE>
F-29
<PAGE>
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1997
CONSOLIDATING STATEMENT OF OPERATIONS
For the Year Ended December 31, 1995
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Amscan
Holdings and Combined
Combined Non-
Guarantors Guarantors Eliminations Consolidated
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
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 costs ....... 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 11):
Income before income taxes ...... $ 18,165
Pro forma income tax expense .... 7,403
---------
Pro forma net income ............ $ 10,762
=========
</TABLE>
F-30
<PAGE>
<TABLE>
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1997
CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 31, 1997
(Dollars in thousands)
(Unaudited)
<CAPTION>
Amscan Holding Combined
and Combined Non-
Guarantors Guarantors Eliminations Consolidated
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income ............................................... $ (182) $ 320 $(320) $ (182)
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation and amortization ................................ 5,864 381 -- 6,245
(Gain) on disposal of property and equipment .................. (31) -- (31)
Provision for doubtful accounts .............................. 3,419 356 -- 3,775
Amortization of Restricted Common Stock award ................ 290 -- 290
Deferred income tax provision ................................ 1,625 (60) -- 1,565
Changes in operating assets and liabilities, net of
acquisitions:
Increase in accounts receivable ........................ (14,915) (954) -- (15,869)
Increase in inventories ................................ (3,773) (2,098) -- (5,871)
Decrease in deposits and other, net ................... 4,055 2,234 -- 6,289
Decrease (increase) in other assets ................... 2,267 (324) 920 2,863
Increase in accounts payable, accrued expenses
and income taxes payable ............................. 4,944 151 -- 5,095
-------- -------- ------ --------
Net cash provided by operating activities ............. 3,563 6 600 4,169
Cash flows from investing activities:
Capital expenditures ............................................. (9,390) (847) -- (10,237)
Proceeds from disposal of property and equipment ................ 140 -- -- 140
-------- -------- ------ --------
Net cash used in investing activities .................. (9,250) (847) -- (10,097)
Cash flows from financing activities:
Net proceeds from sale of Common Stock .......................... 4,524 -- -- 4,524
Capital contributions............................................. 7,500 600 (600) 7,500
Issuance of Common Stock in connection with the Merger ........... 61,875 -- -- 61,875
Payments to acquire treasury stock ............................... (290) -- -- (290)
Payments to acquire Common Stock in the Merger.................... (142,673) -- -- (142,673)
Proceeds from loans, notes payable and long-term
obligations net of debt issuance costs of $5,500................ 236,981 81 237,062
Repayment of loans, notes payable and long-term
obligations.................................................... (51,743) (68) -- (51,811)
Repayment of indebtedness to Principal Stockholder................ (181) (1) -- (182)
-------- -------- ------ --------
Net cash provided by financing activities ............. 115,993 612 (600) 116,005
Effect of exchange rate changes on cash........................... 126 (253) -- (127)
-------- -------- ------ --------
Net increase (decrease) in cash and cash
equivalents........................................... 110,432 (482) -- 109,950
Cash and cash equivalents at beginning of year........................ 272 1,317 -- 1,589
-------- -------- ------ --------
Cash and cash equivalents at end of year.............................. $110,704 $ 835 -- $111,539
======== ======== ====== ========
</TABLE>
F-31
<PAGE>
<TABLE>
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1997
CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 31, 1996
(Dollars in thousands)
(Unaudited)
<CAPTION>
Amscan Holding Combined
and Combined Non-
Guarantors Guarantors Eliminations Consolidated
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income ....................................................... $ 2,127 $ 1,085 $ (1,085) $ 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
Deferred income tax provision ................................ 648 100 -- 748
Changes in operating assets and liabilities, net of
acquisitions:
Increase in accounts receivable ........................ (6,684) (1,164) -- (7,848)
Increase in inventories ................................ (458) (222) -- (680)
(Increase) decrease in deposits and other, net ......... (4,192) 396 -- (3,796)
(Increase) decrease in other assets .................... (187) (215) 1,085 683
Increase in accounts payable and accrued
expenses ............................................. 1,456 516 -- 1,972
-------- ------- -------- -------
Net cash provided by operating activities .............. 11,102 1,171 -- 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 ............................. 123 272 -- 395
-------- ------- -------- -------
Net (decrease) increase 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
======== ======= ======== =======
</TABLE>
F-32
<PAGE>
<TABLE>
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1997
CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 31, 1995
(Dollars in thousands)
(Unaudited)
<CAPTION>
Amscan Holding Combined
and Combined Non-
Guarantors Guarantors Eliminations Consolidated
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
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:
Increase in accounts receivable ........................ (8,769) (845) -- (9,614)
Increase in inventories ................................ (9,055) (1,493) -- (10,548)
Decrease (increase) in deposits and other, net ........ 128 (229) -- (101)
(Increase) decrease in other assets .................... (1,282) 1,525 (1,415) (1,172)
Increase (decrease) in 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 ............................. (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
======== ======= ======= ========
</TABLE>
F-33
<PAGE>
SCHEDULE
AMSCAN HOLDINGS, INC.
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1997, 1996, and 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
Beginning Ending
Balance Write-offs Additions Balance
------- ---------- --------- -------
Allowance for Doubtful Accounts:
<S> <C> <C> <C> <C>
For the year ended:
December 31, 1995 ........................ $1,925 $1,001 $ 1,581 $ 2,505
December 31, 1996 ........................ 2,505 717 2,350 4,138
December 31, 1997 ........................ 4,138 2,220 3,775 5,693
<CAPTION>
Beginning Ending
Balance Write-offs Additions Balance
------- ---------- --------- -------
<S> <C> <C> <C> <C>
Inventory Reserves:
For the year ended:
December 31, 1995 ........................ $ 834 $ 406 $ 800 $1,228
December 31, 1996 ........................ 1,228 731 1,188 1,685
December 31, 1997 ........................ 1,685 1,562 1,039 1,162
</TABLE>
F-34
<PAGE>
AMSCAN HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
June 30, December 31,
1998 1997
------------- -----------
(Unaudited) (Note)
ASSETS
------
Current assets:
Cash and cash equivalents .................... $ 19,833 $ 111,539
Accounts receivable, net of allowances ....... 42,655 44,838
Inventories .................................. 46,483 51,742
Assets held for disposal ..................... 2,776 --
Prepaid expenses and other current assets .... 8,281 8,073
--------- ---------
Total current assets ......................... 120,028 216,192
Property, plant and equipment, net .............. 33,668 38,860
Intangible assets, net .......................... 8,561 7,762
Other assets, net ............................... 7,759 6,462
--------- ---------
Total assets ................................. $ 170,016 $ 269,276
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
Current liabilities:
Notes payable ................................ $ 167 $ 424
Due to stockholders .......................... 158 93,243
Accounts payable ............................. 5,838 12,152
Accrued expenses ............................. 10,234 10,502
Income taxes payable ......................... 167 --
Current portion of long-term obligations ..... 4,401 2,911
--------- ---------
Total current liabilities .................... 20,798 119,399
Long-term obligations, excluding current portion 231,392 234,422
Deferred tax liabilities ........................ 7,342 6,893
Other ........................................... 3,614 3,781
--------- ---------
Total liabilities ............................ 263,146 364,495
Stockholders' deficit:
Common Stock ................................. -- --
Additional paid-in capital ................... 181 --
Unamortized restricted Common Stock award, net (705) (835)
Notes receivable from officers ............... (728) (750)
Accumulated deficit .......................... (90,611) (92,912)
Accumulated other comprehensive loss ......... (1,267) (722)
--------- ---------
Total stockholders' deficit .................. (93,130) (95,219)
--------- ---------
Total liabilities and stockholders' deficit .. $ 170,016 $ 269,276
========= =========
Note: The balance sheet at December 31, 1997 has been derived from the audited
consolidated financial statements at that date.
See accompanying notes to consolidated financial statements.
F-35
<PAGE>
AMSCAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1998 1997
--------- ---------
<S> <C> <C>
Net sales ................................................. $ 104,247 $ 102,401
Cost of sales ............................................. 67,012 65,964
--------- ---------
Gross profit ......................................... 37,235 36,437
Operating expenses:
Selling expenses ....................................... 7,159 6,226
General and administrative expenses .................... 9,771 8,309
Art and development costs .............................. 3,216 2,567
Restructuring charges .................................. 2,400 --
--------- ---------
Total operating expenses ............................. 22,546 17,102
--------- ---------
Income from operations ............................... 14,689 19,335
Interest expense, net ..................................... 10,763 1,866
Other income, net ......................................... (59) (39)
--------- ---------
Income before income taxes and minority interests 3,985 17,508
Income tax expense ........................................ 1,654 7,145
Minority interests ........................................ 30 85
--------- ---------
Net income ........................................... $ 2,301 $ 10,278
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-36
<PAGE>
<TABLE>
AMSCAN HOLDINGS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
For the Six Months Ended June 30, 1998
(Dollars in thousands)
(Unaudited)
<CAPTION>
Unamortized
Restricted Notes Accumulated
Additional Common Receivable Other
Common Paid-in Stock Award from Accumulated Comprehensive
Stock Capital Net Officers Deficit Loss Total
----------- ------------- ------------- ------------ ------------ -------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of December 31, 1997.. $-- $-- $(835) $(750) $(92,912) $ (722) $(95,219)
Net income....................... -- -- -- -- 2,301 -- 2,301
Net change in foreign
currency translation
adjustment..................... -- -- -- -- (545) (545) --
Payment received on notes
receivable from officers....... -- -- -- 22 -- -- 22
Issuance of 2.41 shares of
Common Stock................... -- $181 -- -- -- -- 181
Amortization of restricted
Common Stock award............. -- -- 130 -- -- -- 130
------ ---- ----- ----- -------- ------- --------
Balance as of June 30, 1998...... $ -- $181 $(705) $(728) $(90,611) $(1,267) $(93,130)
====== ==== ===== ===== ======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-37
<PAGE>
AMSCAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income .......................................................... $ 2,301 $ 10,278
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ...................................... 3,445 2,981
Amortization of deferred financing costs ........................... 348 9
Restructuring charges .............................................. 2,400 --
Amortization of restricted Common Stock award ...................... 130 --
Provision for doubtful accounts .................................... 1,303 577
Deferred income tax (benefit) provision ............................ (251) 1,725
Gain on disposal of equipment ...................................... (2) --
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable ....................... 880 (9,843)
Decrease in inventories .......................................... 5,259 2,628
Decrease in prepaid expenses and other current assets ............ 492 856
Decrease in accounts payable, accrued expenses and income
taxes payable ................................................. (8,905) (3,187)
Other, net ....................................................... (1,294) (456)
--------- ---------
Net cash provided by operating activities ................... 6,106 5,568
Cash flows from investing activities:
Capital expenditures ................................................ (2,474) (3,711)
Proceeds from disposal of property and equipment .................... 23 --
---------
Net cash used in investing activities ......................... (2,451) (3,711)
Cash flows from financing activities:
Payments to acquire Common Stock in Merger .......................... (93,085) --
Net proceeds from the issuance of Common Stock ...................... 181 4,539
Proceeds from loans, notes payable and long-term obligations ........ 167 15,632
Repayment of loans, notes payable and long-term obligations ......... (2,058) (22,165)
Repayment of subordinated and other indebtedness due to stockholders (200) --
Payments received on notes receivable from officers ................. 22 --
Payments to acquire treasury stock .................................. -- (290)
--------- ---------
Net cash used in financing activities ......................... (94,773) (2,484)
Effect of exchange rate changes on cash and cash equivalents ........ (588) 289
--------- ---------
Net decrease in cash and cash equivalents ........................... (91,706) (338)
Cash and cash equivalents at beginning of period .................... 111,539 1,589
--------- ---------
Cash and cash equivalents at end of period .......................... $ 19,833 $ 1,251
========= =========
Supplemental Disclosures:
Cash paid during the period for:
Interest paid ................................................. $ 8,345 $ 1,799
Income taxes .................................................. $ 2,297 $ 6,189
Capital lease obligations of $94 and $59 were incurred during the six months
ended June 30, 1998 and 1997, respectively.
</TABLE>
See accompanying notes to consolidated financial statements.
F-38
<PAGE>
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1: ORGANIZATION AND DESCRIPTION OF BUSINESS
Amscan Holdings, Inc. ("Amscan Holdings" and, together with its
subsidiaries, the "Company") 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.
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 would 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. 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) was 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 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,
with fractional shares of Company Common Stock paid in cash. 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 the
surviving corporation in the Merger. 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 Common Stock), $117 million from a senior term loan and $110 million
from the issuance of senior subordinated notes. The Merger was accounted for as
a recapitalization and, accordingly, the historical basis of the Company's
assets and liabilities were not affected by the Merger.
Amscan Holdings and its subsidiaries design, manufacture, contract for
manufacture and distribute party and novelty goods 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.
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 six-month period ended June 30, 1998 is
not necessarily indicative of the results that may be expected for the year
ending December 31, 1998. 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, 1997.
F-39
<PAGE>
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
NOTE 3: RESTRUCTURING CHARGES
In the second quarter of 1998, the Company commenced a restructuring
of its distribution operations to reduce costs and improve operating
efficiencies. The Company will close two distribution facilities located in
California and Canada which will result in the elimination of approximately 100
positions. The restructuring will be substantially completed by the end of 1998.
The Company has recorded restructuring charges of approximately $2,400,000 which
include the non-cash write-down of $1,328,000 relating to property, plant and
equipment (the majority of which has been classified as assets held for
disposal), the accrual of future lease obligations of $474,000, severance and
related costs of $335,000, and other costs of $263,000.
NOTE 4: ACQUISITION OF MINORITY INTEREST
In May 1998, the Company acquired the remaining 25% interest in its
U.K. based subsidiary, Amscan Holdings Limited, for approximately $1,703,000. In
conjunction with the acquisition, the Company will issue a non-interest bearing
note to the former shareholder in the amount of 350,000 pounds sterling
(approximately $583,000) which is payable over five years. The acquisition has
been accounted for as a purchase and the excess purchase price over the fair
value of the net assets acquired of $949,000 is being amortized on a
straight-line basis over thirty years.
The results of operations attributable to the additional 25% interest
in Amscan Holdings Limited are included in the accompanying financial statements
from the date of acquisition. The pro forma results of operations for this
acquisition for the periods presented, had the acquisition occurred at the
beginning of 1998 and 1997, are not significant, and accordingly, pro forma
information has not been provided.
NOTE 5: INVENTORIES
Inventories consisted of the following:
June 30, December 31,
1998 1997
-------- -----------
(In thousands)
Finished goods ...................................... $ 42,996 $ 47,704
Raw materials ....................................... 2,950 3,570
Work-in-process ..................................... 2,183 1,630
-------- --------
48,129 52,904
Less: reserve for slow moving and obsolete inventory (1,646) (1,162)
-------- --------
$ 46,483 $ 51,742
======== ========
Inventories are valued at the lower of cost, determined on a first in - first
out basis, or market.
NOTE 6: INCOME TAXES
The consolidated income tax provisions for each of the six month
periods ended June 30, 1998 and June 30, 1997 were determined based upon
estimates of the Company's consolidated effective income tax rates for the years
ending December 31, 1998 and 1997, respectively. 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.
F-40
<PAGE>
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
NOTE 7: COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Financial Accounting
Standards ("SFAS") No. 130, Reporting Comprehensive Income. SFAS No. 130
established new rules for the reporting and display of comprehensive income and
its components; however, the adoption of this statement had no impact on the
Company's net income or stockholders' deficit. SFAS No. 130 requires the
Company's foreign currency translation adjustment, which prior to adoption were
reported separately in stockholders' deficit to be included in other
comprehensive (loss) income. Amounts reported in prior year financial statements
have been reclassified to conform to the requirements of SFAS No. 130.
Comprehensive income consisted of the following:
Six Months Ended
June 30,
-------------------
1998 1997
---- ----
(in thousands)
Net income ..................... $ 2,301 $10,278
Net change in foreign currency
translation adjustment ...... (545) 245
------- -------
Comprehensive income ........... $ 1,756 $10,523
======= =======
Accumulated other comprehensive loss at June 30, 1998 and December 31,
1997 consisted solely of the Company's foreign currency translation adjustment.
NOTE 8: CAPITAL STOCK
At June 30, 1998 and December 31, 1997, respectively, 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 1,012.41 and 1,010 shares were issued
and outstanding, respectively. In July 1998, the Company reduced its authorized
shares of Common Stock to 3,000 shares.
During the second quarter of 1998, the Company issued 2.41 shares of
its Common Stock to certain of its employees at a price of $75,000 per share and
received cash proceeds of approximately $181,000.
In addition, during the second quarter of 1998, the Company granted
stock options to purchase 5.55 shares of Common Stock under the terms of the
Amscan Holdings, Inc. Stock Incentive Plan, at an exercise price of $75,000 per
share which represented the estimated fair market value of the Company's Common
Stock at the grant date. The options vest in equal installments on each of the
first five anniversaries of the grant date. The options are non-transferable
(except under certain limited circumstances) and have a term of ten years.
At June 30, 1998, there were 87.41 shares of Common Stock held by
employees of which 10 shares were not yet fully paid and 11.25 shares were
subject to future vesting provisions. Under the terms of a stockholders'
agreement ("Stockholders' Agreement"), the Company can purchase all of the
shares held by the employee stockholders, and the employees can require the
Company to purchase all of the shares held by the employee stockholders, under
certain circumstances. The Company has the option to assign the obligation to
purchase employee shares, at a cost of up to $15,000,000, to GSCP. The purchase
price as prescribed in the Stockholders' Agreement is to be determined through a
market valuation of the minority-held shares or, under certain circumstances,
based on cost. At June 30, 1998, the aggregate amount that may be payable to
employee stockholders is significantly less than the cap of $15,000,000.
F-41
<PAGE>
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)
NOTE 9: SUBSEQUENT EVENT
On August 6, 1998, the Company entered into a stock purchase agreement
(the "Stock Purchase Agreement") with the stockholders of Anagram International,
Inc., a Minneapolis-based metallic balloon manufacturer and distributor, and
certain related companies (collectively, the "Anagram Companies"), providing
for, among other things, the acquisition (the "Acquisition") by the Company of
all of the capital stock of each of the Anagram Companies in a transaction
valued at approximately $87,000,000, including the issuance of equity and the
payment or assumption of debt. Consummation of the Acquisition is subject to a
number of conditions, including the availability of financing and customary
consents and approvals. The Acquisition is expected to be completed during the
third quarter of 1998.
The Acquisition will be accounted for under the purchase method,
whereby the purchase price will be allocated to the underlying assets and
liabilities based on their estimated fair values.
The Company is planning to finance the Acquisition with approximately
$40,000,000 of senior term debt, approximately $20,000,000 of additional
revolving credit borrowings, cash on hand, and the issuance of approximately
$13,000,000 of equity. The Company's existing credit agreements are required to
be amended in connection with the Acquisition, including to provide for the
senior debt. The Company has received a commitment for the senior debt financing
from Goldman Sachs Credit Partners L.P.
F-42
<PAGE>
SUPPLEMENTAL INFORMATION
The senior subordinated notes and borrowings under the bank credit
agreement 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 (the
"Guarantors").
Non-guarantor companies include the following:
o Amscan Distributors (Canada) Ltd.
o Amscan Holdings Limited
o Amscan (Asia-Pacific) Pty. Ltd.
o Amscan Partyartikel GmbH
o Amscan Svenska AB
o Amscan de Mexico, S.A. de C.V.
The following consolidating information presents unaudited consolidating balance
sheets as of June 30, 1998, and the related unaudited consolidating statements
of operations and cash flows for the six-month periods ended June 30, 1998 and
1997 for the combined Guarantors and the combined non-guarantors and elimination
entries necessary to consolidate the entities comprising the combined companies.
The following consolidating information does not give effect to the Company's
acquisition of Anagram in September 1998.
F-43
<PAGE>
CONSOLIDATING BALANCE SHEET
June 30, 1998
(Dollars in thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
Amscan
Holdings and Combined
Combined Non-
Guarantors Guarantors Eliminations Consolidated
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................. $ 18,409 $ 1,424 -- $ 19,833
Accounts receivable, net .................. 38,586 4,069 -- 42,655
Inventories ............................... 39,344 7,090 $ 49 46,483
Assets held for disposal .................. 2,776 -- 2,776
Prepaid expenses and other current assets.. 7,185 1,096 -- 8,281
--------- -------- --------- ---------
Total current assets .................... 106,300 13,679 49 120,028
Property, plant and equipment, net ............. 32,424 1,244 -- 33,668
Intangible assets, net ......................... 7,334 1,227 -- 8,561
Other assets, net .............................. 17,088 67 (9,396) 7,759
--------- -------- --------- ---------
Total assets .............................. $ 163,146 $ 16,217 $ (9,347) $ 170,016
========= ======== ========= =========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Notes payable ............................. -- $ 167 -- $ 167
Due to stockholders ....................... $ 158 -- -- 158
Accounts payable .......................... 5,387 451 -- 5,838
Accrued expenses .......................... 7,493 2,741 -- 10,234
Current portions of long-term
obligations ............................. 4,352 49 -- 4,401
--------- -------- --------- ---------
Total current liabilities ................. 17,390 3,408 -- 20,798
Long-term obligations, excluding
current portion .............................. 231,364 28 -- 231,392
Deferred tax liabilities ....................... 7,342 -- -- 7,342
Other .......................................... 229 5,950 $ (2,565) 3,614
--------- -------- --------- ---------
Total liabilities ......................... 256,325 9,386 (2,565) 263,146
Stockholders' (deficit) equity:
Common Stock .............................. -- 339 (339) --
Additional paid-in capital ................ 181 658 (658) 181
Unamortized restricted Common Stock
award, net ............................. (705) -- -- (705)
Notes receivable from officers ............ (728) -- -- (728)
(Accumulated deficit) retained earnings ... (90,660) 7,145 (7,096) (90,611)
Accumulated other comprehensive loss ...... (1,267) (1,311) 1,311 (1,267)
--------- -------- --------- ---------
Total stockholders' (deficit) equity ...... (93,179) 6,831 (6,782) (93,130)
--------- -------- --------- ---------
Total liabilities and
stockholders' (deficit) equity ......... $ 163,146 $ 16,217 $ (9,347) $ 170,016
========= ======== ========= =========
</TABLE>
F-44
<PAGE>
CONSOLIDATING STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1998
(Dollars in thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
Amscan
Holdings and Combined
Combined Non-
Guarantors Guarantors Eliminations Consolidated
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Net sales .......................... $ 96,542 $ 11,894 $ (4,189) $ 104,247
Cost of sales ...................... 63,594 8,110 (4,692) 67,012
-------- -------- -------- ---------
Gross profit .............. 32,948 3,784 503 37,235
Operating expenses:
Selling expenses ............... 5,638 1,521 -- 7,159
General and administrative
expenses ..................... 7,869 1,998 (96) 9,771
Art and development costs ...... 3,216 -- -- 3,216
Restructuring charges .......... 2,118 282 -- 2,400
-------- -------- -------- ---------
Income (loss) from operations.. 14,107 (17) 599 14,689
Interest expense, net .............. 10,746 17 10,763
Other income, net .................. (420) (42) 403 (59)
-------- -------- -------- ---------
Income before income taxes
and minority interests ...... 3,781 8 196 3,985
Income taxes ....................... 1,589 65 -- 1,654
Minority interests ................. -- 30 -- 30
-------- -------- -------- ---------
Net income (loss) ........... $ 2,192 $ (87) $ 196 $ 2,301
======== ======== ======== =========
</TABLE>
F-45
<PAGE>
CONSOLIDATING STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1997
(Dollars in thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
Amscan
Holdings and Combined
Combined Non-
Guarantors Guarantors Eliminations Consolidated
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Net sales .............................. $ 95,548 $ 11,614 $(4,761) $ 102,401
Cost of sales .......................... 63,572 7,720 (5,328) 65,964
-------- -------- ------- ---------
Gross profit .................. 31,976 3,894 567 36,437
Operating expenses:
Selling expenses .............. 4,837 1,389 -- 6,226
General and administrative
expenses ................... 6,670 1,999 (360) 8,309
Art and development costs ..... 2,567 -- -- 2,567
-------- -------- ------- ---------
Income from operations ... 17,902 506 927 19,335
Interest expense, net ......... 1,833 33 -- 1,866
Other income, net ............. (1,069) (18) 1,048 (39)
-------- -------- ------- ---------
Income before income taxes
and minority interests 17,138 491 (121) 17,508
Income taxes ........................... 7,014 131 -- 7,145
Minority interests ..................... -- 85 -- 85
-------- -------- ------- ---------
Net income .................... $ 10,124 $ 275 $ (121) $ 10,278
======== ======== ======= =========
</TABLE>
F-46
<PAGE>
CONSOLIDATING STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 1998
(Dollars in thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
Amscan Holdings Combined
and Combined Non-
Guarantors Guarantors Eliminations Consolidated
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................. $ 2,192 $ (87) $ 196 $ 2,301
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization .................. 3,253 192 -- 3,445
Amortization of deferred financing charges ..... 348 -- -- 348
Restructuring charges .......................... 2,118 282 -- 2,400
Amortization of Restricted Common Stock award .. 130 -- -- 130
Provision for doubtful accounts ................ 936 367 -- 1,303
Deferred income tax benefit .................... (211) (40) -- (251)
Gain on disposal of assets ..................... -- (2) -- (2)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (65) 945 -- 880
Decrease in inventories .................. 4,768 600 (109) 5,259
Decrease (increase) in prepaid expenses
and other current assets ............... 799 (307) -- 492
Decrease in accounts payable, accrued
expenses and income taxes payable ...... (8,902) (3) -- (8,905)
Other, net ........................................ (953) (654) 313 (1,294)
--------- -------- --------- --------
Net cash provided by operating activities 4,413 1,293 400 6,106
Cash flows from investing activities:
Capital expenditures .............................. (2,365) (109) -- (2,474)
Proceeds from disposal of property and equipment .. 23 -- 23
--------- -------- --------- --------
Net cash used in investing activities .... (2,365) (86) -- (2,451)
Cash flows from financing activities:
Payments to acquire Common Stock in Merger ........ (93,085) -- -- (93,085)
Net proceeds from the issuance of Common Stock
and other capital contributions ................. 181 400 (400) 181
Proceeds from loans, notes payable and long-term
obligations ..................................... -- 167 -- 167
Repayment of loans, notes payable and long-term
obligations ..................................... (1,585) (473) -- (2,058)
Payments received on notes
receivable from officers ........................ 22 -- -- 22
--------- -------- --------- --------
Net cash (used in) provided by
financing activities ................... (94,467) 94 (400) (94,773)
Effect of exchange rate changes on cash and cash
equivalents ........................................ 124 (712) -- (588)
--------- -------- --------- --------
Net (decrease) increase in cash and cash
equivalents ............................ (92,295) 589 -- (91,706)
Cash and cash equivalents at beginning of period ..... 110,704 835 -- 111,539
--------- -------- --------- --------
Cash and cash equivalents at end of period ........... $ 18,409 $ 1,424 $ -- $ 19,833
========= ======== ========= ========
</TABLE>
F-47
<PAGE>
CONSOLIDATING STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 1997
(Dollars in thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
Amscan Holdings Combined
and Combined Non-
Guarantors Guarantors Eliminations Consolidated
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income ......................................... $ 10,124 $ 275 $ (121) $ 10,278
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization ................... 2,808 173 -- 2,981
Amortization of deferred financing charges ...... 9 -- -- 9
Provision for doubtful accounts ................. 405 172 -- 577
Deferred income tax provision ................... 1,725 -- -- 1,725
Changes in operating assets and liabilities:
Increase in accounts receivable ................. (9,543) (300) -- (9,843)
Decrease (increase) in inventories .............. 3,049 (267) (154) 2,628
Decrease (increase) in prepaid expenses and other
current assets ................................ 1,224 (368) -- 856
Decrease in accounts payable, accrued expenses
and income taxes payable ..................... (2,835) (352) -- (3,187)
Other, net ............................................. (337) (394) 275 (456)
-------- -------- -------- --------
Net cash provided by (used in ) operating
activities ........................... 6,629 (1,061) -- 5,568
Cash flows from investing activities:
Capital expenditures ............................... (3,529) (182) -- (3,711)
-------- -------- -------- --------
Net cash used in investing activities .... (3,529) (182) -- (3,711)
Cash flows from financing activities:
Net proceeds from the issuance of Common Stock ......... 4,539 -- -- 4,539
Proceeds from loans, notes payable and long-term
obligations ...................................... 15,099 533 -- 15,632
Repayment of loans, notes payable and long-term
obligations ...................................... (22,165) -- -- (22,165)
Repayment of subordinated and other indebtedness due
to stockholders .................................. (199) (1) -- (200)
Payments to acquire treasury stock ..................... (290) (290)
-------- -------- -------- --------
Net cash (used in) provided by financing
activities ........................... (3,016) 532 -- (2,484)
Effect of exchange rate changes on cash
and cash equivalents ............................. 24 265 -- 289
-------- -------- -------- --------
Net increase (decrease) in cash
and cash equivalents ................... 108 (446) -- (338)
Cash and cash equivalents at beginning of period ....... 272 1,317 -- 1,589
-------- -------- -------- --------
Cash and cash equivalents at end of period ............. $ 380 $ 871 $ -- $ 1,251
======== ======== ======== ========
</TABLE>
F-48
<PAGE>
<TABLE>
<S> <C>
===================================================== ===================================================
No person has been authorized in connection with
the offering made hereby to give any information or Amscan Holdings, Inc.
to make any representations other than those
contained in this Prospectus and, if given or made,
such information or representation must not be 9 7/8% Senior Subordinated Notes
relied upon as having been authorized. This due 2007
Prospectus does not constitute an offer to sell or ($110,000,000 principal amount outstanding)
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.......... iii
Prospectus Summary............. 1
Risk Factors................... 14 _________________
[AMSCAN THE PARTY PEOPLE LOGO]
The Transaction................ 20 _________________
Capitalization................. 22
Transaction Pro Forma Consolidated
Financial Data (Unaudited)... 23
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................... 29
Business....................... 40
Management..................... 49
Ownership of Capital Stock..... 58
Description of Senior Debt..... 59
Description of Notes........... 62
Description of Certain Federal Income
Tax Consequences of an Investment in
the Notes.................... 88
Plan of Distribution........... 91
Experts........................ 91
Validity of the Notes.......... 91
Index to Financial Statements.. F-1
===================================================== ====================================================
</TABLE>
<PAGE>
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, 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
II-1
<PAGE>
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.
3.13 Amended Articles of Incorporation of Anagram
International, Inc. (incorporated by reference to
Exhibit 3.1 to the Company's Current Report on 8-K filed
September 25, 1998 (Commission File No. 000-21827)).
3.14 By-Laws of Anagram International, Inc. (incorporated by
reference to Exhibit 3.2 to the Company's Current Report
on 8-K filed September 25, 1998 (Commission File No.
000-21827)).
3.15 Articles of Incorporation of Anagram International
Holdings, Inc. (incorporated by reference to Exhibit 3.3
to the Company's Current Report on 8-K filed September
25, 1998 (Commission File No. 000-21827)).
3.16 By-Laws of Anagram International Holdings, Inc.
(incorporated by reference to Exhibit 3.4 to the
Company's Current Report on 8-K filed September 25,
1998 (Commission File No. 000-21827)).
3.17 Articles of Organization of Anagram International LLC
(incorporated by reference to Exhibit 3.5 to the
Company's Current Report on 8-K filed September 25,
1998 (Commission File No. 000-21827)).
3.18 Operating Agreement of Anagram International, LLC
(incorporated by reference to Exhibit 3.6 to the
Company's Current Report on 8-K filed September 25,
1998 (Commission File No. 000-21827)).
3.19 Certificate of Formation of Anagram Eden Prairie
Property Holdings LLC (incorporated by reference to
Exhibit 3.7 to the Company's Current Report on 8-K
filed September 25, 1998 (Commission File No.
000-21827)).
*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.
4.2 Supplemental Indenture, dated as of September 17, 1998,
by and among Anagram International, Inc., Anagram
International Holdings, Inc., Anagram International LLC
and Anagram Eden Prairie Property Holdings LLC and IBJ
Schroder Bank & Trust Company, as Trustee (incorporated
by reference to Exhibit 4.1 to the Company's Current
Report on 8-K filed September 25, 1998 (Commission
File No. 000-21827)).
4.3 Senior Subordinated Guarantee, dated as of September 17,
1998, by Anagram International, Inc., Anagram
International Holdings, Inc., Anagram International, LLC
and Anagram Eden Prairie Property Holdings LLC
(incorporated by reference to Exhibit 4.2 to the
Company's Current Report on 8-K filed September 25,
1998 (Commission File No. 000-21827)).
II-2
<PAGE>
*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 Amended and Restated Revolving Loan Credit Agreement,
dated as of September 17, 1998, among the Company, the
financial institutions parties thereto, Goldman, Sachs
Credit Partners L.P., as arranger and syndication agent,
and Fleet National Bank as administrative agent
(incorporated by reference to Exhibit 10.1 to the
Company's Current Report on 8-K filed September 25,
1998 (Commission File No. 000-21827)).
*10.3 Amended and Restated AXEL Credit Agreement, dated as of
September 17, 1998, among the Company, the financial
institutions parties thereto, Goldman, Sachs Credit
Partners L.P., as arranger and syndication agent, and
Fleet National Bank as administrative agent
(incorporated by reference to Exhibit 10.2 to the
Company's Current Report on 8-K filed September 25,
1998 (Commission File No. 000-21827)).
*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 between the Company and Gerald C. Rittenberg.
*10.6 Employment Agreement, dated as of August 10, 1997, by
and between the Company and James M. Harrison.
10.7 Employment Agreement, dated as of October 4, 1996, by
and between the Company and William S. Wilkey
(incorporated by reference to Exhibit 10(e) to the
Company's Registration Statement on Form S-1 (File No.
333-14107)).
10.8 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 applicable to the Registration
Statement filing.
24.2 Powers of Attorney additionally applicable to the filing
contained herein.
*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.
- -----------------------------
* Previously filed
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.
II-3
<PAGE>
(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.
(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.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Post-Effective Amendment to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Elmsford, New York, on September 30, 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
Post-Effective Amendment to the Registration Statement has been signed by the
following persons in the capacities and on September 30, 1998.
Name Title
-------------------------- ----------------------------------
* Chief Executive Officer and Director
--------------------------
Gerald C. Rittenberg
* President, Chief Financial
Officer, Treasurer and Director
--------------------------
James M. Harrison
* Secretary and Controller
--------------------------
Michael A. Correale
* Chairman of the Board and Director
--------------------------
Terence M. O'Toole
* Director
--------------------------
Sanjeev K. Mehra
* Director
--------------------------
Joseph P. DiSabato
By: /s/ James M. Harrison
--------------------------
James M. Harrison
Attorney-In-Fact
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Post-Effective Amendment to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Elmsford, New York, on September 30, 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
Post-Effective Amendment to the Registration Statement has been signed by the
following persons in the capacities and on September 30, 1998.
Name Title
-------------------------- ----------------------------------
* President and Director
--------------------------
Gerald C. Rittenberg
* Executive Vice President, Secretary
and Director
--------------------------
James M. Harrison
* Vice President, Treasurer and Director
--------------------------
Michael A. Correale
By: /s/ James M. Harrison
--------------------------
James M. Harrison
Attorney-In-Fact
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Post-Effective Amendment to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Elmsford, New York, on September 30, 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
Post-Effective Amendment to the Registration Statement has been signed by the
following persons in the capacities and on September 30, 1998.
Name Title
-------------------------- ----------------------------------
* President and Director
--------------------------
Gerald C. Rittenberg
* Treasurer, Secretary and Director
--------------------------
James M. Harrison
* Assistant Treasurer and Director
--------------------------
Michael A. Correale
By: /s/ James M. Harrison
--------------------------
James M. Harrison
Attorney-In-Fact
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Post-Effective Amendment to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Elmsford, New York, on September 30, 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
Post-Effective Amendment to the Registration Statement has been signed by the
following persons in the capacities and on September 30, 1998.
Name Title
-------------------------- ----------------------------------
* President
--------------------------
Gerald C. Rittenberg
* Treasurer and Secretary
--------------------------
James M. Harrison
* Assistant Treasurer
--------------------------
Michael A. Correale
By: /s/ James M. Harrison
--------------------------
James M. Harrison
Attorney-In-Fact
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Post-Effective Amendment to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Elmsford, New York, on September 30, 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
Post-Effective Amendment to the Registration Statement has been signed by the
following persons in the capacities and on September 30, 1998.
Name Title
-------------------------- ----------------------------------
* President and Director
--------------------------
Gerald C. Rittenberg
* Treasurer, Secretary and Director
--------------------------
James M. Harrison
* Assistant Treasurer and Director
--------------------------
Michael A. Correale
By: /s/ James M. Harrison
--------------------------
James M. Harrison
Attorney-In-Fact
II-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Post-Effective Amendment to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Elmsford, New York, on September 30, 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
Post-Effective Amendment to the Registration Statement has been signed by the
following persons in the capacities and on September 30, 1998.
Name Title
-------------------------- ----------------------------------
* President and Director
--------------------------
Gerald C. Rittenberg
* Treasurer, Secretary and Director
--------------------------
James M. Harrison
* Assistant Treasurer and Director
--------------------------
Michael A. Correale
By: /s/ James M. Harrison
--------------------------
James M. Harrison
Attorney-In-Fact
II-10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Post-Effective Amendment to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Elmsford, New York, on September 30, 1998.
ANAGRAM INTERNATIONAL, INC.
By: /s/ James M. Harrison
--------------------------------------
Name: James M. Harrison
Title: Senior Vice President Treasurer
and Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed by the
following persons in the capacities and on September 30, 1998.
Name Title
-------------------------- ----------------------------------
* President
--------------------------
Gary Kieves
* Senior Vice President, Assistant
Treasurer, Assistant Secretary and
Director
--------------------------
Gerald C. Rittenberg
* Senior Vice President, Treasurer,
Chief Financial Officer and Director
--------------------------
James M. Harrison
* Vice President, Assistant Treasurer,
Secretary, and Director
--------------------------
Michael A. Correale
By: /s/ James M. Harrison
--------------------------
James M. Harrison
Attorney-In-Fact
II-11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Post-Effective Amendment to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Elmsford, New York, on September 30, 1998.
ANAGRAM INTERNATIONAL
HOLDINGS, INC.
By: /s/ James M. Harrison
--------------------------------------
Name: James M. Harrison
Title: Senior Vice President, Treasurer
and Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed by the
following persons in the capacities and on September 30, 1998.
Name Title
-------------------------- ----------------------------------
* President, Chief Executive Officer
and Director
--------------------------
Gerald C. Rittenberg
* Senior Vice President, Treasurer,
Chief Financial Officer and Director
--------------------------
James M. Harrison
By: /s/ James M. Harrison
--------------------------
James M. Harrison
Attorney-In-Fact
II-12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Post-Effective Amendment to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Elmsford, New York, on September 30, 1998.
ANAGRAM EDEN PRAIRIE
PROPERTY HOLDINGS LLC
By ANAGRAM INTERNATIONAL INC.,
its Sole Member
*
By: /s/ James M. Harrison
--------------------------------------
Name: James M. Harrison
Title: Senior Vice President, Treasurer
and Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed by the
following persons in the capacities and on September 30, 1998.
Name Title
-------------------------- ----------------------------------
* President
--------------------------
Gary Kieves
* Senior Vice President, Assistant
Treasurer, Assistant Secretary and
Director
--------------------------
Gerald C. Rittenberg
* Senior Vice President Treasurer,
Chief Financial Officer and Director
--------------------------
James M. Harrison
* Vice President, Assistant Treasurer,
Secretary, and Director
--------------------------
Michael A. Correale
By: /s/ James M. Harrison
--------------------------
James M. Harrison
Attorney-In-Fact
II-13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Post-Effective Amendment to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Elmsford, New York, on September 30, 1998.
ANAGRAM INTERNATIONAL, LLC
By: /s/ James M. Harrison
--------------------------------------
Name: James M. Harrison
Title: Manager
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed by the
following persons in the capacities and on September 30, 1998.
Name Title
-------------------------- ----------------------------------
* Manager
--------------------------
Gerald C. Rittenberg
* Manager (and principal financial
and accounting officer)
--------------------------
James M. Harrison
* Manager
--------------------------
Michael A. Correale
* Manager
--------------------------
Gary Kieves
* Manager
--------------------------
James Plutt
By: /s/ James M. Harrison
--------------------------
James M. Harrison
Attorney-In-Fact
II-14
<PAGE>
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.
3.13 Amended Articles of Incorporation of Anagram
International, Inc. (incorporated by
reference to Exhibit 3.1 to the Company's
Current Report on 8-K filed September 25,
1998 (Commission File No. 000-21827)).
3.14 By-Laws of Anagram International, Inc.
(incorporated by reference to Exhibit 3.2 to
the Company's Current Report on 8-K filed
September 25, 1998 (Commission File No.
000-21827)).
3.15 Articles of Incorporation of Anagram
International Holdings, Inc. (incorporated
by reference to Exhibit 3.3 to the Company's
Current Report on 8-K filed September 25,
1998 (Commission File No. 000-21827)).
3.16 By-Laws of Anagram International Holdings,
Inc. (incorporated by reference to Exhibit
3.4 to the Company's Current Report on 8-K
filed September 25, 1998 (Commission File
No. 000-21827)).
3.17 Articles of Organization of Anagram
International LLC (incorporated by
reference to Exhibit 3.5 to the Company's
Current Report on 8-K dated September 24,
1998 (Commission File No. 000-21827)).
3.18 Operating Agreement of Anagram International
LLC (incorporated by reference to Exhibit
3.6 to the Company's Current Report on 8-K
filed September 25, 1998 (Commission File
No. 000-21827)).
3.19 Certificate of Formation of Anagram Eden
Prairie Property Holdings LLC (incorporated
by reference to Exhibit 3.7 to the Company's
Current Report on 8-K filed September 25,
1998 (Commission File No. 000-21827)).
*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.
4.2 Supplemental Indenture, dated as of
September 17, 1998, by and among Anagram
International, Inc., Anagram International
Holdings, Inc., Anagram International LLC
and Anagram Eden Prairie Property Holdings
LLC and IBJ Schroder Bank & Trust Company,
as Trustee (incorporated by reference to
Exhibit 4.1 to the Company's Current Report
on 8-K filed September 25, 1998
(Commission File No. 000-21827)).
4.3 Senior Subordinated Guarantee, dated as of
September 17, 1998, by Anagram
International, Inc., Anagram International
Holdings, Inc., Anagram International, LLC
and Anagram Eden Prairie Property Holdings
LLC (incorporated by reference to Exhibit
4.2 to the Company's Current Report on 8-K
filed September 25, 1998 (Commission File
No. 000-21827)).
*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.
<PAGE>
*10.2 Amended and Restated Revolving Loan Credit
Agreement, dated as of September 17, 1998,
among the Company, the financial
institutions parties thereto, Goldman, Sachs
Credit Partners L.P., as arranger and
syndication agent, and Fleet National Bank
as administrative agent (incorporated by
reference to Exhibit 10.1 to the Company's
Current Report on 8-K filed September 25,
1998 (Commission File No. 000-21827)).
*10.3 Amended and Restated AXEL Credit Agreement,
dated as of September 17, 1998, among the
Company, the financial institutions parties
thereto, Goldman, Sachs Credit Partners
L.P., as arranger and syndication agent, and
Fleet National Bank as administrative agent
(incorporated by reference to Exhibit 10.2
to the Company's Current Report on 8-K
filed September 25, 1998 (Commission File
No. 000-21827)).
*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 between the Company and Gerald
C. Rittenberg.
*10.6 Employment Agreement, dated as of August 10,
1997, by and between the Company and James
M. Harrison.
10.7 Employment Agreement, dated as of October 4,
1996, by and between the Company and William
S. Wilkey. (incorporated by reference to
Exhibit 10(e) to the Company's Registration
Statement on Form S-1 (File No. 333-14107))
10.8 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 applicable to the
Registration Statement filing.
24.2 Powers of Attorney additionally applicable
to the filing contained herein.
*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.
EXHIBIT 12.1
AMSCAN HOLDINGS, INC.
RATIO OF INCOME TO FIXED CHARGES
(Dollars in thousands, except ratio data)
<TABLE>
<CAPTION>
Transaction
Years Ended December 31, Pro Forma
-----------------------------------------------------------------------
1993 1994 1995 1996 1997 1997
-------- -------- --------- --------- ---------- ----------
Earnings:
<S> <C> <C> <C> <C> <C> <C>
Income (loss) before taxes and
minority interests $ 9,104 $10,591 $ 19,206 $ 5,732 $ 7,676 $ 11,285
Add: fixed charges 3,358 4,719 6,874 8,735 6,512 25,235
-------- -------- --------- -------- -------- --------
Earnings, as adjusted $12,462 $15,310 $ 26,080 $14,467 $14,188 $ 13,950
======== ======== ========= ======== ======== ========
Computation of fixed charges:
Interest expense $ 2,711 $ 3,971 $ 6,025 $ 6,968 $ 4,231 $ 22,954
Interest portion of rental
expense 647 748 849 1,767 2,281 2,281
-------- -------- --------- -------- -------- --------
Total fixed charges $ 3,358 $ 4,719 $ 6,874 $ 8,735 $ 6,512 $ 25,235
======== ======== ========= ======== ======== ========
Ratio of earnings to fixed charges 3.7x 3.2x 3.8x 1.7x 2.2x 0.6x
</TABLE>
<TABLE>
<CAPTION>
TRANSACTION
PRO FORMA
---------
TWELVE
MONTHS ENDED
SIX MONTHS ENDED JUNE 30, JUNE 30,
---------------------------- -------------
1997 1998 1998
------------ ------------ -------------
Earnings:
<S> <C> <C> <C>
Income (loss) before taxes and
minority interests $ 17,508 $ 3,985 $ (14,816)
Add: fixed charges 2,999 12,412 25,061
------------ ------------ -------------
Earnings, as adjusted $ 20,507 $ 16,397 $ 10,245
============ ============ =============
Computation of fixed charges:
Interest expense $ 1,931 $ 11,354 $ 22,789
Interest portion of rental expense 1,068 1,058 2,272
------------ ------------ -------------
Total fixed charges $ 2,999 $ 12,412 $ 25,061
============ ============ =============
Ratio of earnings to fixed charges 6.8x 1.3x 0.4x
</TABLE>
EXHIBIT 21.1
State or Other
Jurisdiction of
Incorporation or
Name, Address and Telephone Number Organization
---------------------------------- ------------
Amscan Inc..................................... New York
Trisar, Inc.................................... California
Am-Source, Inc................................. Rhode Island
SSY Realty Corp................................ New York
JCS Realty Corp................................ New York
Anagram International, Inc..................... Minnesota
Anagram International Holdings, Inc............ Minnesota
Anagram International, LLC..................... Nevada
Anagram Eden Prairie Property Holdings LLC..... Delaware
- --------
* The address of each of these subsidiaries is 80 Grasslands Road, Elmsford,
New York 10523. Their telephone number is (914) 345-2020.
EXHIBIT 23.1
Consent of Independent Auditors
-------------------------------
The Board of Directors and Stockholders
Amscan Holdings, Inc.
We consent to the use of our report dated February 13, 1998 on the consolidated
balance sheets of Amscan Holdings, Inc. as of December 31, 1997 and 1996 and the
consolidated statements of operations, stockholders' (deficit) equity, and cash
flows and the schedule-valuation and qualifying accounts, for the years ended
December 31, 1997, 1996 and 1995 included herein, and to the reference to our
firm under the heading "Experts" in the Registration Statement No. 333-45457 and
related prospectus.
/s/ KPMG Peat Marwick LLP
-------------------------
Stamford, Connecticut
September 28, 1998
EXHIBIT 24.2
ANAGRAM INTERNATIONAL, INC.
POWER OF ATTORNEY
Know all men by these presents, that each director and officer of Anagram
International, Inc. whose signature appears below constitutes and appoints James
M. Harrison, with full power to act, his true and lawful attorney-in-fact and
agent, with full and several power of substitution, for him and in his name,
place and stead, in any and all capacities, to sign any or all amendments,
including other post-effective amendments, and supplements to the post-effective
amendment to the registration statement on Form S-4 to be filed initially with
the Securities and Exchange Commission on or about September 30, 1998, and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and agent
or any of them, or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
Date: September 30, 1998
Name Title
/s/ Gerald C. Rittenberg Senior Vice President, Assistant Treasurer,
- --------------------------- Assistant Secretary and Director
Gerald C. Rittenberg
/s/ James M. Harrison Senior Vice President, Treasurer, Chief Financial
- --------------------------- Officer and Director
James M. Harrison
/s/ Michael A. Correale Vice President, Assistant Treasurer and Secretary
- ---------------------------
Michael A. Correale
<PAGE>
ANAGRAM INTERNATIONAL HOLDINGS, INC.
POWER OF ATTORNEY
Know all men by these presents, that each director and officer of Anagram
International Holdings, Inc. whose signature appears below constitutes and
appoints James M. Harrison, with full power to act, his true and lawful
attorney-in-fact and agent, with full and several power of substitution, for him
and in his name, place and stead, in any and all capacities, to sign any or all
amendments, including other post-effective amendments, and supplements to the
post-effective amendment to the registration statement on Form S-4 to be filed
initially with the Securities and Exchange Commission on or about September 30,
1998, and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and agent
or any of them, or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
Date: September 30, 1998
Name Title
/s/ Gerald C. Rittenberg President, Chief Executive Officer and Director
- ---------------------------
Gerald C. Rittenberg
/s/ James M. Harrison Senior Vice President, Chief Financial Officer,
- --------------------------- Treasurer and Director
James M. Harrison
/s/ Michael A. Correale Vice President, Assistant Treasurer and Secretary
- ---------------------------
Michael A. Correale
<PAGE>
ANAGRAM INTERNATIONAL, LLC
POWER OF ATTORNEY
Know all men by these presents, that each director and officer of Anagram
International, LLC whose signature appears below constitutes and appoints James
M. Harrison, with full power to act, his true and lawful attorney-in-fact and
agent, with full and several power of substitution, for him and in his name,
place and stead, in any and all capacities, to sign any or all amendments,
including other post-effective amendments, and supplements to the post-effective
amendment to the registration statement on Form S-4 to be filed initially with
the Securities and Exchange Commission on or about September 30, 1998, and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and agent
or any of them, or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
Date: September 30, 1998
Name Title
/s/ Gerald C. Rittenberg Manager
- ------------------------------
Gerald C. Rittenberg
/s/ James M. Harrison Manager
- ------------------------------
James M. Harrison
/s/ Michael A. Correale Manager
- ------------------------------
Michael A. Correale
<PAGE>
ANAGRAM EDEN PRAIRIE PROPERTY HOLDINGS, LLC
POWER OF ATTORNEY
Know all men by these presents, that each manager of Anagram Eden Prairie
Property Holdings, LLC whose signature appears below constitutes and appoints
James M. Harrison, with full power to act, his true and lawful attorney-in-fact
and agent, with full and several power of substitution, for him and in his name,
place and stead, in any and all capacities, to sign any or all amendments,
including other post-effective amendments, and supplements to the post-effective
amendment to the registration statement on Form S-4 to be filed initially with
the Securities and Exchange Commission on or about September 30, 1998, and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and agent
or any of them, or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
Date: September 30, 1998
Name Title
/s/ Gerald C. Rittenberg Senior Vice President, Assistant
- ------------------------------ Treasurer, Assistant Secretary and
Gerald C. Rittenberg Director of sole member
/s/ James M. Harrison Senior Vice President, Treasurer, Chief
- ------------------------------ Financial Officer and Director of sole
James M. Harrison member
/s/ Michael A. Correale Vice President, Assistant Treasurer,
- ------------------------------ Secretary and Director of sole member
Michael A. Correale
