Registration No. 333-68536
As filed with the Securities and Exchange Commission on November 21, 2001
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
--------
AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT
Under The Securities Act of 1933
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AMERICAN GREETINGS CORPORATION
(Exact name of registrant as specified in its charter)
Ohio 34-0065325
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One American Road, Ohio 44144 (216) 252-7300
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Jon Groetzinger, Jr.
Senior Vice President, General Counsel and Secretary
American Greetings Corporation
One American Road
Cleveland, Ohio 44144
(216) 252-7300
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copy to:
Stanley E. Everett
Brouse McDowell
500 First National Tower
Akron, Ohio 44114
(330) 535-5711
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this registration statement.
If the only 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.|_|
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering.|_| ________________
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.|_|_______________
THIS REGISTRATION STATEMENT SHALL HEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
THE PROVISIONS OF SECTION 8(a) OF THE SECURITIES ACT OF 1933.
The information in this prospectus is not complete and may be changed. These
securities may not be sold until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities, and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION DATED NOVEMBER 21, 2001
OFFER TO EXCHANGE
ALL OUTSTANDING
AMERICAN GREETINGS CORPORATION
11.75% SENIOR SUBORDINATED NOTES DUE 2008
($260,000,000 AGGREGATE PRINCIPAL AMOUNT)
FOR
AMERICAN GREETINGS CORPORATION
11.75% SENIOR SUBORDINATED NOTES DUE 2008
REGISTERED UNDER THE SECURITIES ACT OF 1933
TERMS OF EXCHANGE
o Expires 5:00 p.m., New York City time, December 26, 2001, unless extended
o Not subject to any condition other than that the exchange offer not violate
applicable law or any applicable interpretation of the Staff of the
Securities and Exchange Commission
o All outstanding notes that are validly tendered and not validly withdrawn
will be exchanged
o Tenders of outstanding notes may be withdrawn any time prior to 5:00 p.m. on
the business day prior to expiration of the exchange offer
o The exchange of notes will not be a taxable exchange for United States
federal income tax purposes
o American Greetings Corporation will not receive any proceeds from the
exchange offer
o The terms of the notes to be issued are substantially identical to the
outstanding notes, except for certain transfer restrictions and registration
rights relating to the outstanding notes
o The notes to be issued will not be listed on any securities exchange
CONSIDER CAREFULLY THE "RISK FACTORS" BEGINNING ON PAGE 10 OF THIS PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR
DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Prospectus dated , 2001.
This exchange offer is not being made to, nor will American Greetings
Corporation accept surrenders for exchange from, holders of outstanding notes in
any jurisdiction in which this exchange offer or the acceptance thereof would
not be in compliance with the securities or blue sky laws of such jurisdiction.
TABLE OF CONTENTS
Incorporation of Certain Documents by Reference..................................................................................2
Where You Can Find More Information..............................................................................................3
Summary..........................................................................................................................4
Selected Consolidated Financial Data.............................................................................................8
Risk Factors....................................................................................................................10
Caution Regarding Forward-looking Statements....................................................................................16
Exchange Offer..................................................................................................................17
Description of Notes............................................................................................................23
Certain United States Federal Income Tax Considerations.........................................................................59
Plan of Distribution............................................................................................................63
Legal Matters...................................................................................................................64
Experts.........................................................................................................................64
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Securities and Exchange Commission (the "Commission") allows the Company to
"incorporate" into this prospectus information that it files with the Commission
in other documents. This means that the Company can disclose to you important
business and financial information that is not included with the prospectus by
referring to other documents that contain that information. The information
incorporated by reference is considered to be part of this prospectus.
Information contained in this prospectus and information that the Company files
with the Commission in the future and incorporates by reference in this
prospectus automatically updates and supersedes previously filed information.
The Company incorporates by reference the documents listed below and any future
filings it makes with the Commission under Sections 13(a), 13(c), 14 or 15(d) of
the Securities Exchange Act of 1934 (the "Exchange Act"), prior to the sale of
all the notes covered by this prospectus: (a) its Annual Report on Form 10-K for
the fiscal year ended February 28, 2001; (b) its Form 10-Q for the fiscal
quarters ended May 31, 2001 and August 31, 2001; (c) its Form 8-K dated
September 12, 2001 and the related Form 8-K/A filed with the Commission on
November 21, 2001; (d) the description of its capital contained in its
registration statement on Form 8-A filed with the Commission on February 6,
1998, including any amendments or reports filed for the purpose of updating that
description; and (e) all its other filings with the Commission pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of
this prospectus and prior to the termination of the offering.
UPON REQUEST. YOU MAY OBTAIN WITHOUT CHARGE COPIES OF ANY OR ALL OF THESE
DOCUMENTS, INCLUDING EXHIBITS. TO ENSURE TIMELY DELIVERY, YOUR REQUEST, WHICH
MAY BE ORAL OR IN WRITING, MUST BE RECEIVED BY THE COMPANY NO LATER THAN
DECEMBER 18, 2001, THE DATE THAT IS FIVE (5) BUSINESS DAYS BEFORE THE DATE YOU
MUST MAKE YOUR INVESTMENT DECISION. PLEASE MAKE YOUR REQUEST TO JON GROETZINGER,
JR., SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY, AMERICAN GREETINGS
CORPORATION, ONE AMERICAN ROAD, CLEVELAND, OHIO 44144; TELEPHONE (216) 252-
7300.
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WHERE YOU CAN FIND MORE INFORMATION
The Company is subject to the informational requirements of the Exchange Act,
and, accordingly, files reports, proxy statements and other information with the
Commission. You may read and copy any document the Company has filed at the
Commission's public reference room at Judiciary Plaza Building, 450 Fifth
Street, N.W., Washington, D.C. 20549. You should call 1-800-SEC-0330 for more
information on the public reference room. The Commission maintains an Internet
site that contains reports, proxy and information statements and other
information about issuers that file electronically with the Commission. The
address of the Commission's Internet site is http://www.sec.gov. This prospectus
is part of a registration statement that the Company filed with the Commission.
The registration statement contains more information than this prospectus
regarding the Company, the notes and the Company's capital stock, including
certain exhibits and schedules. You can obtain a copy of the registration
statement from the Commission at the address listed above or from the
Commission's Internet site.
3
SUMMARY
This summary highlights the key information contained in this prospectus.
Because it is a summary, it does not contain all the information that may be
important to you. You should read carefully this entire prospectus. In
particular, you should read the section titled "Risk Factors" and the financial
statements and the notes relating to those statements included in or
incorporated into this prospectus. The Company's fiscal year ends on February 28
or 29. References to a particular fiscal year refer to the fiscal year ending in
February of that year. For example, fiscal 2001 refers to the year ended
February 28, 2001. The term "you" refers to a holder of the outstanding notes
issued on June 29, 2001 or to a prospective purchaser of the registered notes
offered hereby, or both, as the context requires. The Company's website is
located at www.americangreetings.com. Information contained on the Company's
website does not constitute, and shall not be deemed to constitute, part of this
prospectus.
THE COMPANY
Founded in 1906, the Company is the second largest greeting card company in the
world with approximately 39% market share of the $7 billion U.S. greeting card
industry. It creates, manufactures and distributes greeting cards, gift wrap,
party goods, calendars, candles, balloons, stationery, non-prescription reading
glasses and educational products. The Company sells its products internationally
in more than 70 countries through its wholly owned subsidiaries and licensees.
It offers online greeting cards through its subsidiary AmericanGreetings.com.
The contribution of each major product category as a percentage of fiscal 2001
net sales was: everyday greeting cards (42%), seasonal greeting cards (20%),
gift wrap and wrap accessories (16%) and other products (22%). For fiscal 2001,
the Company had net sales of $2.5 billion and Adjusted EBITDA of $260.1 million.
"Adjusted EBITDA" represents earnings before non-recurring items, interest
expense, income taxes, other expense (income)-net and depreciation and
amortization. Adjusted EBITDA is presented because it is a widely accepted
financial indicator of a company's ability to incur and service debt. Adjusted
EBITDA does not represent net income or cash flows from operations as those
terms are defined in generally accepted accounting principles, or GAAP, and it
does not necessarily indicate whether cash flows will be sufficient to fund cash
needs. Included in other expense (income)-net and in depreciation and
amortization is goodwill amortization of $8,723,000 for fiscal 2001.
RECENT DEVELOPMENTS
On September 12, 2001, Brewers Acquisition, Inc. ("Purchaser"), a wholly-owned
subsidiary of AmericanGreetings.com, Inc. ("AmericanGreetings.com"), acquired
the BlueMountain.com division ("BlueMountain.com") of At Home Corporation
("Excite@Home"). AmericanGreetings.com is a subsidiary of the Company. The
transaction was structured as a merger of a subsidiary of Excite@Home, EGCB,
Inc. ("EGCB"), into the Purchaser, pursuant to which the Purchaser acquired
substantially all of the assets and assumed certain liabilities associated with
BlueMountain.com in consideration for a purchase price of $35 million in cash,
subject to post-closing adjustments. The Company funded the transaction from
available cash at the date of acquisition.
BlueMountain.com is an electronic greeting card publisher that offers free
animated and musical greeting cards that consumers can email to users of the
Internet. The BlueMountain.com website, www.bluemountain.com, offers thousands
of cards in nine languages as well as a variety of e-commerce gift offerings,
such as flowers, chocolates and gift baskets. AmericanGreetings.com presently
intends to operate BlueMountain.com as a subsidiary under the name EGCB.
However, AmericanGreetings.com will conduct a further review of BlueMountain.com
and its assets, corporate structure, capitalization, operations, properties,
policies, management and personnel. After such review, AmericanGreetings.com
will determine what changes, if any, would be desirable in light of the
circumstances that then exist.
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EXECUTIVE OFFICES
The address of the Company's principal executive offices is One American Road,
Cleveland, Ohio, 44144-2398, and its telephone number is (216) 252-7300.
THE EXCHANGE OFFER
On June 29, 2001, the Company completed the private offering of $260 million of
its 11.75% Notes due 2008. The Company entered into an exchange and registration
rights agreement with the initial purchasers in the private offering in which it
agreed, among other things, to deliver this prospectus to you and to complete
the exchange offer within 150 days of the issuance of the outstanding notes. In
the exchange offer, you are entitled to exchange your outstanding notes for
registered notes with substantially identical terms. If the exchange offer is
not completed by December 26, 2001, the interest rates on the outstanding notes
will be increased by 0.25% through March 27, 2002 and by an additional 0.25%
thereafter, until the exchange offer is completed. You should read the
discussion under the headings "Exchange Offer" at page 17 and "Description of
Notes" at page 23 for further information regarding the registered notes.
The Company believes the registered notes issued in the exchange offer may be
resold by you without compliance with the registration and prospectus delivery
provisions of the Securities Act, subject to certain conditions. You should read
the discussion under the headings "Exchange Offer" at page 17 and "Plan of
Distribution" at page 63 for further information regarding the exchange offer
and resale of the registered notes.
SUMMARY DESCRIPTION OF THE TERMS OF THE NOTES
Issuer American Greetings Corporation
Securities Offered $260 million aggregate principal amount of 11.75% Notes due 2008
Maturity Date July 15, 2008
Interest Payment Dates January 15 and July 15 of each year, commencing January 15, 2002
Denominations The notes issued in the exchange offer will be issued in minimum initial purchase
amounts of $1,000 and integral multiples of $1,000 thereafter.
Global Note;
Book-entry System The notes are issued in book-entry form, registered in the name of DTC or its
nominee. Purchasers do not receive individually certificated notes. Instead, the
notes are evidenced by a global note, in fully registered form and without coupons
in minimum denominations of $1,000, and deposited with the trustee, as custodian
for DTC The interest of any holder in the global note will be shown on, and
transfers of that interest will be affected only through, records maintained by
DTC and its direct and indirect participants. See "Description of Notes-- Book-
Entry, Delivery and Form" at page 42 and "--Certain Book-Entry Procedures
for the Global Notes" at page 42.
Optional Redemption The Company may redeem the notes, in whole or in part, at any time beginning
July 15, 2005, at the redemption prices listed under "Description of Notes--
Optional Redemption." Before July 15, 2004, the Company may redeem up to
35% of the notes issued under the indenture with the proceeds of one or more
offerings of certain equity securities by the Company at the price listed under
"Description of Notes - Optional Redemption" at page 26.
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Sinking Fund None
Ranking The notes are subordinated to the Company's Senior Indebtedness, as that term
is defined in "Description of Notes--Subordination" at page 24. The notes also
are effectively subordinated in right of payment to all indebtedness and other
liabilities of the Company's subsidiaries. As of September 30, 2001, the
Company had outstanding Senior Indebtedness of approximately $616.4 million
and its subsidiaries had approximately $204.7 million of indebtedness and
other liabilities outstanding (including trade payables). The indenture under which
the notes were issued does not restrict the incurrence of Senior Indebtedness or
any other indebtedness, by the Company or any of its subsidiaries. See
"Description of Notes-- Subordination" at page 24.
Registration Covenant Under the exchange and registration rights agreement executed as part of the
offering of the outstanding notes, the Company agreed to complete the exchange
offer within 30 days after the effective date of its registration statement; and to
use its best efforts to cause to become effective a shelf registration statement for
the resale of the notes if applicable law or interpretations of the staff of the
Commission are changed such that the notes to be received in the exchange offer
are not transferable without restriction under the Securities Act, or if the
exchange offer has not been completed within 180 days following the issue date
of the outstanding notes, or if the exchange offer is not available to all holders of
the outstanding notes. The interest rate on the notes will increase if the Company
does not comply with certain of its obligations under the exchange and registration
rights agreement. See "Exchange Offer - Special Interest" at page 17.
Repurchase If the Company experiences a specified change in control, a holder of notes will
have the right, subject to certain conditions and restrictions, to require the
Company to repurchase, with cash or stock, some or all of the notes at a price
equal to 100% of the principal amount plus accrued and unpaid interest to the
repurchase date. The repurchase price is payable in cash or, at the Company's
option and subject to the satisfaction of certain conditions, in Class A Common
Shares. If the Company pays the repurchase price in Class A Common Shares,
the shares will be valued at 95% of the average closing sales prices of the Class
A Common Shares for the five trading days preceding and including the third
trading day prior to the repurchase date. See "Description of Notes-- Repurchase
at Option of Holders Upon a Change of Control" at page 26.
Events of default Events of default include:
o failure to pay principal of or premium, if any, on any of the notes when due;
o failure to pay interest on any of the notes within 30 days after payment
becomes due, whether or not such payment is prohibited by the provisions of
the indenture;
o failure to perform or comply with certain covenants in the indenture with
respect to the notes, and such failure is not cured within 60 days after the
Company is given written notice of such failure;
o failure by the Company or any of its subsidiaries to pay when due
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(either at final maturity or upon acceleration of the due
date), more than $20 million of indebtedness for money borrowed,
and such indebtedness is not discharged, or such acceleration
is not rescinded or annulled, within 60 days after the Company
receives written notice of such failure;
o certain events of bankruptcy, insolvency or reorganization of the
Company; and
o failure to provide the required notice of any change in control
or to pay the repurchase price in connection with a change in
control, whether or not the notice is prohibited by the
subordination provisions of the indenture.
Trading The notes currently are designated for trading in the Private
Offerings, Resale and Trading through Automatic Linkages
(PORTAL) Market of the National Association of Securities Dealers,
Inc. The Company's Class A Common Shares trade on the New York Stock
Exchange under the symbol "AM."
Governing law The indenture and the notes are governed by the laws of the State of
New York.
Risk Factors For a description of some of the risks you should carefully consider
before buying the notes, see "Risk Factors" beginning on page 10 of
this prospectus.
Ratio of Earnings to Fixed Charges
Six Months
Ended August 31, Year Ended February 28 or 29,
2000 2001 1997 1998 1999 2000 2001
1.1x - 6.3x 8.2x 6.9x 3.7x 2.3x
The amount of the deficiency for the first six months
of fiscal 2002 was $140,027,000. The ratio of
earnings to fixed charges is computed by dividing
fixed charges into earnings plus fixed charges. For
purposes of determining this ratio, earnings
represent earnings before income taxes and the
cumulative effect of accounting change. Fixed charges
consist of interest expense and the estimated
interest component of rent expense.
7
SELECTED CONSOLIDATED FINANCIAL DATA
The following tables set forth certain selected consolidated financial data of
the Company and the ratio of earnings to fixed charges for, and as of the end
of, each of the five fiscal years ended February 28, 2001. The selected
consolidated financial data for the five fiscal years ended February 28, 2001
has been derived from the consolidated financial statements of the Company,
which statements have been audited by Ernst & Young LLP, independent auditors.
The data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," as set forth in the
Company's Form 10-K for fiscal 2001 and its Form 10-Q for its fiscal quarter
ended May 31, 2001. These documents have been filed with the Commission. See
"Where You Can Get More Information" at page 3. The data for the periods
presented are not necessarily comparable because of acquisitions throughout
these periods.
FISCAL YEAR ENDED FEBRUARY 28 OR 29
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
1997 1998 1999 2000 2001
------------- ------------- ------------- ------------- ------------
STATEMENT OF OPERATIONS:
Net sales.............................. $2,161,089 $2,198,765 $2,205,706 $2,175,236 $2,518,814
Material, labor and other
production costs................ 805,124 790,688 757,080 809,347 999,271
----------- ----------- ----------- ----------- -----------
Gross profit........................ 1,355,965 1,408,077 1,448,626 1,365,889 1,519,543
Selling, distribution and
marketing...................... 839,916 876,822 894,323 921,392 1,068,543
Administrative and general.......... 234,838 233,457 228,183 227,075 280,202
Non-recurring items................. ---- (22,125) 13,925 38,873 ----
Interest............................ 30,749 22,992 29,326 34,255 55,387
Other expenses (income)-- net (3,868) 4,494 1,272 3,670 16,778
------------ ------------ ------------ ------------ ------------
Income before income taxes and
cumulative effect of accounting
change.............................. 254,330 292,437 281,597 140,624 98,633
Income taxes...................... 87,235 102,353 101,375 50,625 191,306
------------ ----------- ----------- ----------- -----------
Income (loss) before cumulative
effect of accounting change......... 167,095 190,084 180,222 89,999 (92,673)
Cumulative effect of accounting
change, net of tax.............. ---- ---- ---- ---- (21,14
Net Income (loss)...................... $ 167,095 $ 190,084 $ 180,222 $ 89,999 $ (113,814)
=========== =========== =========== =========== ===========
Earnings per Share..................... $2.23 $2.58 $2.56 $1.37 $(1.79)
Earning per Share ---- assuming
dilution............................ $2.22 $2.55 $2.53 $1.37 $(1.79)
Weighted average number of
shares outstanding (thousands) 74,819 73,708 70,346 65,592 63,646
Weighted average number of
shares outstanding
(thousands) ---- assuming
dilution............................ 75,326 74,546 71,104 65,592 63,646
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Other Data:
Cash flows provided (used) by:
Operating activities.................. $ 153,903 $ 195,192 $ 211,268 $ 168,519 $ 109,800
Investing activities:
Property, plant and
equipment additions............ (92,895) (67,898) (60,950) (50,753) (74,382)
Other investing activities.......... (12,158) 79,847 (23,982 (86,894) (123,574)
------------ ----------- ----------- ------------ ------------
Total investing activities........... (105,053) 11,949 (84,932) (137,647) (197,956)
Adjusted EBITDA(1)..................... 346,895 364,313 394,261 287,992 260,132
Adjusted EBITDA margin on net
sales.................................. 16.1% 16.6% 17.9% 13.2% 10.3%
Depreciation and amortization.......... $ 70,611 $ 72,225 $ 74,783 $ 76,600 $ 98,057
Total debt to Adjusted EBITDA.......... 1.0X 1.0X 1.2X 1.9X 2.9x
Adjusted EBITDA to interest 11.3X 15.8X 13.4X 8.4X 4.7x
expense................................
Ratio of earnings to fixed
charges(2).......................... 6.3X 8.2X 6.9X 3.7X 2.3x
BALANCE SHEET DATA:
Working capital........................ $ 562,148 $ 506,029 $ 728,144 $ 518,196 $ 94,455
Net PP&E............................... 462,787 447,632 434,806 447,415 477,188
Total assets........................... 2,135,120 2,161,464 2,419,328 2,517,983 2,712,074
Short-term debt........................ 133,171 199,640 17,777 109,694 378,904
Long-term debt......................... 219,639 148,800 463,246 442,102 380,124
Shareholders' equity................... 1,361,655 1,345,217 1,346,611 1,252,411 1,047,190
Percentage of total debt to
capitalization...................... 20.6% 20.6% 26.3% 30.6% 42.0%
(1) Adjusted EBITDA represents earnings before non-recurring items,
interest expense, income taxes, other expense (income)-net and
depreciation and amortization. Adjusted EBITDA is presented because it
is a widely accepted financial indicator of a company's ability to
incur and service debt. Adjusted EBITDA does not represent net income
or cash flows from operations as those terms are defined in generally
accepted accounting principles, or GAAP, and does not necessarily
indicate whether cash flows will be sufficient to fund cash needs.
Included in other expense (income)-net and in depreciation and
amortization is goodwill amortization of $4,927, $5,710, $6,642, $6,030
and $8,723 for fiscal years 1997 through 2001, respectively.
(2) The ratio of earnings to fixed charges is computed by dividing fixed
charges into earnings plus fixed charges. For purposes of determining
this ratio, earnings have been calculated by adding income before
income taxes and the cumulative effect of accounting change. Fixed
charge consist of interest expense and the estimated interest component
of rent expense.
9
RISK FACTORS
An investment in the notes involves significant risk. You should carefully
consider the following risk factors and the other information set forth in this
prospectus before deciding to purchase any notes.
RISKS RELATING TO THE OFFERING
THE COMPANY'S SUBSTANTIAL LEVERAGE COULD ADVERSELY AFFECT ITS FINANCIAL
CONDITION AND PREVENT IT FROM FULFILLING ITS OBLIGATIONS UNDER THE NOTES.
The Company is highly leveraged. On September 30, 2001, it had total
indebtedness of approximately $968 million and shareholders' equity of
approximately one billion. The Company and its subsidiaries will be permitted
to incur additional indebtedness in the future. See "Description of Notes" at
page 23. In addition, the Company may incur substantial further indebtedness
under any new credit facilities into which it may enter. Its ability to make
scheduled payments of principal of, or to pay interest on, or to refinance, its
indebtedness (including the notes), or to fund planned capital expenditures will
depend on its future operating performance, which, to a certain extent, is
subject to general economic, financial, competitive, legislative, regulatory and
other factors that are beyond the Company's control. Based upon the Company's
current level of operations, management believes that cash flow from operations
and available cash, together with available borrowings under credit facilities,
will be adequate to meet currently anticipated funding requirements. Management
cannot assure you that the Company will have adequate liquidity to fund its
ongoing cash needs, and the Company may need to refinance all or a portion of
the principal of the notes on or prior to maturity. There can be no assurance
that the Company's business will generate sufficient cash flow from operations,
or that future borrowings will be available under existing credit facilities in
an amount sufficient to enable it to service its indebtedness, including the
notes, or to fund its other liquidity needs. In addition, there can be no
assurance that the Company will be able to effect any refinancing on
commercially reasonable terms or at all. The degree to which the Company will be
leveraged could have important consequences to holders of the notes, including,
but not limited to:
o making it more difficult for the Company to satisfy its obligations with
respect to the notes;
o increasing the Company's vulnerability to general adverse economic and
industry conditions;
o limiting the Company's ability to obtain additional financing to fund
future working capital, capital expenditures and other general corporate
requirements;
o requiring the dedication of a substantial portion of the Company's cash
flow from operations to the payment of principal of, and interest on, its
indebtedness, thereby reducing the availability of such cash flow to fund
working capital, capital expenditures, research and development or other
general corporate purposes; and
o limiting the Company's flexibility in planning for, or reacting to, changes in
its business and the industry.
In addition, the indenture contains financial and other restrictive covenants
that limit the Company's ability to, among other things, borrow additional
funds. Failure by the Company to comply with such covenants could result in an
event of default which, if not cured or waived, could have a material adverse
effect on the Company. See "Description of Notes" at page 23.
THE NOTES ARE JUNIOR TO THE COMPANY'S SENIOR DEBT.
The notes are subordinated in right of payment to all the Company's current and
future senior debt. Upon any distribution to the Company's creditors in a
liquidation or dissolution, the holders of senior debt are entitled to be paid
in full before any payment may be made with respect to the notes. In addition,
the subordination provisions of the indenture provide that payments with respect
to the notes are blocked in the event of a payment default on senior debt
10
and may be blocked for up to 179 days each year in the event of certain
non-payment defaults on senior debt. In the event of the Company's bankruptcy,
liquidation or reorganization, holders of the notes will participate ratably
with all holders of subordinated indebtedness that is deemed to be of the same
class as the notes and potentially with all other general creditors, based upon
the respective amounts owed to each holder or creditor, in the Company's
remaining assets. In any of the foregoing events, there can be no assurance that
there would be sufficient assets to pay amounts due on the notes. As a result,
holders of notes may receive less, ratably, than the holders of senior debt. In
addition, under the subordination provisions of the indenture, payments that
would otherwise be made to holders of the notes will instead be paid to holders
of senior debt under certain circumstances. As a result of these provisions,
other creditors (including trade creditors) that are not holders of senior debt
may recover more, ratably, than holders of the notes. In addition, the notes
will be effectively subordinated to all outstanding obligations of any of the
Company's subsidiaries. As of September 30, 2001, the Company had $616.4
million of senior debt outstanding and its subsidiaries had $204.7 million of
outstanding debt and other liabilities (including trade payables). In addition,
the Company is able to incur a significant amount of additional senior
indebtedness under its existing credit facilities. The indenture also permits
the incurrence of substantial additional indebtedness, including senior debt, by
the Company and its subsidiaries in the future. See "Outstanding Indebtedness"
at page 22.
THE NOTES ARE EFFECTIVELY SUBORDINATED TO THE DEBT OF THE COMPANY'S
SUBSIDIARIES.
The Company derives much of its revenue from its subsidiaries. The indenture
governing the notes permits the incurrence of substantial additional
indebtedness by the Company and its subsidiaries, and it does not require the
Company's subsidiaries to guarantee the notes. In the event of a bankruptcy,
liquidation or reorganization of a subsidiary, holders of any of such
subsidiary's indebtedness will have a claim to the assets of the subsidiary that
is prior to the Company's interest in those assets. As of September 30,
2001, the aggregate amount of indebtedness and other liabilities of the
Company's subsidiaries (including trade payables) was approximately $204.7
million. If any subsidiary indebtedness were to be accelerated, there can be no
assurance that the assets of such subsidiary would be sufficient to repay such
indebtedness or that the Company's assets and the assets of its other
subsidiaries would be sufficient to repay in full its indebtedness, including
the notes. See "Outstanding Indebtedness" at page 22.
THE COMPANY MAY NOT HAVE THE ABILITY TO RAISE THE FUNDS NECESSARY TO FINANCE ANY
CHANGE OF CONTROL OFFER REQUIRED BY THE INDENTURE.
Upon a change of control, the Company will be required to offer to repurchase
all outstanding notes at 100% of the principal amount thereof plus accrued and
unpaid interest to the date of repurchase. However, there can be no assurance
that sufficient funds will be available at the time of any change of control to
make any required repurchases of notes tendered or that restrictions in its
credit facilities will allow the Company to make such required repurchases.
Notwithstanding these provisions, the Company could enter into certain
transactions, including certain recapitalizations, that would not constitute a
change of control but would increase the amount of debt outstanding at such
time. See "Description of Notes -- Repurchase at Option of Holders Upon a Change
in Control" at page 26.
NO PUBLIC MARKET EXISTS FOR THE NOTES, AND THE PRICE OF THE NOTES MAY BE
VOLATILE.
There is no existing market for the notes and, although the notes are eligible
for trading in PORTAL, there can be no assurance as to the liquidity of any
markets that may develop for the notes, the ability of holders of the notes to
sell their notes or the prices at which holders would be able to sell their
notes. Future trading prices of the notes will depend on many factors,
including, among other things, prevailing interest rates, the Company's
operating results and the market for similar securities. In addition, if the
Company or its securities are downgraded by any rating agency, the trading price
of the notes may decrease. The initial purchasers have advised the Company that
they intend to make a market in the notes offered hereby. However, they are not
obligated to do so, and any market making may be discontinued at any time
without notice. The Company does not intend to apply for listing of the notes on
any securities exchange.
11
FEDERAL AND STATE LAWS PERMIT A COURT TO VOID THE NOTES UNDER CERTAIN
CIRCUMSTANCES.
Under applicable provisions of federal bankruptcy law or comparable provisions
of state fraudulent transfer law, if, among other things, the Company, at the
time it incurred the indebtedness evidenced by the notes, (1) (a) was or is
insolvent or rendered insolvent by reason of such occurrence or (b) was or is
engaged in a business or transaction for which the assets remaining with the
Company constituted unreasonably small capital or (c) intended or intends to
incur, or believed or believes it would incur, debts beyond its ability to pay
such debts as they mature, and (2) the Company received or receives less than
reasonably equivalent value or fair consideration for the incurrence of such
indebtedness, then the notes could be voided, or claims in respect of the notes
could be subordinated to all the Company's other debts. In addition, the payment
of interest and principal by the Company pursuant to the notes could be voided
and required to be returned to the person making such payment, or to a fund for
the benefit of the Company's creditors. The measures of insolvency for purposes
of the foregoing considerations will vary depending upon the law applied in any
proceeding. Generally, however, the Company would be considered insolvent if:
o the sum of its debts, including contingent liabilities, were greater than
the saleable value of all of its assets at a fair valuation or if the
present fair saleable value of its assets were less than the amount that
would be required to pay its probable liability on its existing debts,
including contingent liabilities, as they become absolute and mature; or
o the Company could not pay its debts as they become due.
On the basis of historical financial information, recent operating history and
other factors, management believes the Company will not be insolvent, will not
have unreasonably small capital for the business in which it is engaged and will
not incur debts beyond its ability to pay such debts as they mature. There can
be no assurance, however, as to what standard a court would apply in making such
determination or that a court would agree with the Company's conclusions in this
regard.
RISKS RELATING TO THE COMPANY'S BUSINESS
THE COMPANY CANNOT ASSURE YOU THAT IT WILL HAVE ADEQUATE LIQUIDITY TO FUND ITS
ONGOING CASH NEEDS.
Over the next twelve months, the Company will face significant capital
requirements in order to fund its restructuring program, its negotiated contract
with a major mass merchandiser, and its seasonal working capital needs. In
addition, the Company may have additional funding needs during or after that
period that are not currently anticipated. There can be no assurance that
additional financing will be available to the Company or, if available, that it
can be obtained on terms acceptable to management or within limitations that are
contained in the Company's current or future financing arrangements. Failure to
obtain any necessary additional financing could result in the delay or
abandonment of some or all of the Company's restructuring plans, negatively
impact its ability to make capital expenditures and result in its failure to
meet its obligations.
In addition, from 1992 to 1999, the Company took certain tax deductions related
to its corporate-owned life insurance programs (COLI). Recently, a federal tax
decision unfavorable to another corporation for a similar COLI issue was
published. As a result, the Company recorded a non-cash charge of approximately
$143 million in the fourth quarter of 2001, which amount represents the effect
of assessments by the Internal Revenue Service for the disallowance of certain
deductions related to this insurance program. Although management believes that
in the event of a proceeding against the Company, it would actively defend
itself and believes the Company could distinguish certain of its COLI plans from
those addressed in the prior litigation, there can be no assurance that the
Company would be successful, and the Company could be required to pay the amount
of its recorded charge to the Internal Revenue Service. In this event, the
Company would require additional financing to provide the cash for such a
payment. There can be no assurance that additional financing will be available
to the Company or, if available, that it can be obtained on terms acceptable to
the Company or within limitations that are contained in its current or future
financing arrangements.
12
THE COMPANY CANNOT ASSURE YOU THAT IT WILL BE ABLE TO IMPLEMENT ITS PROPOSED
COST SAVINGS INITIATIVES OR THAT THOSE INITIATIVES WILL PRODUCE THE ANTICIPATED
POSITIVE EFFECTS.
In November 2000, management announced that the Company would undertake a review
of its operations, focusing on process improvements. In March 2001, the Company
devised a restructuring plan for its core greeting card business that is
expected to improve efficiency and reduce costs. The restructuring plan includes
a rationalization process, a product line size reduction program, the
consolidation of its facilities and workforce reduction of approximately 1,500
employees, or approximately 13% of its current full-time workforce. The
reorganization is expected to result in a pre- tax charge of between $200
million and $220 million in fiscal 2002. Although management believes the
implementation of the restructuring is feasible on the schedule currently
contemplated, the Company may encounter unanticipated difficulties. There can be
no assurance that the anticipated cost savings will be realized as a result of
the implementation of the restructuring plan. In addition, several large
retailers, two of which together represented approximately 15% of the Company's
sales in fiscal 2001, have encouraged the Company to implement scan-based
trading, which is a form of consignment selling in which inventory is held on
the Company's books, instead of the books of its retailers, until an actual sale
to a consumer occurs. The Company is in the process of implementing scan- based
trading with certain retailers, and it expects this implementation to result in
a one-time pre-tax charge of between $80 and $90 million in fiscal 2002, and it
anticipates the effects on the Company to be an ongoing reduction in working
capital, maximization of retail productivity and throughput, reduced costs and
enhanced retailer relationships. However, there can be no assurance that the
expected benefits of scan-based trading will be realized.
THE COMPANY HAS A HISTORY OF LOSSES AND MAY NOT BE PROFITABLE IN THE FUTURE.
The Company experienced a loss in fiscal 2001 and may incur additional losses in
the future. The Company has and will continue to have a substantial amount of
interest expense in respect of debt incurred and depreciation and amortization
expenses relating to its recent acquisitions as well as to its fiscal 2002
restructuring program. Such expenses have contributed to the net losses the
Company experienced. Management expects that the Company will continue to incur
such non-operating expenses at increased levels as a result of scan-based
trading, the restructuring program and a change in the contractual relationship
with a partner of the Company's Internet unit.
THE COMPANY RELIES ON A FEW LARGE CUSTOMERS FOR A SIGNIFICANT PORTION OF ITS
SALES.
A few of the Company's customers are material to its business and operations. In
both fiscal 2000 and fiscal 2001, the Company's largest customer, Wal-Mart
Stores, Inc., represented approximately 10% of its consolidated net sales.
Aggregate consolidated net sales to its five largest customers represented
approximately 29% of its total consolidated net sales in fiscal 2001. There can
be no assurance that these large customers will continue to purchase the
Company's products in historical quantities. The loss of sales to one of its
large customers could materially adversely affect the Company, its operating
results, its financial condition and its prospects.
13
DIFFICULTIES IN INTEGRATING POTENTIAL ACQUISITIONS COULD ADVERSELY AFFECT THE
COMPANY'S BUSINESS.
The Company regularly evaluates potential acquisition opportunities to support
and strengthen its business. The Company cannot be sure that it will be able to
locate suitable acquisition candidates, acquire candidates on acceptable terms
or integrate acquired businesses successfully. Future acquisitions may require
the Company to incur additional debt and contingent liabilities, which may
materially and adversely affect its business, operating results and financial
condition. Furthermore, the process of integrating acquired businesses
effectively involves the following risks:
o assimilating operations and products may be unexpectedly difficult;
o management's attention may be diverted from other business concerns;
o the Company may enter markets in which it has limited or no direct
experience; and
o the Company may lose key employees of an acquired business.
The Company does not currently have any material agreements relating to proposed
or pending acquisitions or joint ventures.
THE COMPANY'S OPERATING RESULTS MAY FLUCTUATE ON A SEASONAL BASIS.
The greeting card business is a seasonal business based on holidays, with
results of operations for the first, second and fourth fiscal quarters generally
being lower than those of the third fiscal quarter. Consequently, the Company's
overall operating results in the future may fluctuate substantially based on
seasonal demand for its products. Such variations in demand could have a
material adverse effect on the timing of its cash flows and therefore its
ability to service its obligations with respect to the notes.
THE COMPANY OPERATES IN AN EXTREMELY COMPETITIVE MARKET, AND ITS BUSINESS WILL
SUFFER IF IT IS UNABLE TO COMPETE EFFECTIVELY.
The Company operates in a highly competitive industry. The greeting card
business is extremely concentrated, and the Company is one of only two main
competitors, which together encompass over 75% of the overall market. The
Company's main competitor may have substantially greater financial, technical or
marketing resources, a greater customer base, stronger name recognition and a
lower cost of funds than the Company has, and that competitor also has
longstanding relationships with certain large customers to which it may offer
products not provided by the Company, which may put the Company at a competitive
disadvantage. As a result, this competitor or others may be able to:
o adapt to changes in customer requirements more quickly;
o take advantage of acquisition and other opportunities more readily; and
o devote greater resources to the marketing and sale of its products and adopt
more aggressive pricing policies than the Company.
There can be no assurance that the Company will be able to continue to compete
successfully in this market or against such competition. If the Company is
unable to introduce new and innovative products that are attractive to its
customers, or is unable to allocate sufficient resources to effectively market
and advertise its products so that they achieve widespread market acceptance,
the Company may not be able to compete effectively, and its operating results
and financial condition will be adversely affected.
14
THE COMPANY MAY BE ADVERSELY AFFECTED BY RETAIL TRENDS AND VOLATILITY.
The Company's business and that of most of its customers is cyclical and has
historically experienced periodic downturns in direct relation to general
economic downturns. A downturn in the economy may affect consumer purchases of
discretionary items, which could adversely affect the Company's sales. The
Company's success depends on the sustained demand for its products. Many factors
affect the level of consumer spending on the Company's products, including,
among others, general business conditions, interest rates, the availability of
consumer credit, taxation and consumer confidence in future economic conditions.
Consumer purchases of discretionary items, such as the Company's products, tend
to decline during recessionary periods when disposable income is lower. These
downturns have been characterized by diminished product demand and subsequent
accelerated erosion of average selling prices. A general slowdown in the
economies in which the Company sells its products or even an uncertain economic
outlook could adversely affect consumer spending on the Company's products and,
in turn, its sales and results of operations. With the growing trend toward
towards retail trade consolidation, the Company is increasingly dependent upon a
reduced number of key retailers whose bargaining strength is growing. The
Company may be negatively affected by changes in the policies of its retail
trade customers, such as inventory de-stocking, limitations on access to shelf
space, scan-based trading and other conditions. Increased consolidations in the
retail industry could result in price and other competition that could damage
the Company's business.
TWO SIGNIFICANT STOCKHOLDER GROUPS CONTROL A SUBSTANTIAL PORTION OF THE
COMPANY'S OUTSTANDING CAPITAL STOCK.
As of September 30, 2001, two significant stockholder groups
beneficially owned approximately 52% in the aggregate of the Company's
outstanding Class B Common Shares. Class A Common Shares are entitled to one
vote per share, and Class B Common Shares are entitled to ten votes per share.
Accordingly, holders of Class B Common Shares, as a group, will be able to
significantly influence the outcome of stockholder votes, including votes
concerning the election of directors, the adoption or amendment of provisions in
the Company's Articles of Incorporation or Code of Regulations, and the approval
of mergers and other significant corporate transactions, and their interests may
not be aligned with your interests. Two of the nine members of the Company's
board of directors are members of one of these stockholder groups. The existence
of these levels of ownership concentrated in a few persons makes it less likely
that any other shareholder will be able to affect the Company's management or
strategic direction. These factors may also have the effect of delaying or
preventing a change in the Company's management or voting control or its
acquisition by a third party.
THE LOSS OF KEY MEMBERS OF THE COMPANY'S SENIOR MANAGEMENT TEAM COULD ADVERSELY
AFFECT ITS BUSINESS.
The Company's success depends largely on the efforts and abilities of its
current senior management team. The experience and industry contacts of its
management team significantly benefit the Company. If the Company were to lose
the benefit of that experience and those contacts, the Company's business could
be adversely affected.
POLITICAL AND ECONOMIC CONDITIONS IN FOREIGN COUNTRIES IN WHICH THE COMPANY
OPERATES COULD ADVERSELY AFFECT THE COMPANY.
A portion of the Company's current operations are conducted and located abroad.
International revenue represented 17.1% of total revenue in fiscal 2001 and
19.5% of total revenue in fiscal 2000. Management expects that international
revenue will continue to represent a significant portion of the Company's total
revenue in the foreseeable future. The success of the Company's sales to, and
operations in, foreign markets depends on numerous factors, many of which are
beyond its control, including economic conditions in the foreign countries in
which the Company sells its products and services. Its international sales and
operations may also expose the Company to risks inherent in doing business
outside the United States, including currency fluctuations, restrictions on the
repatriation of profits and assets, compliance with foreign laws and standards
and political risks. In general, the Company does not execute hedge transactions
to reduce its exposure to foreign currency exchange rate risks. There can be no
assurance that any foreign government will not adopt regulations or take other
actions that would have a direct or indirect adverse impact on the
15
Company's business or market opportunities within any country. Furthermore,
there can be no assurance that the political, cultural and economic climate
outside the United States will be favorable to the Company's operations and
growth strategy.
THE COMPANY'S BUSINESS COULD BE ADVERSELY AFFECTED IF MANAGEMENT IS UNSUCCESSFUL
IN NEGOTIATING NEW COLLECTIVE BARGAINING AGREEMENTS.
The Company is subject to a limited number of collective bargaining agreements.
At September 30, 2001, the Company had a total of approximately 12,231 full-time
employees and approximately 27,128 part-time employees. Approximately 2,700 of
its hourly plant employees are unionized, of which 100% are covered by eight
collective bargaining agreements. These agreements expire at various times over
the next four years. These agreements generally cover wages, health care
benefits and retirement plans, seniority, job classes and work rules. The
Company can give you no assurance that these collective bargaining agreements
will be renewed upon expiration or that new collective bargaining agreements on
terms acceptable to the Company will be established. Failure to renew such
agreements could adversely impact the Company's financial condition and results
of operations.
VARIOUS GOVERNMENTAL REGULATIONS AND ENVIRONMENTAL RISKS APPLICABLE TO ITS
BUSINESS MAY REQUIRE THE COMPANY TO TAKE ACTIONS WHICH WILL ADVERSELY AFFECT ITS
RESULTS OF OPERATIONS.
The Company's business is subject to numerous federal, state, provincial, local
and foreign laws and regulations, including regulations with respect to air
emissions, wastewater discharges and the generation, handling, storage,
transportation, treatment and disposal of waste materials. Although management
believes the Company is in substantial compliance with all applicable laws and
regulations, legal requirements are frequently changed and subject to
interpretation, and management is unable to predict the ultimate cost of
compliance with these requirements or their effect on the Company's operations.
The Company may be required to make significant expenditures to comply with
governmental laws and regulations. Management cannot be certain that existing
laws or regulations, as currently interpreted or reinterpreted in the future, or
future laws or regulations, will not have a material adverse effect on the
Company's results of operations and financial condition.
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These forward-looking
statements are subject to risks and uncertainties and include statements
regarding position, business strategy and other plans and objectives for future
operations and statements which are not historical facts. Although the Company
believes such statements are based on reasonable assumptions, these
forward-looking statements are subject to numerous factors, risks and
uncertainties that could cause actual outcomes and results to be materially
different from those projected. These factors, risks and uncertainties include,
among others, retail bankruptcies and consolidations, successful integration of
acquisitions, a weak retail environment, consumer acceptance of products as
priced and marketed, the impact of technology on core product sales and
competitive terms of sale offered to customers. Risks pertaining specifically to
the Company's electronic marketing business include the ability of
AmericanGreetings.com to attract strategic partners as investors, the viability
of online advertising as a revenue generator and the public's acceptance of
online greetings and other social expression products. These factors expressly
qualify all subsequent oral and written forward-looking statements attributable
to the Company or persons acting on its behalf.
Except for its ongoing obligations to disclose material information as required
by the federal securities laws, the Company does not have any intention or
obligation to update forward-looking statements after the distribution of this
prospectus. Actual results may differ materially from those suggested by the
forward-looking statements for various reasons, including those discussed above
under "Risk Factors" in this prospectus.
16
EXCHANGE OFFER
The exchange offer relates to the exchange of up to $260 million in aggregate
principal amount of outstanding notes for an equal aggregate principal amount of
registered notes. The registered notes are obligations of the Company and are
entitled to the benefits of the indenture governing the outstanding notes. The
form and terms of the registered notes are identical in all material respects to
the form and terms of the outstanding notes, except that the registered notes
have been registered under the Securities Act and therefore are not entitled to
the benefits of the registration rights agreement that was executed as part of
the offering of the outstanding notes. The registration rights agreement
provides for registration rights with respect to the outstanding notes and for
certain contingent increases in the interest rates of the outstanding notes, if
the Company fails to meet certain registration obligations.
THE OFFER
The Company is offering to exchange $1,000 principal amount of its 11.75% Notes
due 2008 which have been registered under the Securities Act for each $1,000
principal amount of its outstanding 11.75% Notes due 2011 that were issued in
the private offering on June 29, 2008. In order to be exchanged, an outstanding
note must be properly tendered and accepted. All outstanding notes that are
validly tendered and not validly withdrawn will be exchanged. As of this date
there are $260 million principal amount of notes outstanding. The Company will
issue registered notes on or promptly after expiration of the exchange offer.
REGISTRATION RIGHTS AGREEMENT
You are entitled to exchange your notes for registered notes with substantially
identical terms. The exchange offer is intended to satisfy these rights. After
the exchange offer is complete, you will no longer be entitled to any exchange
or registration rights with respect to your notes, except that, if a holder of
outstanding notes notifies the Company prior to the 20th day after the
completion of the exchange offer that (i) it is prohibited by law or Commission
policy from participating in the exchange offer or (ii) that it may not resell
the registered notes to the public without delivering a prospectus, and this
prospectus is not appropriate or available for such resales or (iii) that it is
a broker- dealer and owns notes acquired directly from the Company or an
affiliate of the Company, then the Company may be required to file with the
Commission a shelf registration statement to cover resale of the notes of those
holders who provide certain information for inclusion in the registration
statement.
SPECIAL INTEREST
If the Company fails to file a required shelf registration statement as required
by the registration rights agreement, it is required to pay special interest
("Special Interest") of $.05 per $1,000 principal amount of notes with respect
to the first 90-day period after the date such filing was required to be made.
The Special Interest rate will increase by an additional $.05 per week per
$1,000 principal amount of notes with respect to each subsequent 90-day period
until the filing has been made; provided, however, that the maximum rate of
Special Interest will be $.50 per week per $1,000 principal amount of notes.
RESALE OF THE NOTES
Based on an interpretation by the staff of the Commission set forth in no-action
letters issued to third parties, including "Exxon Capital Holdings Corporation"
(available May 13, 1988), "Morgan Stanley & Co. Incorporated" (available June 5,
1991), "Mary Kay Cosmetics, Inc." (available June 5, 1991) and "Warnaco, Inc."
(available October 11, 1991), the Company believes the registered notes issued
in the exchange offer may be offered for a resale, resold and otherwise
transferred by you without compliance with the registration and prospectus
delivery provisions of the Securities Act provided that:
17
o the registered notes issued in the exchange offer are acquired in the
ordinary course of business;
o you are not participating, do not intend to participate, and have no
arrangement or understanding with any person to participate, in the
distribution of the registered notes issued to you in the exchange offer;
o you are not a broker-dealer who purchased outstanding notes directly from
the Company for resale pursuant to Rule 144A or any other available
exemption under the Securities Act; and
o you are not an "affiliate" of the Company.
If you do not meet all of the above conditions and you transfer any note issued
to you in the exchange offer without delivering a prospectus meeting the
requirements of the Securities Act or without an exemption from registration of
your notes from such requirements, you may incur liability under the Securities
Act. The Company does not assume or indemnify you against such liability.
Each broker-dealer issued registered notes in the exchange offer for its own
account in exchange for outstanding notes that were acquired by such
broker-dealer as a result of market-making or other trading activities must
acknowledge that it will deliver a prospectus meeting the requirements of the
Securities Act in connection with any resale of the registered notes issued in
the exchange offer. The Letter of Transmittal states that by so acknowledging
and by delivering a prospectus, such a broker-dealer will not be deemed to admit
that it is an "underwriter" within the meaning of the Securities Act. A
broker-dealer may use this prospectus for an offer to resell or the resale or
other retransfer of the notes issued to it in the exchange offer.
The Company has agreed to keep the registration statement effective from the
time the registered notes are first issued until the earlier of 180 days after
the exchange offer is completed or the time when no broker-dealer referred to in
the preceding paragraph owns any of the privately-placed notes. The Company
believes no registered holder of the outstanding notes is an affiliate (as such
term is defined in Rule 405 of the Securities Act) of the Company. The exchange
offer is not being made to, nor will the Company accept surrenders for exchange
from, holders of outstanding notes in any jurisdiction in which this exchange
offer or the acceptance thereof would not be in compliance with the securities
or blue sky laws of such jurisdiction.
EXPIRATION DATE
The exchange offer will expire at 5:00 p.m., New York City time, December 26,
2001, unless the Company decides to extend the expiration date.
ACCRUED INTEREST ON THE EXCHANGE NOTES AND THE OUTSTANDING NOTES
The registered notes will bear interest from June 29, 2001. Holders of
outstanding notes accepted for exchange will be deemed to have waived the right
to receive any payment of interest on such outstanding notes accrued from June
29, 2001 to the date of the issuance of the registered notes. Consequently, any
holder that exchanges outstanding notes for registered notes will receive the
same interest payment on January 15, 2002 (the first interest payment date with
respect to the outstanding notes and the registered notes to be issued in the
exchange offer) that such holder would have received had the exchange offer not
been accepted.
TERMINATION OF THE EXCHANGE OFFER
The Company may terminate the exchange offer if it determines that its ability
to proceed with the exchange offer could be materially impaired due to any legal
or governmental action, new law, statute, rule or regulation or any
interpretation of the staff of the Commission of any existing law, statute, rule
or regulation. The Company does not expect any of the foregoing conditions to
occur, although there can be no assurance that such conditions will not occur.
Each holder of outstanding notes will have certain rights against the Company
under the registration rights agreement executed when the Company issued the
outstanding notes should the Company fail to consummate the exchange offer.
18
PROCEDURES FOR TENDERING OUTSTANDING NOTES
Any financial institution that is a participant in DTC's Book-Entry Transfer
Facility system may make book-entry delivery of the outstanding notes held as
book-entry interests by causing DTC to transfer such notes into the Exchange
Agent's account in accordance with DTC's procedure for such transfer. Although
delivery of such notes may be effected through book-entry transfer into the
Exchange Agent's account at DTC, either:
(1) the Letter of Transmittal (or facsimile thereof), with any required
signature guarantees and any other required documents, or
(2) a computer-generated message transmitted by means of the Automated Tender
Offer Program system of DTC and received by the Exchange Agent and forming
a part of a confirmation of book entry transfer in which the holder of Old
Notes acknowledges and agrees to be bound by the terms of the Letter of
Transmittal,
must, in any case, be transmitted to and received or confirmed by the Exchange
Agent at its addresses set forth herein under "-Exchange Agent" prior to 5:00
p.m., New York City time, on the Expiration Date. DELIVERY OF DOCUMENTS TO DTC
IN ACCORDANCE WITH ITS PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE
AGENT.
To tender in the Exchange Offer, a holder of certificated totes must complete,
sign and date the Letter of Transmittal, or a facsimile thereof, have the
signatures thereon guaranteed if required by the Letter of Transmittal, and mail
or otherwise deliver such Letter of Transmittal or such facsimile, together with
the notes to be tendered and any other required documents, to the Exchange Agent
prior to 5:00 p.m., New York City time, on the Expiration Date.
The tender by a holder of outstanding notes will constitute an agreement between
such holder and us in accordance with the terms and subject to the conditions
set forth herein and in the Letter of Transmittal.
Delivery of all documents must be made to the Exchange Agent at its address set
forth in this prospectus. Any holder may also request that such holder's broker,
dealer, commercial bank, trust company or nominee effect such tender for such
holder.
The method of delivery of outstanding notes and the Letters of Transmittal and
all other required documents to the Exchange Agent is at the election and risk
of the holder. Instead of delivery by mail, it is recommended that a holder use
an overnight or hand delivery service. In all cases, sufficient time should be
allowed to assure timely delivery. No Letter of Transmittal or outstanding notes
should be sent to the Company.
Only a holder of outstanding notes may tender such notes in the exchange offer.
The term "holder" with respect to the exchange offer means any person in whose
name outstanding notes are registered on our books or any other person who has
obtained a properly completed bond power from the registered holder, or any
person whose outstanding notes are held of record by DTC who desires to deliver
such notes by book entry transfer at DTC.
Any beneficial holder whose notes are registered in the name of such holder's
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact such registered holder promptly and instruct such
registered holder to tender on his behalf. If such beneficial holder wishes to
tender on his own behalf, such beneficial holder must, prior to completing and
executing the Letter of Transmittal and delivering his notes, either make
appropriate arrangements to register ownership of the notes in such holder's
name or obtain a properly completed bond power from the registered holder. The
transfer of record ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case may
be, must be guaranteed by a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office of correspondent in the United
States or an "eligible guarantor institution" within the meaning of Rule 17Ad-15
under the Exchange Act (an "Eligible Institution") unless the notes tendered
pursuant thereto are tendered:
19
(1) by a registered holder who has not completed the box entitled "Special
Issuance Instructions" or "Special Delivery Instructions" on the Letter of
Transmittal or
(2) for the account of an Eligible Institution.
If the Letter of Transmittal is signed by a person other than the registered
holder of any notes listed therein, such notes must be endorsed or accompanied
by appropriate bond powers which authorize such person to tender the notes on
behalf of the registered holder, in either case signed as the name of the
registered holder or holders appears on the notes.
If the Letter of Transmittal or any notes or bond powers are signed by trustees,
executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of authority of such signatory to so act
must be submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of receipt),
acceptance and withdrawal of the tendered notes will be determined by the
Company in its sole discretion, which determinations will be final and binding.
The Company reserves the absolute right to reject any and all notes not validly
tendered or any notes the acceptance of which would, in the opinion of the
Company's legal counsel, be unlawful. The Company also reserves the absolute
right to waive any irregularities or conditions of tender as to particular
notes. The Company's interpretation of the terms and conditions of the exchange
offer (including the instructions in the Letter of Transmittal) will be final
and binding on all parties. Unless waived any defects or irregularities in
connection with tenders of notes must be cured within such time as we shall
determine. Neither the Company, the Exchange Agent or any other person shall be
under any duty to give notification of defects or irregularities with respect to
tenders of notes nor shall any of them incur any liability for failure to give
such notification. Tenders of notes will not be deemed to have been made until
such irregularities have been cured or waived. Any notes received by the
Exchange Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned without cost by
the Exchange Agent to the tendering holder of such notes unless otherwise
provided in the Letter of Transmittal, as soon as practicable following the
Expiration Date.
By tendering, each holder of notes will represent to the Company that among
other things, the registered notes acquired pursuant to the exchange offer are
being obtained in the ordinary course of business of the person receiving such
registered notes, whether or not such person is the holder, that neither the
holder nor any other person has an arrangement or understanding with any person
to participate in the distribution of the registered notes and that neither the
holder nor any such other person is an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act.
SPECIAL PROCEDURES FOR BENEFICIAL OWNERS
If you are the beneficial owner of notes and your name does not appear on a
security position listing of DTC as the holder of such notes, or if you are a
beneficial owner of notes that are registered in the name of a broker, dealer,
commercial bank, trust company or other nominee, and you wish to tender such
notes in the exchange offer, you should promptly contact the person in whose
name your notes are registered and instruct such person to tender on your
behalf. If you wish to tender on your own behalf you must, prior to executing
the Letter of Transmittal and delivering your outstanding notes, either make
appropriate arrangements to register ownership of the outstanding notes in your
name or obtain a properly completed bond power from the registered holder. The
transfer of record ownership may take considerable time.
20
GUARANTEED DELIVERY PROCEDURES
A holder of outstanding notes wishing to tender such notes (i) whose notes are
not immediately available or cannot otherwise be delivered or (ii) who cannot
deliver the Letter of Transmittal or any other required documents to the
Exchange Agent prior to the Expiration Date or (iii) who cannot complete the
procedure for book-entry transfer on a timely basis, may effect a tender if:
(1) the tender is made through an Eligible Institution;
(2) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder of the outstanding notes,
the certificate number or numbers of such notes and the principal amount of
the notes tendered, stating that the tender is being made thereby, and
guaranteeing that, within five business days after the Expiration Date, the
Letter of Transmittal (or facsimile thereof), together with the
certificate(s) representing the notes to be tendered in proper form for
transfer and any other documents required by the Letter of Transmittal,
will be deposited by the Eligible Institution with the Exchange Agent; and
(3) such properly completed and executed Letter of Transmittal (or facsimile
thereof), together with the certificate(s) representing all tendered notes
in proper form for transfer (or confirmation of a book-entry transfer into
the Exchange Agent's account at DTC of outstanding notes delivered
electronically) and all other documents required by the Letter of
Transmittal are received by the Exchange Agent within five business days
after the Expiration Date.
WITHDRAWAL RIGHTS
You may withdraw the tender of your notes at any time prior to 5:00 p.m., New
York City time, on December 24, 2001, the business day prior to the Expiration
Date.
ACCEPTANCE OF OUTSTANDING NOTES AND DELIVERY OF EXCHANGE NOTES
Subject to certain conditions (as summarized above in "Termination of the
Exchange Offer" and described more fully under the heading "The Exchange
Offer-Termination"), the Company will accept for exchange any and all
outstanding notes tendered in the exchange offer prior to 5:00 p.m., New York
City time, on the Expiration Date. The notes issued pursuant to the exchange
offer will be delivered promptly following the Expiration Date.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The exchange of notes in the exchange offer generally will not be a taxable
event for United States federal income tax purposes. Management believes you
will not recognize any taxable gain or loss or any interest income as a result
of such exchange. However, you should consult your own tax advisor.
USE OF PROCEEDS
The Company will not receive any proceeds from the issuance of notes pursuant to
the exchange offer. The Company will pay all expenses incident to the exchange
offer.
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EXCHANGE AGENT
The Huntington National Bank is serving as agent in connection with the exchange
offer ("Exchange Agent"). The Exchange Agent's address is 917 Euclid Avenue,
Cleveland, Ohio 44115-1497. For more information with respect to the exchange
offer, the telephone number for the Exchange Agent is 216.515.6662 and the
facsimile number for the Exchange Agent is 216.515.6584.
OUTSTANDING INDEBTEDNESS
In addition to the debt represented by the Company's outstanding $260 million
aggregate principal amount of 11.75% Senior Subordinated Notes that are the
subject of the exchange offer, the Company has the following outstanding
indebtedness:
THE CREDIT AGREEMENT
On August 7, 2001, the Company entered into a Credit Agreement with Keybank
National Association, as Documentation Agent, National City Bank and Goldman
Sachs Credit Partners L.P., as Joint-Lead Arrangers and Co- Syndication Agents,
National City Bank, as Administrative Agent, and certain other lenders. That
Credit Agreement provides for (i) a $105,000,000.00, 364-day revolving facility,
a $120,000,000.00 general revolving facility maturing Jan. 15, 2006, and a
$125,000,000.00 term loan maturing June 15, 2006. The Company has the option to
request a one-year extension of the 364-day revolving facility. Borrowings under
the various facilities can be made on a fixed or variable rate basis, with the
rate dependent upon the Company's credit rating. Loans under the Credit
Agreement are secured by a security interest in all tangible personal property
owned by the Company and a mortgage lien in and to all real property owned by
the Company. The loans are further secured by a pledge of substantially all of
the Company's stock in its domestic subsidiaries. Substantially all of the
Company's domestic subsidiaries have guaranteed payment of the loans to the
Company, and have granted the lenders security interests and mortgage liens in
personal property and real estate owned by such subsidiaries. At September 30,
2001, (i) $55,000,000 was outstanding under the 364-day revolving facility; (ii)
$65,000,000 was outstanding under the general revolving commitment; and (iii)
$125,000,000 was outstanding under the term loan. A general facility fee,
364-day facility fee and global agent fees are due on the facilities and can
vary with the Company's credit rating. The Credit Agreement contains various
restrictive covenants which require, among other things, that the Company meet
specified periodic financial ratios, minimum net worth and earnings
requirements. The Credit Agreement restricts the Company's ability to incur
additional indebtedness and to engage in acquisitions of other businesses and
entities.
The Second Amended and Restated Credit Agreement, dated April 30, 2001, among
the Company, Bank of America, N.A., as Global Agent, Banc of America Securities
Limited, as UK Facility Agent, National City Bank, as Global Co-Syndication
Agent, Bank One, Michigan, as Global Co-Syndication Agent, and certain other
lenders, was terminated and repaid with the proceeds of borrowings under the
Credit Agreement.
6.10% SENIOR NOTES DUE 2028
The Company has outstanding its 6.10% Senior Notes due August 1, 2028. The
existing Notes are senior unsecured obligations, rank on parity with all the
Company's existing and future senior unsecured debt and rank senior to all of
its future subordinated debt. If the Company incurs any secured senior debt in
the future, it will be required to secure the existing notes on an equal and
ratable basis. The Company may not redeem the existing notes prior to their
maturity. A registered holder of an existing note may elect to have that note,
or a portion that is a multiple of $1,000, repaid on August 1, 2008 at 100% of
the principal amount thereof, together with accrued interest.
22
7.00% CONVERTIBLE SUBORDINATED NOTES DUE 2006
On June 21, 2001, the Company issued and sold $150,000,000 of its 7.00%
Convertible Subordinated Notes due 2006 in private placement transactions to
qualified institutional buyers (as defined in Rule 144A under the Securities
Act, accredited investors (as defined in Rule 501 under the Securities Act) and
non-U.S. persons (as defined in Regulation S under the Securities Act). On July
20, 2001 the Company issued and sold an additional $25,000,000 of such notes in
similar private placement transactions, pursuant to an over-allotment option
granted to the initial purchasers. These convertible subordinated notes are
subordinated to the outstanding notes to be exchanged for registered notes in
the exchange offer. The convertible subordinated notes are convertible into the
Company's Class A Common Shares at a rate of 71.9466 shares per $1,000 of such
convertible subordinated notes. The Company may not redeem the convertible
subordinated notes prior to their maturity. On August 28, 2001, the Company
filed a registration statement with the Commission to register for resale the
convertible subordinated notes and the Class A Common Shares issuable upon
conversion of such notes.
DESCRIPTION OF NOTES
You can find the definitions of certain terms used in this description under the
subheading "Certain Definitions." In this description, the term the
"Company"refers only to American Greetings Corporation and not to any of its
subsidiaries.
The outstanding notes were issued under the terms of an indenture dated as of
June 29, 2001, between the Company, as issuer, and The Huntington National Bank,
as trustee; a copy of the indenture will be made to any holder upon request to
the Company. The outstanding notes were issued in a private transaction that was
not subject to the registration requirements of the Securities Act. The
registered notes have been registered under the Securities Act. Upon issuance of
the registered notes, the indenture will be subject to and governed by the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"). The following
summary of the material provisions of the indenture does not purport to be
complete and is subject, and qualified in its entirety by, reference to the
provisions of the Indenture, including the definitions of certain terms
contained therein and those terms made part of the Indenture by reference to the
Trust Indenture Act. Certain of these terms are defined below under the caption
" - Certain Definitions" at page 45. Unless otherwise noted, the description set
forth below applies to both the outstanding notes and the registered notes. The
terms of the registered notes and the outstanding notes are identical, except
that the registered notes, which have been registered under the Securities Act,
do not have registration rights. The terms of the registered notes and the
outstanding notes are those stated in the indenture and those made part of the
indenture by reference to the Trust Indenture Act of 1939.
GENERAL
The notes:
o are general unsecured obligations of the Company;
o are subordinated in right of payment to all existing and future Senior Debt
of the Company;
o are pari passu in right of payment with any future senior subordinated
Indebtedness of the Company.
The notes will be effectively subordinated in right of payment to all
Indebtedness and other liabilities and commitments (including trade payables and
lease obligations) of the Company's Subsidiaries. Any right of the Company to
receive assets of any of its Subsidiaries upon such Subsidiary's liquidation or
reorganization (and the consequent right of the holders of the notes to
participate in those assets) will be effectively subordinated to the claims of
that Subsidiary's creditors, except to the extent that the Company is itself
recognized as a creditor of the Subsidiary, in which case the claims of the
Company would still be subordinate in right of payment to any security in the
assets of the Subsidiary and any indebtedness of the Subsidiary senior to that
held by the Company.
23
On September 30, 2001, the Company had total Senior Debt of approximately
$616.4 million and its Subsidiaries had $204.7 million of outstanding debt and
other liabilities (including trade payables and lease obligations). As indicated
above and as discussed in detail below under the caption "-- Subordination" at
page 24, payments on the notes will be subordinated to the payment in full of
Senior Debt. The indenture will permit the Company to incur additional Senior
Debt.
As of the date of the indenture, all the Company's subsidiaries will be
"Restricted Subsidiaries." However, under the circumstances described below
under the subheading "-- Certain Covenants -- Designation of Restricted and
Unrestricted Subsidiaries" at page 35, the Company will be permitted to
designate certain of its subsidiaries as "Unrestricted Subsidiaries." The
Unrestricted Subsidiaries will not be subject to many of the restrictive
covenants in the indenture.
The registered notes will be issued solely in exchange for an equal principal
amount of outstanding notes pursuant to the exchange offer. The form and terms
of the registered notes will be identical in all material respects to the form
and terms of the outstanding notes, except that:
o the registered notes will not contain terms with respect to transfer
restrictions;
o the registered notes have been registered under the Securities Act; and
o the registration rights applicable to the outstanding notes are not
applicable to the registered notes.
PRINCIPAL, MATURITY AND INTEREST
The notes will bear interest at the rate of 11.75% per annum ("Original Rate")
payable semi-annually in arrears on January 15 and July 15, commencing January
15, 2002. If Adjusted Consolidated Cash Flow, as shown on any financial
statement furnished to the holders of notes pursuant to the covenant described
under the heading " -- Certain Covenants -- Reports" at page 37 (or any
amendment or restatement thereof) for any four full consecutive fiscal quarters
ending on or prior to May 31, 2003, is less than $225 million, interest on the
notes will begin to accrue (on and after such date) at a rate of 12.75% per
annum (the "Increased Rate") and will continue to accrue at the Increased Rate
until the maturity of the notes. The Company will make each interest payment to
the holders of record on the immediately preceding January 1 and July 1.
Interest on the notes will accrue from June 29, 2001, or, if interest has
already been paid, from the date it was most recently paid. Interest will be
computed on the basis of a 360-day year comprised of twelve 30-day months.
METHODS OF RECEIVING PAYMENTS ON THE NOTES
If a holder has given wire transfer instructions, the Company will pay all
principal, interest and premium, if any, on that holder's notes in accordance
with those instructions. All other payments on notes will be made at the office
or agency of the paying agent and registrar within the City and State of New
York, unless the Company elects to make interest payments by check mailed to the
holders at the addresses set forth in the register of holders.
PAYING AGENT AND REGISTRAR FOR THE NOTES
The trustee will initially act as paying agent and registrar. The Company may
change the paying agent or registrar without prior notice to the holders of the
notes, and the Company or any of its Subsidiaries may act as paying agent or
registrar.
24
TRANSFER AND EXCHANGE
A holder may transfer or exchange notes in accordance with the indenture. The
registrar and the trustee may require a holder to furnish appropriate
endorsements and transfer documents in connection with a transfer of notes.
Holders will be required to pay all taxes due on transfer. The Company is not
required to transfer or exchange any note selected for redemption, nor is the
Company required to transfer or exchange any note for a period of 15 days before
a selection of notes to be redeemed.
SUBORDINATION
The payment of principal, interest and premium and Special Interest, if any, on
the notes will be subordinated to the prior payment in full of all Senior Debt
of the Company, including Senior Debt incurred after the date of the indenture.
The holders of Senior Debt will be entitled to receive payment in full of all
Obligations due in respect of Senior Debt (including interest after the
commencement of any bankruptcy proceeding at the rate specified in the
applicable Senior Debt) before the holders of notes will be entitled to receive
any payment with respect to the notes (except that holders of notes may receive
and retain Permitted Junior Securities and payments made from the trust
described under "-- Legal Defeasance and Covenant Defeasance" at page 39), in
the event of any distribution to creditors of the Company:
o in a liquidation or dissolution of the Company;
o in a bankruptcy, reorganization, insolvency, receivership or similar
proceeding relating to the Company or its property;
o in an assignment for the benefit of creditors; or
o in any marshaling of the Company's assets and liabilities.
The Company also may not make any payment in respect of the notes (except in
Permitted Junior Securities or from the trust described under "-- Legal
Defeasance and Covenant Defeasance" at page 39) if:
o a payment default on Designated Senior Debt occurs and is continuing beyond
any applicable grace period; or
o any other default occurs and is continuing on any series of Designated
Senior Debt that permits holders of that series of Designated Senior Debt
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.
Payments on the notes may and will be resumed:
o in the case of a payment default, upon the date on which such default is
cured or waived; and
o in the case of a nonpayment default, upon 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, unless the
maturity of any Designated Senior Debt has been accelerated.
No new Payment Blockage Notice may be delivered unless and until:
o 360 days have elapsed since the delivery of the immediately prior Payment
Blockage Notice; and
o all scheduled payments of principal, interest and premium and Special
Interest, if any, on the notes that have come due have been paid in full in
cash.
25
No nonpayment default that existed or was continuing on the date of delivery of
any Payment Blockage Notice to the trustee will be, or be made, the basis for a
subsequent Payment Blockage Notice.
If the trustee or any holder of the notes receives a payment in respect of the
notes (except in Permitted Junior Securities or from the trust described under
"-- Legal Defeasance and Covenant Defeasance") when:
o the payment is prohibited by these subordination provisions; and
o the trustee or the holder has actual knowledge that the payment is
prohibited,
the trustee or the holder, as the case may be, will hold the payment in trust
for the benefit of the holders of Senior Debt. Upon the proper written request
of the holders of Senior Debt, the trustee or the holder, as the case may be,
will deliver the amounts in trust to the holders of Senior Debt or their proper
representative.
The Company must 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 bankruptcy, liquidation or
reorganization 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 notes are junior to the Company's senior debt" at page 10.
OPTIONAL REDEMPTION
At any time prior to July 15, 2004, the Company may on any one or more occasions
redeem up to 35% of the aggregate principal amount of notes issued under the
indenture at a redemption price of 111.75% of the principal amount, plus accrued
and unpaid interest and Special Interest, if any, to the redemption date, with
the net cash proceeds of one or more Equity Offerings; provided that:
o at least 65% of the aggregate principal amount of notes issued under the
indenture remains outstanding immediately after the occurrence of such
redemption (excluding notes held by the Company and its Restricted
Subsidiaries); and
o the redemption occurs within 90 days of the date of the closing of such
Equity Offering.
Except pursuant to the preceding paragraph, the notes will not be redeemable at
the Company's option prior to July 15, 2005. After July 15, 2005, the Company
may redeem all or a part of the notes upon not less than 30 nor more than 60
days' notice, at the redemption prices (expressed as percentages of principal
amount) set forth below plus accrued and unpaid interest and Special Interest,
if any, on the notes redeemed, to the applicable redemption date, if redeemed
during the twelve-month period beginning on July 15 of the years indicated
below:
YEAR PERCENTAGE
2005 105.875%
2006 102.938%
2007 100.000%
Unless the Company defaults in payment of the redemption price, on and after the
redemption date, interest will cease to accrue on the notes or portion thereof
called for redemption.
MANDATORY REDEMPTION
The Company is not required to make mandatory redemption or sinking fund
payments with respect to the notes.
26
REPURCHASE AT OPTION OF HOLDERS
Change of Control
If a Change of Control occurs, 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 of $1,000) of that holder's notes pursuant to a Change of
Control Offer on the terms set forth in the indenture. In the Change of Control
Offer, the Company will offer a Change of Control Payment in cash equal to 101%
of the aggregate principal amount of notes repurchased plus accrued and unpaid
interest and Special Interest, if any, on the notes repurchased, to the date of
purchase. Within ten 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 on the Change
of Control Payment Date specified in the notice, which date will be no earlier
than 30 days and no later than 60 days from the date such notice is mailed,
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 those laws and regulations are applicable in connection with the
repurchase of the notes as a result of a Change of Control. To the extent that
the provisions of any securities laws or regulations conflict with the Change of
Control provisions of the indenture, the Company will comply with the applicable
securities laws and regulations and will not be deemed to have breached its
obligations under the Change of Control provisions of the indenture by virtue of
such conflict.
On the Change of Control Payment Date, the Company will, to the extent lawful:
o accept for payment all notes or portions of notes properly tendered pursuant
to the Change of Control Offer;
o deposit with the paying agent an amount equal to the Change of Control
Payment in respect of all notes or portions of notes properly tendered; and
o deliver or cause to be delivered to the trustee the notes properly accepted
together with an officers' certificate stating the aggregate principal
amount of notes or portions of notes being purchased by the Company.
The paying agent will promptly mail to each holder of notes properly 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 notes
surrendered, if any; provided that each new note will be in a principal amount
of $1,000 or an integral multiple of $1,000.
Prior to complying with any of the provisions of this "Change of Control"
covenant, but in any event within 90 days following a Change of Control, the
Company will either repay all outstanding Senior Debt or obtain the requisite
consents, if any, under all agreements governing outstanding Senior Debt to
permit the repurchase of notes required by this covenant. 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 provisions described above that require the Company to make a Change of
Control Offer following a Change of Control 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.
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 properly tendered and not withdrawn under the Change of
Control Offer.
27
The agreements governing the Company's Senior Debt currently prohibit the
Company from purchasing any notes, and also provide that certain change of
control or asset sale events with respect to the Company would constitute a
default under such agreements. Any future credit agreements or other agreements
relating to Senior Debt to which the Company becomes a party, including the New
Credit Facilities, may contain similar restrictions and provisions. In the event
a Change of Control or Asset Sale occurs at a time when the Company is
prohibited from purchasing notes, the Company could seek the consent of its
senior 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, the Company's failure to purchase tendered notes
would constitute an Event of Default under the indenture which could, in turn,
constitute a default under such Senior Debt. In such circumstances, the
subordination provisions in the indenture would likely restrict payments to the
holders of notes. See "Risk Factors -- The Company may not have the funds
necessary to finance any change of control offer required by the indenture
governing the notes" at page 11.
The definition of Change of Control includes a phrase relating to the direct or
indirect sale, lease, transfer, conveyance or other disposition of "all or
substantially all" of the properties or assets of the Company and its
Subsidiaries taken as a whole. Although there is a limited body of case law
interpreting the phrase "substantially all," there is no precise established
definition of the phrase under applicable law. Accordingly, the ability of a
holder of notes to require the Company to repurchase its notes as a result of a
sale, lease, transfer, conveyance or other disposition of less than all of the
assets of the Company and its Subsidiaries taken as a whole to another Person or
group may be uncertain.
ASSET SALES
The Company will not, and will not permit any of its Restricted Subsidiaries to,
consummate an Asset Sale unless:
(1) the Company (or the Restricted Subsidiary, as the case may be) receives
consideration at the time of the Asset Sale at least equal to the fair
market value of the assets or Equity Interests issued or sold or otherwise
disposed of;
(2) the fair market value is determined by the Company's Board of Directors and
evidenced by a resolution of the Board of Directors set forth in an
officers' certificate delivered to the trustee; and
(3) at least 75% of the consideration received in the Asset Sale by Company or
such Restricted Subsidiary is in the form of cash. For purposes of this
provision, each of the following will be deemed to be cash:
(a) 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) 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; and
(b) any securities, notes or other obligations received by the Company or
any such Restricted Subsidiary from such transferee that are
contemporaneously, subject to ordinary settlement periods, converted by
the Company or such Restricted Subsidiary into cash, to the extent of
the cash received in that conversion.
Within 360 days after the receipt of any Net Proceeds from an Asset Sale, the
Company may apply those Net Proceeds, at its option:
(1) to repay Senior Debt and, if the Senior Debt repaid is revolving credit
Indebtedness, to correspondingly reduce commitments with respect thereto;
(2) to acquire all or substantially all of the assets of, or a majority of the
Voting Stock of, another Permitted Business; or
28
(3) to acquire other long-term assets that are used or useful in a Permitted
Business.
Pending the final application of any Net Proceeds, the Company may temporarily
reduce revolving credit borrowings or otherwise invest the Net Proceeds in Cash
Equivalents.
Any Net Proceeds from Asset Sales that are not applied or invested as provided
in the preceding paragraph will constitute "Excess Proceeds." When the aggregate
amount of Excess Proceeds exceeds $10.0 million, the Company will make an Asset
Sale Offer to all holders of notes and all holders of other Indebtedness that is
pari passu with the notes containing provisions similar to those set forth in
the indenture with respect to offers to purchase or redeem with the proceeds of
sales of assets to purchase the maximum principal amount of notes and such other
pari passu Indebtedness that may be purchased out of the Excess Proceeds. The
offer price in any Asset Sale Offer will be equal to 100% of principal amount
plus accrued and unpaid interest and Special Interest, if any, to the date of
purchase, and will be payable in cash. If any Excess Proceeds remain after
consummation of an Asset Sale Offer, the Company may use those Excess proceeds
for any purpose not otherwise prohibited by the indenture. If the aggregate
principal amount of notes and other pari passu Indebtedness tendered into such
Asset Sale Offer exceeds the amount of Excess Proceeds, the trustee will select
the notes and such other pari passu Indebtedness to be purchased on a pro rata
basis. Upon completion of each Asset Sale Offer, the amount of Excess Proceeds
will 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 those
laws and regulations are applicable in connection with each repurchase of notes
pursuant to an Asset Sale Offer. To the extent that the provisions of any
securities laws or regulations conflict with the Asset Sale provisions of the
indenture, the Company will comply with the applicable securities laws and
regulations and will not be deemed to have breached its obligations under the
Asset Sale provisions of the indenture by virtue of such conflict.
SELECTION AND NOTICE
If fewer than all the notes are to be redeemed at any time, the trustee will
select notes for redemption as follows:
(1) if the notes are listed on any national securities exchange, in compliance
with the requirements of the principal national securities exchange on which
the notes are listed; or
(2) if the notes are not listed on any national securities exchange, on a pro
rata basis, by lot or by such method as the trustee deems fair and
appropriate.
No notes of $1,000 or less can be redeemed in part. Notices of redemption will
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, except that redemption notices may be mailed more than 60
days prior to a redemption date if the notice is issued in connection with a
defeasance of the notes or a satisfaction and discharge of the indenture.
Notices of redemption may not be conditional.
If any note is to be redeemed in part only, the notice of redemption that
relates to that note will state the portion of the principal amount of that note
that is to be redeemed. A new note in principal amount equal to the unredeemed
portion of the original note will be issued in the name of the holder of the
note upon cancellation of the original note. Notes called for redemption become
due on the date fixed for redemption. On and after the redemption date, interest
ceases to accrue on notes or portions of them called for redemption.
29
CERTAIN COVENANTS
The indenture contains, among others, the following covenants:
RESTRICTED PAYMENTS
The Company will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly:
(1) 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 (including, without limitation, any payment in connection with any
merger or consolidation involving the Company or any of its Restricted
Subsidiaries) or to the direct or indirect holders of the Equity Interests
of the Company's or any of its Restricted Subsidiaries' Equity Interests in
such capacity (other than dividends or distributions payable in Equity
Interests (other than Disqualified Stock) of the Company or to the Company
or a Restricted Subsidiary of the Company);
(2) purchase, redeem or otherwise acquire or retire for value (including,
without limitation, in connection with any merger or consolidation involving
the Company) any Equity Interests of the Company or any direct or indirect
parent of the Company;
(3) make any payment on or with respect to, or purchase, redeem, defease or
otherwise acquire or retire for value any Indebtedness that is subordinated
to the notes, except a payment of interest or principal at the Stated
Maturity thereof; or
(4) make any Restricted Investment (all such payments and other actions set
forth in these clauses (1) through (4) above being collectively referred to
as "Restricted Payments"),
unless, at the time of and after giving effect to such Restricted Payment:
(1) no Default or Event of Default has occurred and is continuing or would occur
as a consequence of such Restricted Payment; and
(2) the Company, at the time of such Restricted Payment and after giving pro
forma effect thereto as if such Restricted Payment had been made at the
beginning of the applicable four-quarter period, would 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 Preferred Stock" at page 31; and
(3) such Restricted Payment, together with the aggregate amount of all other
Restricted Payments made by the Company and its Restricted Subsidiaries
after the date of the indenture (excluding Restricted Payments permitted by
clauses (2), (3) and (4) of the next succeeding paragraph), is less than the
sum, without duplication, of:
(a) 50% of the Consolidated Net Income of the Company for the period (taken
as one accounting period) from the beginning of the first fiscal quarter
commencing after the date of the indenture to the end of the Company's
most recently ended fiscal quarter for which internal financial
statements are available at the time of such Restricted Payment (or, if
such Consolidated Net Income for such period is a deficit, less 100% of
such deficit), plus
(b) 100% of the aggregate net cash proceeds received by the Company since
the date of the indenture as a contribution to its common equity capital
or from the issue or sale of Equity Interests of the Company (other than
Disqualified Stock) or from the issue or sale of convertible or
exchangeable Disqualified Stock or convertible or exchangeable debt
securities of the Company that have been converted into or exchanged for
such Equity Interests (other than Equity Interests (or Disqualified
Stock or debt securities) sold to a Subsidiary of the Company), plus
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(c) to the extent that any Restricted Investment that was made after the
date of the indenture is sold for cash or otherwise liquidated or repaid
for cash, the lesser of (i) the cash return of capital with respect to
such Restricted Investment (less the cost of disposition, if any) and
(ii) the initial amount of such Restricted Investment.
So long as no Default has occurred and is continuing or would be caused thereby,
the preceding provisions will not prohibit:
(1) the payment of any dividend within 60 days after the date of declaration of
the dividend, if at the date of declaration the dividend payment would have
complied with the provisions of the indenture;
(2) the redemption, repurchase, retirement, defeasance or other acquisition of
any subordinated Indebtedness of the Company or of any Equity Interests of
the Company in exchange for, or out of the net cash proceeds of the
substantially concurrent sale (other than to a Subsidiary of the Company)
of, Equity Interests of the Company (other than Disqualified Stock);
provided that the amount of any such net cash proceeds that are utilized for
any such redemption, repurchase, retirement, defeasance or other acquisition
will be excluded from clause (3)(b) of the preceding paragraph;
(3) the defeasance, redemption, repurchase or other acquisition of subordinated
Indebtedness of the Company with the net cash proceeds from an incurrence of
Permitted Refinancing Indebtedness;
(4) the payment of any dividend by a Restricted Subsidiary of the Company to the
holders of its Equity Interests on a pro rata basis;
(5) the repurchase, redemption 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 management of the Company (or any of its
Restricted Subsidiaries) pursuant to any management equity subscription
agreement, stock option agreement or similar agreement; provided that the
aggregate price paid for all such repurchased, redeemed, acquired or retired
Equity Interests may not exceed $5.0 million in any twelvemonth period;
(6) the purchase by the Company of fractional shares arising out of stock
dividends, splits or combinations, business combinations or upon conversion
of the Convertible Subordinated Notes; and
(7) other Restricted Payments in an amount not to exceed $50.0 million; provided
that Restricted Payments made pursuant to this clause (7) shall not exceed
$25.0 million in the aggregate in any twelve-month period.
The amount of all Restricted Payments (other than cash) will be the fair market
value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued by the Company or such Restricted
Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair
market value of any assets or securities that are required to be valued by this
covenant will be determined by the Board of Directors whose resolution with
respect thereto will be delivered to the trustee. The Board of Directors'
determination must be based upon an opinion or appraisal issued by an
accounting, appraisal or investment banking firm of national standing if the
fair market value exceeds $10.0 million. Not later than the date of making any
Restricted Payment, the Company will 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 this "Restricted Payments"
covenant were computed, together with a copy of any fairness opinion or
appraisal required by the indenture.
31
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
The Company will not, and will not permit any of its Subsidiaries to, directly
or indirectly, create, incur, issue, assume, guarantee or otherwise become
directly or indirectly liable, contingently or otherwise, with respect to
(collectively, "incur") any Indebtedness (including Acquired Debt), and the
Company will not issue any Disqualified Stock and will not permit any of its
Subsidiaries to issue any shares of preferred stock; provided, however, that the
Company may incur Indebtedness (including Acquired Debt) or issue Disqualified
Stock, if the Fixed Charge Coverage Ratio for the Company's most recently ended
four full fiscal quarters for which internal financial statements are available
immediately preceding the date on which such additional Indebtedness is incurred
or such Disqualified Stock is issued would have been at least 2.5 to 1 if such
additional indebtedness is incurred or Disqualified Stock is issued on or prior
to June 29, 2002, at least 2.75 to 1 if such additional indebtedness is incurred
or Disqualified Stock is issued after June 29, 2002, but on or prior to June 29,
2003, and 3.0 to 1 if such additional indebtedness is incurred or Disqualified
Stock is issued after June 29, 2003, 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, at the beginning of such four-quarter period.
The first paragraph of this covenant will not prohibit the incurrence of any of
the following items of Indebtedness (collectively, "Permitted Debt"):
(1) the incurrence by the Company of additional Indebtedness and letters of
credit under Credit Facilities in an aggregate principal amount at any one
time outstanding under this clause (1) (with letters of credit being deemed
to have a principal amount equal to the maximum potential liability of the
Company and its Restricted Subsidiaries thereunder) not to exceed $695
million (provided that such amount shall be reduced to the extent of any
reduction or elimination of any commitment under any Credit Facility
resulting from or relating to the formation of any Receivables Subsidiary or
the consummation of any Qualified Receivables Transaction), less the
aggregate amount of all repayments, optional or mandatory, of the principal
of any term Indebtedness under a Credit Facility (other than repayments that
are concurrently reborrowed) that have been made by the Company or any of
its Restricted Subsidiaries since the date of the indenture and less the
aggregate amount of all commitment reductions with respect to any revolving
credit borrowings under a Credit Facility that have been made by the Company
or any of its Restricted Subsidiaries since the date of the indenture;
provided that no Indebtedness incurred pursuant to this clause (1) shall be
used to fund any acquisition by the Company or any of its subsidiaries;
(2) the incurrence by the Company and its Restricted Subsidiaries of the
Existing Indebtedness;
(3) the incurrence by the Company of Indebtedness represented by the notes to be
issued on the date of the indenture and the registered notes to be issued
pursuant to the registration rights agreement;
(4) the incurrence by the Company or any of its Restricted Subsidiaries of
Indebtedness represented by Capital Lease Obligations, mortgage financings
or purchase money obligations, in each case, incurred for the purpose of
financing all or any part of the purchase price or cost of construction or
improvement of property, plant or equipment used in the business of the
Company or such Restricted Subsidiary, in an aggregate principal amount,
including all Permitted Refinancing Indebtedness incurred to refund,
refinance or replace any Indebtedness incurred pursuant to this clause (4),
not to exceed $25.0 million at any time outstanding;
(5) 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 refund, refinance or replace Indebtedness (other than
intercompany Indebtedness) that was permitted by the indenture to be
incurred under the first paragraph of this covenant or clauses (2), (3),
(4), (5), (11) or (12) of this paragraph;
(6) the incurrence by the Company or any of its Restricted Subsidiaries of
intercompany Indebtedness between or among the Company and any of its Wholly
Owned Restricted Subsidiaries; provided, however, that:
32
(a) if the Company is the obligor on such Indebtedness, such Indebtedness
must be expressly subordinated to the prior payment in full in cash of
all Obligations with respect to the notes and
(b) (i) any subsequent issuance or transfer of Equity Interests that
results in any such Indebtedness being held by a Person other than the
Company or a Restricted Subsidiary of the Company and (ii) any sale or
other transfer of any such Indebtedness to a Person that is not either
the Company or a Wholly Owned Restricted Subsidiary of the Company;
will be deemed, in each case, to constitute an incurrence of such
Indebtedness by the Company or such Restricted Subsidiary, as the case
may be, that was not permitted by this clause (6);
(7) the incurrence by the Company or any of its Restricted Subsidiaries of
Hedging Obligations that are incurred for the purpose of fixing or hedging
interest rate risk with respect to any floating rate Indebtedness that is
permitted by the terms of the indenture to be outstanding;
(8) the incurrence by Unrestricted Subsidiaries of the Company of Non-Recourse
Debt; provided, however, that if any such Indebtedness ceases to be
Non-Recourse Debt of an Unrestricted Subsidiary, such event will be deemed
to constitute an incurrence of Indebtedness by a Restricted Subsidiary of
the Company that was not permitted by this clause (8);
(9) the accrual of interest, the accretion or amortization of original issue
discount, the payment of interest on any Indebtedness in the form of
additional Indebtedness with the same terms, and the payment of dividends
on Disqualified Stock in the form of additional shares of the same class of
Disqualified Stock will not be deemed to be an incurrence of Indebtedness
or an issuance of Disqualified Stock for purposes of this covenant;
provided, in each such case, that the amount thereof is included in Fixed
Charges of the Company as accrued;
(10) the incurrence by a Receivables Subsidiary of Indebtedness in a Qualified
Receivables Transaction that is without recourse to the Company or to any
other Subsidiary of the Company or its assets (other than such Receivables
Subsidiary and its assets and, as to the Company or any Subsidiary of the
Company, other than pursuant to representations, warranties, covenants and
indemnities customary for such transactions) and is not guaranteed by any
such Person;
(11) the Guarantee by a Restricted Subsidiary of the Company of Indebtedness of
the Company or a Restricted Subsidiary of the Company that was permitted to
be incurred by another provision of this covenant;
(12) the incurrence by S.A. Greetings Corporation (PTY) Ltd. of up to $6.0
million of Indebtedness and the Guarantee of such Indebtedness by the
Company; and
(13) the incurrence by the Company or any of its Restricted Subsidiaries of
additional Indebtedness in an aggregate principal amount (or accreted
value, as applicable) at any time outstanding, including all Permitted
Refinancing Indebtedness incurred to refund, refinance or replace any
Indebtedness incurred pursuant to this clause (13), not to exceed $25.0
million.
For purposes of determining compliance with this "Incurrence of Indebtedness and
Issuance of Preferred Stock" covenant, in the event that an item of proposed
Indebtedness meets the criteria of more than one of the categories of Permitted
Debt described in clauses (1) through (13) above, or is entitled to be incurred
pursuant to the first paragraph of this covenant, the Company will be permitted
to classify such item of Indebtedness on the date of its incurrence, or later
reclassify all or a portion of such item of Indebtedness, in any manner that
complies with this covenant. Indebtedness under Credit Facilities outstanding on
the date on which notes are first issued and authenticated under the indenture
will be deemed to have been incurred on such date in reliance on the exception
provided by clause (1) of the definition of Permitted Debt.
33
ANTI-LAYERING
The Company will not 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 of the Company and senior in any respect in right of payment to
the notes.
LIENS
The Company will not, and will not permit any of its Subsidiaries to, directly
or indirectly, create, incur, assume or suffer to exist any Lien of any kind
securing Indebtedness or trade payables on any asset now owned or hereafter
acquired, except Permitted Liens.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
The Company will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly, create or permit to exist or become effective any
consensual encumbrance or restriction on the ability of any Restricted
Subsidiary to:
(1) pay dividends or make any other distributions on its Capital Stock to the
Company or any of its Restricted Subsidiaries, or with respect to any other
interest or participation in, or measured by, its profits, or pay any
indebtedness owed to the Company or any of its Restricted Subsidiaries;
(2) make loans or advances to the Company or any of its Restricted
Subsidiaries; or
(3) transfer any of its properties or assets to the Company or any of its
Restricted Subsidiaries.
However, the preceding restrictions will not apply to encumbrances or
restrictions existing under or by reason of:
(1) agreements governing Existing Indebtedness and Credit Facilities as in
effect on the date of the indenture and any amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements or
refinancings of those agreements, provided that the amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacement or refinancings are no more restrictive, taken as a whole, with
respect to such dividend and other payment restrictions than those
contained in those agreements on the date of the indenture;
(2) agreements governing Indebtedness under Credit Facilities incurred pursuant
to clause (1) of the covenant entitled "Incurrence of Indebtedness and
Issuance of Preferred Stock" and any amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements or
refinancings of those agreements; provided that the encumbrance or
restriction is not materially more disadvantageous to the holders of the
notes than is customary in comparable financings (as determined in good
faith by the board of directors of Company);
(3) the indenture and the notes;
(4) applicable law;
(5) 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 or Capital
Stock 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;
34
(6) customary non-assignment provisions in leases entered into in the ordinary
course of business and consistent with past practices;
(7) purchase money obligations for property acquired in the ordinary course of
business that impose restrictions on that property of the nature described
in clause (3) of the preceding paragraph;
(8) any agreement for the sale or other disposition of a Restricted Subsidiary
that restricts distributions by that Restricted Subsidiary pending its sale
or other disposition;
(9) Permitted Refinancing Indebtedness, provided that the restrictions
contained in the agreements governing such Permitted Refinancing
Indebtedness are no more restrictive, taken as a whole, than those
contained in the agreements governing the Indebtedness being refinanced;
(10) Liens securing Indebtedness otherwise permitted to be incurred under the
provisions of the covenant described above under the caption "-- Liens"
that limit the right of the debtor to dispose of the assets subject to such
Liens;
(11) provisions with respect to the disposition or distribution of assets or
property in joint venture agreements, assets sale agreements, stock sale
agreements and other similar agreements entered into in the ordinary course
of business;
(12) Indebtedness or other contractual requirements of a Receivables Subsidiary
in connection with a Qualified Receivables Transaction, provided that such
restrictions apply only to such Receivables Subsidiary; and
(13) restrictions on cash or other deposits or net worth imposed by customers
under contracts entered into in the ordinary course of business.
MERGER, CONSOLIDATION OR SALE OF ASSETS
The Company may not, directly or indirectly: (i) consolidate or merge with or
into another Person (whether or not the Company is the surviving corporation);
or (ii) sell, assign, transfer, convey or otherwise dispose of all or
substantially all of the properties or assets of the Company and its Restricted
Subsidiaries taken as a whole, in one or more related transactions, to another
Person; unless:
(1) either: (a) the Company is the surviving corporation; or (b) the Person
formed by or surviving any such consolidation or merger (if other than the
Company) or to which such sale, assignment, transfer, conveyance or other
disposition has been made is a corporation organized or existing under the
laws of the United States, any state of the United States or the District
of Columbia;
(2) the Person formed by or surviving any such consolidation or merger (if
other than the Company) or the Person to which such sale, assignment,
transfer, conveyance or other disposition has been made assumes all the
obligations of the Company under the notes, the indenture and the
registration rights agreement pursuant to terms reasonably satisfactory to
the trustee;
(3) immediately after such transaction no Default or Event of Default exists;
and
(4) 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, conveyance or other disposition has been made: (a) will have
Consolidated Net Worth immediately after the transaction equal to or
greater than the Consolidated Net Worth of the Company immediately
preceding the transaction; and (b) will, on the date of such transaction
after giving pro forma effect thereto and any related financing
transactions as if the same 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 Preferred Stock."
35
In addition, the Company may not, directly or indirectly, lease all or
substantially all of its properties or assets, in one or more related
transactions, to any other Person. This "Merger, Consolidation or Sale of
Assets" covenant will not apply to a sale, assignment, transfer, conveyance or
other disposition of assets between or among the Company and any of its Wholly
Owned Restricted Subsidiaries.
DESIGNATION OF RESTRICTED AND UNRESTRICTED SUBSIDIARIES
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if that designation would not cause a Default. If a
Restricted Subsidiary is designated as an Unrestricted Subsidiary, the aggregate
fair market value of all outstanding Investments owned by the Company and its
Restricted Subsidiaries in the Subsidiary properly designated will be deemed to
be an Investment made as of the time of the designation and will reduce the
amount available for Restricted Payments under the first paragraph of the
covenant described above under the caption "-- Restricted Payments" at page 29
or Permitted Investments, as determined by the Company. That designation will
only be permitted if the Investment would be permitted at that time and if the
Restricted Subsidiary otherwise meets the definition of an Unrestricted
Subsidiary. The Board of Directors may redesignate any Unrestricted Subsidiary
to be a Restricted Subsidiary if the redesignation would not cause a Default.
TRANSACTIONS WITH AFFILIATES
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 transaction, contract, agreement, understanding, loan,
advance or guarantee with, or for the benefit of, any Affiliate (each, an
"Affiliate Transaction"), unless:
(1) the 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
(2) 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
$1.0 million, a resolution of the Board of Directors set forth in an
officers' certificate certifying that such Affiliate Transaction
complies with this covenant and 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
$10.0 million, an opinion as to the fairness to the holders of such
Affiliate Transaction from a financial point of view issued by an
accounting, appraisal or investment banking firm of national standing.
The following items will not be deemed to be Affiliate Transactions and,
therefore, will not be subject to the provisions of the prior paragraph:
(1) any employment agreement, stock option plan or other compensation plan
entered into by the Company or any of its Restricted Subsidiaries in the
ordinary course of business and consistent with the past practice of the
Company or such Restricted Subsidiary;
(2) transactions between or among the Company and/or its Restricted
Subsidiaries;
(3) transactions with a Person that is an Affiliate of the Company solely
because the Company owns an Equity Interest in, or controls, such Person;
36
(4) payment of reasonable directors fees to Persons who are not otherwise
Affiliates of Company;
(5) sales of Equity Interests (other than Disqualified Stock) to Affiliates of
the Company;
(6) transactions between the Company or a Restricted Subsidiary and an
Affiliate existing prior to the date of the indenture on the terms thereof
described in this offering circular, and any amendments thereto, provided
that such amendments, taken as a whole, do not contain terms materially
less advantageous to Company than those existing on the date of the
indenture;
(7) transactions between or among the Company and/or its Receivables
Subsidiaries or transactions between a Receivables Subsidiary and any
Person in which the Receivables Subsidiary has an Investment; and
(8) Restricted Payments that are permitted by the provisions of the indenture
described above under the caption "-- Restricted Payments."
BUSINESS ACTIVITIES
The Company will not, and will not permit any Subsidiary to, engage in any
business other than Permitted Businesses, except to such extent as would not be
material to the Company and its Subsidiaries taken as a whole.
PAYMENTS FOR CONSENT
The Company will not, and will not permit any of its Subsidiaries to, directly
or indirectly, pay or cause to be paid any consideration to or for the benefit
of any holder of notes for or as an inducement to any consent, waiver or
amendment of any of the terms or provisions of the indenture or the notes unless
such consideration is offered to be paid and is paid to all holders of the notes
that consent, waive or agree to amend in the time frame set forth in the
solicitation documents relating to such consent, waiver or agreement.
REPORTS
Whether or not required by the Commission, so long as any notes are outstanding,
the Company will furnish to the holders of notes, within the time periods
specified in the Commission's rules and regulations:
(1) 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 on the annual
financial statements by the Company's certified independent accountants;
and
(2) 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, following the consummation of the exchange offer, whether or not
required by the Commission, the Company will file a copy of all of the
information and reports referred to in clauses (1) and (2) above with the
Commission for public availability within the time periods specified in the
Commission's rules and regulations (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 has agreed that,
for so long as any notes remain outstanding, it will furnish to the holders 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.
37
If the Company has designated any of its Subsidiaries as Unrestricted
Subsidiaries, then the quarterly and annual financial information required by
the preceding paragraph will include a reasonably detailed presentation, either
on the face of the financial statements or in the footnotes thereto, and in
Management's Discussion and Analysis of Financial Condition and Results of
Operations, of the financial condition and results of operations of the Company
and its Restricted Subsidiaries separate from the financial condition and
results of operations of the Unrestricted Subsidiaries of the Company.
EVENTS OF DEFAULT AND REMEDIES
Each of the following is an Event of Default:
(1) default for 30 days in the payment when due of interest on, or Special
Interest with respect to, the notes whether or not prohibited by the
subordination provisions of the indenture;
(2) 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;
(3) failure by the Company or any of its Subsidiaries to comply with the
provisions described under the captions "-- Repurchase at the Option of
Holders -- Change of Control at page 26,"-- Repurchase at the Option of
Holders -- Asset Sales" at page 28, "-- Certain Covenants -- Restricted
Payments at page 29, "-- Certain Covenants -- Incurrence of Indebtedness
and Issuance of Preferred Stock" at page 31 or "-- Certain Covenants --
Merger, Consolidation or Sale of Assets" at page 35:
(4) failure by the Company or any of its Subsidiaries for 60 days after notice
to comply with any of the other agreements in the indenture;
(5) 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 Subsidiaries (or the
payment of which is guaranteed by the Company or any of its Subsidiaries)
whether such Indebtedness or guarantee now exists, or is created after the
date of the indenture, if that default:
(a) is caused by a failure to pay principal of, or interest or premium, if
any, on such Indebtedness prior to the expiration of the grace period
provided in such Indebtedness on the date of such default (a "Payment
Default"); or
(b) 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 under which there has been a Payment Default or the
maturity of which has been so accelerated, aggregates $20.0 million or
more;
(6) failure by the Company or any of its Subsidiaries to pay final judgments
aggregating in excess of $20.0 million, which judgments are not paid,
discharged or stayed for a period of 60 days; and
(7) certain events of bankruptcy or insolvency described in the indenture with
respect to the Company, any of its Significant Subsidiaries, or any group
of Subsidiaries that, taken together, would constitute a Significant
Subsidiary.
In the case of an Event of Default arising from certain events of bankruptcy or
insolvency, with respect to the Company, any Subsidiary that is a Significant
Subsidiary or any group of Subsidiaries that, taken together, would constitute a
Significant Subsidiary, all outstanding notes will become due and payable
immediately without further action or notice. If any other 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.
38
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 if it determines that
withholding notes is in their interest, except a Default or Event of Default
relating to the payment of principal or interest or Special Interest.
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 or Special Interest on, or the principal of, the notes.
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 will also become and be
immediately due and payable to the extent permitted by law upon the acceleration
of the notes. If an Event of Default occurs prior to July 15, 2005, 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 July 15, 2005, then the premium specified in the indenture will
also become immediately due and payable to the extent permitted by law upon the
acceleration of the notes.
The Company is required to deliver to the trustee annually a statement regarding
compliance with the indenture. Upon becoming aware of any Default or Event of
Default, the Company is required to deliver to the trustee a statement
specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company, as
such, will have any liability for any obligations of the Company under the notes
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 are part of the
consideration for issuance of the notes. The waiver may not be effective to
waive liabilities under the federal securities laws.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding notes ("Legal
Defeasance") except for:
(1) the rights of holders of outstanding notes to receive payments in respect
of the principal of, or interest or premium and Special Interest, if any,
on such notes when such payments are due from the trust referred to below;
(2) 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;
(2) the rights, powers, trusts, duties and immunities of the trustee, and the
Company's obligations in connection therewith; and
(3) the Legal Defeasance provisions of the indenture.
39
In addition, the Company may, at its option and at any time, elect to have the
obligations of the Company released with respect to certain covenants that are
described in the indenture ("Covenant Defeasance") and thereafter any omission
to comply with those covenants will not constitute a Default or Event of Default
with respect to the notes. 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.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) the Company 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 of cash in U.S. dollars and
non-callable Government Securities, in amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public
accountants, to pay the principal of, or interest and premium, if any, on
the outstanding notes on the stated maturity or on the applicable
redemption date, as the case may be, and the Company must specify whether
the notes are being defeased to maturity or to a particular redemption
date;
(2) in the case of Legal Defeasance, the Company has delivered to the trustee
an opinion of counsel reasonably acceptable to the trustee confirming that
(a) the Company has 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 will
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;
(3) in the case of Covenant Defeasance, the Company has delivered to the
trustee an opinion of counsel 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;
(4) no Default or Event of Default has occurred and is 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);
(5) such Legal Defeasance or Covenant Defeasance will not result in a breach or
violation of, or constitute a default under any material agreement or
instrument (other than the indenture) to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries
is bound;
(6) the Company must deliver to the trustee an officers' certificate stating
that the deposit was not made by the Company with the intent of preferring
the holders of notes over the other creditors of the Company with the
intent of defeating, hindering, delaying or defrauding creditors of the
Company or others; and
(7) the Company must deliver to the trustee an officers' certificate and an
opinion of counsel, each stating that all conditions precedent relating to
the Legal Defeasance or the Covenant Defeasance have been complied with.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the indenture or 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, 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, without limitation, consents obtained in connection with a purchase
of, or tender offer or exchange offer for, notes). Without the consent of each
holder affected, an amendment or waiver may not (with respect to any notes held
by a non- consenting holder):
40
(1) reduce the principal amount of notes whose holders must consent to an
amendment, supplement or waiver;
(2) 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 the caption "--
Repurchase at the Option of Holders" at page 26);
(3) reduce the rate of or change the time for payment of interest on any note;
(4) waive a Default or Event of Default in the payment of principal of, or
interest or premium, or Special Interest, 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 of the notes and a waiver of the
payment default that resulted from such acceleration);
(5) make any note payable in money other than that stated in the notes;
(6) 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 interest or premium or Special Interest, if any, on the
notes;
(7) waive a redemption payment with respect to any note (other than a payment
required by one of the covenants described above under the caption "--
Repurchase at the Option of Holders" at page 26); or
(8) make any change in the preceding amendment and waiver provisions.
In addition, any amendment to, or waiver of, the provisions of the indenture
relating to subordination that adversely affects the rights of the holders of
the notes will require the consent of the holders of at least 75% in aggregate
principal amount of notes then outstanding.
Notwithstanding the preceding, without the consent of any holder of notes, the
Company and the trustee may amend or supplement the indenture or the notes:
(1) to cure any ambiguity, defect or inconsistency;
(2) to provide for uncertificated notes in addition to or in place of
certificated notes;
(3) to provide for the assumption of the Company's obligations to holders of
notes in the case of a merger or consolidation or sale of all or
substantially all of the Company's assets;
(4) 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
(5) to comply with requirements of the Commission in order to effect or
maintain the qualification of the indenture under the Trust indenture Act.
SATISFACTION AND DISCHARGE
The indenture will be discharged and will cease to be of further effect as to
all notes issued thereunder, when:
(1) either:
(a) all notes that have been authenticated, except lost, stolen or
destroyed notes that have been replaced or paid and notes for whose
payment money has been deposited in trust and thereafter repaid to the
Company, have been delivered to the trustee for cancellation; or
41
(b) all notes that have not been delivered to the trustee for cancellation
have become due and payable by reason of the mailing of a notice of
redemption or otherwise or will become due and payable within one year
and the Company has irrevocably deposited or caused to be deposited
with the trustee as trust funds in trust solely for the benefit of the
holders, cash in U.S. dollars, non-callable Government Securities, or
a combination of cash in U.S. dollars and non-callable Government
Securities, in amounts as will be sufficient without consideration of
any reinvestment of interest, to pay and discharge the entire
indebtedness on the notes not delivered to the trustee for
cancellation for principal, premium and Special Interest, if any, and
accrued interest to the date of maturity or redemption;
(2) no Default or Event of Default has occurred and is continuing on the date
of the deposit or will occur as a result of the deposit and the deposit
will not result in a breach or violation of, or constitute a default under,
any other instrument to which the Company is a party or by which it is
bound;
(3) the Company has paid or caused to be paid all sums payable by it under the
indenture; and
(4) the Company has delivered irrevocable instructions to the trustee under the
indenture to apply the deposited money toward the payment of the notes at
maturity or the redemption date, as the case may be.
In addition, the Company must deliver an officers' certificate and an opinion of
counsel to the trustee stating that all conditions precedent to satisfaction and
discharge have been satisfied.
CONCERNING THE TRUSTEE
The Huntington National Bank is the trustee under the indenture. If the trustee
becomes a creditor of the Company, the indenture limits its right 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 it acquires any
conflicting interest it must eliminate such conflict within 90 days and 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 occurs and
is continuing, 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 of
notes, unless such holder has offered to the trustee security and indemnity
satisfactory to it against any loss, liability or expense.
ADDITIONAL INFORMATION
Anyone who receives this offering memorandum may obtain a copy of the indenture
and registration rights agreement without charge by writing to American
Greetings Corporation, One American Road, Cleveland, Ohio 44144; Attention: Mr.
Dale A. Cable.
BOOK-ENTRY, DELIVERY AND FORM
The certificates representing the notes are issued in fully registered form
without coupons in the form of a global note certificate (the "Global Note").
The Global Note will be deposited upon issuance with the trustee as custodian
for The Depository Trust Company ("DTC"), in New York, New York, and registered
in the name of DTC or its nominee, in each case for credit to an account of a
direct or indirect participant in DTC as described below.
42
Except as set forth below, the Global Note may be transferred, in whole and not
in part, only to another nominee of DTC or to a successor of DTC or its nominee.
Beneficial interests in the Global Note may not be exchanged for notes in
certificated form except in the limited circumstances described below. See "--
Certificated Notes" at page 44. Except in the limited circumstances described
below, owners of beneficial interests in the Global Note will not be entitled to
receive physical delivery of notes in certificated form.
Transfers of beneficial interests in the Global Note will be subject to the
applicable rules and procedures of DTC and its direct or indirect participants
(including, if applicable, those of Euroclear and Clearstream), which may change
from time to time.
CERTAIN BOOK-ENTRY PROCEDURES FOR THE GLOBAL NOTES
The descriptions of the operations and procedures of DTC set forth below are
provided solely as a matter of convenience. These operations and procedures are
solely within the control of the DTC settlement system and are subject to change
by DTC from time to time. Neither the Company nor the Exchange Agent take any
responsibility for these operations or procedures, and investors are urged to
contact the DTC system or its participants directly to discuss these matters.
DTC has advised the Company that it is
(1) a limited purpose trust company organized under the laws of the State of
New York;
(2) a "banking organization" within the meaning of the New York Banking Law;
(3) a member of the Federal Reserve System;
(4) a "clearing corporation" within the meaning of the Uniform Commercial Code,
as amended, and
(5) a "clearing agency" registered pursuant to Section 17A of the Exchange Act.
DTC was created to hold securities for its participants (collectively, the
"Participants") and facilitates the clearance and settlement of securities
transactions between Participants through electronic book-entry changes to
the accounts of its Participants, thereby eliminating the need for physical
transfer and delivery of certificates.
DTC's Participants include securities brokers and dealers (including the initial
purchasers), banks and trust companies, clearing corporations and certain other
organizations. Indirect access to DTC's system is also available to other
entities such as banks, brokers, dealers and trust companies (collectively, the
"Indirect Participants") that clear through or maintain a custodial relationship
with a Participant, either directly or indirectly. Investors who are not
Participants may beneficially own securities held by or on behalf of DTC only
through Participants or Indirect Participants.
The Company expects that pursuant to procedures established by DTC
(1) upon deposit of each Global Note, DTC will credit the accounts of
Participants designated by the initial purchasers with an interest in the
Global Note; and
(2) ownership of such Global Notes will be shown on, and the transfer of
ownership thereof will be effected only through, records maintained by DTC
(with respect to the interests of Participants) and the records of
Participants and the Indirect Participants (with respect to the interests
of persons other than Participants).
The laws of some jurisdictions may require that in order to effectively transfer
interests in securities to certain persons, such persons must take physical
delivery of such securities in definitive form. Accordingly, the ability to
transfer interests in the notes represented by a Global Note to such persons may
be limited. In addition, because DTC
43
can act only on behalf of its participants, who in turn act on behalf of persons
who hold interests through Participants, the ability of a person having an
interest in notes represented by a Global Note to pledge or transfer such
interest to persons or entities that do not participate in DTC's system, or to
otherwise take actions in respect of such interest, may be affected by the lack
of a physical definitive security in respect of such interest.
So long as DTC or its nominee is the registered owner of a Global Note, DTC or
such nominee, as the case may be, will be considered the sole owner or holder of
the notes represented by the Global Note for all purposes under the Indenture.
Except as provided below, owners of beneficial interests in a Global Note will
not be entitled to have notes represented by such Global Note registered in
their names, will not receive or be entitled to receive physical delivery of
Certificated Notes, and will not be considered the owners or holders thereof
under the Indenture for any purpose, including with respect to the giving of any
direction, instruction or approval to the Trustee thereunder. Accordingly, each
holder owning a beneficial interest in a Global Note must rely on the procedures
of DTC and, if such holder is not a Participant or an Indirect Participant, on
the procedures of the Participant through which such holder owns its interest,
to exercise any rights of a holder of notes under the Indenture with respect to
such Global Note. The Company understands that under existing industry practice,
in the event that the Company requests any action of holders of notes, or a
holder that is an owner of a beneficial interest in a Global Note desires to
take any action that DTC, as the holder of such Global Note, is entitled to
take, DTC would authorize the Participants to take such action and the
Participants would authorize holders owning through such Participants to take
such action or would otherwise act upon the instruction of such holders. Neither
the Company nor the Trustee will have any responsibility or liability for any
aspect of the records relating to or payments made on account of notes by DTC,
or for maintaining, supervising or reviewing any records of DTC relating to such
notes.
Payments with respect to the principal of, and premium, if any, and interest on,
any notes represented by a Global Note registered in the name of DTC or its
nominee on the applicable record date will be payable by the Company's Paying
Agent to or at the direction of DTC or its nominee in its capacity as the
registered holder of the Global Note representing such notes under the
Indenture. Initially, the Trustee will act as Paying Agent and Registrar. Under
the terms of the Indenture, the Company and the Company's Paying Agent may treat
the persons in whose names the notes, including the Global Notes, are registered
as the owners thereof for the purpose of receiving payment thereon and for any
and all other purposes whatsoever. Accordingly, neither the Company, nor the
Trustee, nor any Paying Agent has or will have any responsibility or liability
for the payment of such amounts to owners of beneficial interests in a Global
Note (including principal, premium, if any, liquidated damages, if any, and
interest). Payments by the Participants and the Indirect Participants to the
owners of beneficial interests in a Global Note will be governed by standing
instructions and customary industry practice and will be the responsibility of
the Participants or the Indirect Participants and DTC.
Transfers between participants in DTC will be effected in accordance with DTC's
procedures. Neither the company nor the trustee will have any responsibility for
the performance by DTC or its participants or indirect participants of their
obligations under the rules and procedures governing DTC's operations.
SAME DAY SETTLEMENT AND PAYMENT
The Company will make payments in respect of the notes represented by the Global
Notes (including principal, premium, if any, interest and Special Interest, if
any) by wire transfer of immediately available funds to the accounts specified
by the Global Note holder. The Company will make all payments of principal,
interest and premium and Special Interest, if any, with respect to Certificated
Notes by wire transfer of immediately available funds to the accounts specified
by the holders of the Certificated Notes or, if no such account is specified, by
mailing a check to each such holder's registered address. The notes represented
by the Global Notes trade in the PORTAL market and to trade in DTC's Same-Day
Funds Settlement System, and any permitted secondary market trading activity in
such notes will, therefore, be required by DTC to be settled in immediately
available funds. The Company expects that secondary trading in any Certificated
Notes will also be settled in immediately available funds. Because of time zone
differences, the securities account of a Euroclear or Clearstream participant
purchasing an interest in a Global Note
44
from a Participant in DTC will be credited, and any such crediting will be
reported to the relevant Euroclear or Clearstream participant, during the
securities settlement processing day (which must be a business day for Euroclear
and Clearstream) immediately following the settlement date of DTC. DTC has
advised the Company that cash received in Euroclear or Clearstream as a result
of sales of interests in a Global Note by or through a Euroclear or Clearstream
participant to a Participant in DTC will be received with value on the
settlement date of DTC but will be available in the relevant Euroclear or
Clearstream cash account only as of the business day for Euroclear or
Clearstream following DTC's settlement date.
CERTIFICATED NOTES
A Global Note is exchangeable for definitive notes in registered certificated
form ("Certificated Notes") if:
(1) DTC (a) notifies the Company that it is unwilling or unable to continue as
depositary for the Global Notes and the Company fails to appoint a
successor depositary or (b) has ceased to be a clearing agency registered
under the Exchange Act;
(2) The Company, at its option, notifies the trustee in writing that it elects
to cause the issuance of the Certificated Notes; or
(3) there has occurred and is continuing a Default or Event of Default with
respect to the notes.
In addition, beneficial interests in a Global Note may be exchanged for
Certificated Notes upon prior written notice given to the trustee by or on
behalf of DTC in accordance with the indenture. In all cases, Certificated Notes
delivered in exchange for any Global Note or beneficial interests in Global
Notes will be registered in the names, and issued in any approved denominations,
requested by or on behalf of the depositary (in accordance with its customary
procedures) and will bear the applicable restrictive legend referred to in
"Notice to Investors," unless that legend is not required by applicable law.
Certificated Notes may not be exchanged for beneficial interests in any Global
Note unless the transferor first delivers to the trustee a written certificate
(in the form provided in the indenture) to the effect that such transfer will
comply with the appropriate transfer restrictions applicable to such notes.
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:
(1) Indebtedness of any other Person existing at the time such other
Person is merged with or into or became a Subsidiary of such specified
Person, whether or not such Indebtedness is incurred in connection
with, or in contemplation of, such other Person merging with or into,
or becoming a Subsidiary of, such specified Person; and
(2) Indebtedness secured by a Lien encumbering any asset acquired by such
specified Person. "Adjusted Consolidated Cash Flow" means, with respect to any
specified Person for any period, the Consolidated Net Income of such Person for
such period plus:
(1) an amount equal to any extraordinary loss plus any net loss realized
by such Person or any of its Restricted Subsidiaries in connection
with an Asset Sale, to the extent such losses were deducted in
computing such Consolidated Net Income; plus
45
(2) 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
(3) consolidated interest expense of such Person and its Restricted
Subsidiaries for such period, whether paid or accrued and whether or
not capitalized (including, without limitation, amortization of debt
issuance costs and 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 of the effect of all payments made or received
pursuant to Hedging Obligations), to the extent that any such expense
was deducted in computing such Consolidated Net Income; plus
(4) non-recurring and special charges deducted in computing Consolidated
Net Income; plus
(5) depreciation, amortization (including amortization of goodwill and
other intangibles but excluding amortization of prepaid cash expenses
that were paid in a prior period) and other non-cash expenses
(excluding any such non-cash expense to the extent that it represents
an accrual of or reserve for cash expenses in any future period or
amortization of a prepaid cash expense that was paid in a prior
period) of such Person and its Restricted Subsidiaries for such period
to the extent that such depreciation, amortization and other non-cash
expenses were deducted in computing such Consolidated Net Income;
minus
(6) non-cash items increasing such Consolidated Net Income for such
period, other than the accrual of revenue in the ordinary course of
business, in each case, on a consolidated basis and determined in
accordance with GAAP.
"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,"
as used with respect to any Person, means 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 Stock of a Person will be deemed to be control. For purposes of this
definition, the terms "controlling,'"'controlled by" and "under common control
with" have correlative meanings. No Person (other than the Company or any
Subsidiary of the Company) in whom a Receivables Subsidiary makes an Investment
in connection with a Qualified Receivables Transaction will be deemed to be an
Affiliate of the Company or any of its Subsidiaries solely by reason of such
Investment.
"Asset Sale" means:
(1) the sale, lease, conveyance or other disposition of any assets or
rights, other than sales of inventory in the ordinary course of
business consistent with past practices; provided that the sale,
conveyance or other disposition of all or substantially all of the
assets of the Company and its Subsidiaries taken as a whole will be
governed by the provisions of the indenture described above under the
caption "--Repurchase at the Option of Holders-- Change of Control"
and/or the provisions described above under the caption "-- Certain
Covenants-- Merger, Consolidation or Sale of Assets" and not by the
provisions of the Asset Sale covenant; and
(2) the issuance of Equity Interests in any of the Company's Restricted
Subsidiaries or the sale of Equity Interests in any of its
Subsidiaries.
Notwithstanding the preceding, the following items will not be deemed to be
Asset Sales:
(1) any single transaction or series of related transactions that involves
assets having a fair market value of less than $1.0 million;
46
(2) a transfer of assets between or among the Company and its Restricted
Subsidiaries;
(3) an issuance of Equity Interests by a Subsidiary to the Company or to a
Restricted Subsidiary;
(4) the sale or lease of equipment, inventory, accounts receivable or
other assets in the ordinary course of business;
(5) the sale or other disposition of cash or Cash Equivalents;
(6) the sale or other disposition of all or substantially all of the
assets comprising the party goods and candles businesses of the
Company (as such businesses are described in this offering circular)
or the stock of any subsidiary substantially all of the assets of
which are the assets comprising the party goods and candles businesses
of the Company; provided that the requirements set forth under clauses
(1) and (2) of the covenant described above under the caption
"Repurchase at the Option of Holders -- Asset Sales" shall have been
satisfied and any cash proceeds received upon any such sale or
disposition shall be applied in accordance with the Asset Sale
covenant;
(7) sales of accounts receivable and related assets of the type specified
in the definition of "Qualified Receivables Transaction" to a
Receivables Subsidiary for the fair market value thereof, including
cash in an amount at least equal to 75% of the book value thereof as
determined in accordance with GAAP, it being understood that, for the
purposes of this clause (7), notes received in exchange for the
transfer of accounts receivable and related assets will be deemed cash
if the Receivables Subsidiary or other payor is required to repay said
notes as soon as practicable from available cash collections less
amounts required to be established as reserves pursuant to contractual
agreements with entities that are not Affiliates of the Company
entered into as part of a Qualified Receivables Transaction;
(8) transfers of accounts receivable and related assets of the type
specified in the definition of "Qualified Receivables Transaction" (or
a fractional undivided interest therein) by a Receivables Subsidiary
in a Qualified Receivables Transaction; and
(9) a Restricted Payment or Permitted Investment that is permitted by the
covenant described above under the caption "--Certain Covenants--
Restricted Payments."
"Beneficial Owner" has the meaning assigned to such term in Rule 13d-3 and Rule
13d-5 under the Exchange Act, except that in calculating the beneficial
ownership of any particular "person" (as that term is used in Section 13(d)(3)
of the Exchange Act), such "person" will be deemed to have beneficial ownership
of all securities that such "person" has the right to acquire by conversion or
exercise of other securities, whether such right is currently exercisable or is
exercisable only upon the occurrence of a subsequent condition. The terms
"Beneficially Owns" and "Beneficially Owned" have a corresponding meaning.
"Board of Directors" means:
(1) with respect to a corporation, the board of directors of the
corporation;
(2) with respect to a partnership, the board of directors of the general
partner of the partnership; and
(3) with respect to any other Person, the board or committee of such
Person serving a similar function.
"Capital Lease Obligation" means, at the time any determination is to be made,
the amount of the liability in respect of a capital lease that would at that
time be required to be capitalized on a balance sheet in accordance with GAAP.
47
"Capital Stock" means:
(1) in the case of a corporation, corporate stock;
(2) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however
designated) of corporate stock;
(3) in the case of a partnership or limited liability company, partnership
or membership interests (whether general or limited); and
(4) 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.
"Cash Equivalents" means:
(1) United States dollars;
(2) securities issued or directly and fully guaranteed or insured by the
United States government or any agency or instrumentality of the
United States government (provided that the full faith and credit of
the United States is pledged in support of those securities) having
maturities of not more than six months from the date of acquisition;
(3) certificates of deposit and eurodollar time deposits with maturities
of six months or less from the date of acquisition, bankers'
acceptances with maturities not exceeding six months and overnight
bank deposits, in each case, with any domestic commercial bank having
capital and surplus in excess of $500.0 million and a Thomson Bank
Watch Rating of "B" or better;
(4) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (2) and (3)
above entered into with any financial institution meeting the
qualifications specified in clause (3) above;
(5) commercial paper having the highest rating obtainable from Moody's or
S&P and in each case maturing within six months after the date of
acquisition; and
(6) money market funds at least 95% of the assets of which constitute Cash
Equivalents of the kinds described in clauses (1) through (5) of this
definition.
"Change of Control" means the occurrence of any of the following:
(1) the direct or indirect sale, transfer, conveyance or other disposition
(other than by way of merger or consolidation), in one or a series of
related transactions, of all or substantially all of the properties or
assets of the Company and its Restricted Subsidiaries taken as a whole
to any "person" (as that term is used in Section 13(d)(3) of the
Exchange Act) other than a Principal or a Related Party of a
Principal;
(2) the adoption of a plan relating to the liquidation or dissolution of
the Company;
(3) the consummation of any transaction (including, without limitation,
any merger or consolidation) the result of which is that any "person"
(as defined above), other than the Principals and their Related
Parties, becomes the Beneficial Owner, directly or indirectly, of more
than 50% of the Voting Stock of the Company, measured by voting power
rather than number of shares; or
(4) the first day on which a majority of the members of the Board of
Directors of the Company are not Continuing Directors.
48
"Consolidated Cash Flow" means, with respect to any specified Person for any
period, the Consolidated Net Income of such Person for such period plus:
(1) an amount equal to any extraordinary loss plus any net loss realized
by such Person or any of its Restricted Subsidiaries in connection
with an Asset Sale, to the extent such losses were deducted in
computing such Consolidated Net Income; plus
(2) 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
(3) consolidated interest expense of such Person and its Restricted
Subsidiaries for such period, whether paid or accrued and whether or
not capitalized (including, without limitation, amortization of debt
issuance costs and 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 of the effect of all payments made or received
pursuant to Hedging Obligations), to the extent that any such expense
was deducted in computing such Consolidated Net Income; plus
(4) depreciation, amortization (including amortization of goodwill and
other intangibles but excluding amortization of prepaid cash expenses
that were paid in a prior period) and other non-cash expenses
(excluding any such non-cash expense to the extent that it represents
an accrual of or reserve for cash expenses in any future period or
amortization of a prepaid cash expense that was paid in a prior
period) of such Person and its Restricted Subsidiaries for such period
to the extent that such depreciation, amortization and other non-cash
expenses were deducted in computing such Consolidated Net Income;
minus
(5) non-cash items increasing such Consolidated Net Income for such
period, other than the accrual of revenue in the ordinary course of
business, in each case, on a consolidated basis and determined in
accordance with GAAP.
"Consolidated Net Income" means, with respect to any specified Person for any
period, the aggregate of the Net Income of such Person and its Subsidiaries for
such period, on a consolidated basis, determined in accordance with GAAP;
provided that:
(1) the Net Income (but not loss) of any Person that is not a Subsidiary
or that is accounted for by the equity method of accounting will be
included only to the extent of the amount of dividends or
distributions paid in cash to the specified Person or a Wholly Owned
Subsidiary of the Person;
(2) the Net Income of any Subsidiary will be excluded to the extent that
the declaration or payment of dividends or similar distributions by
that 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 Subsidiary
or its stockholders;
(3) the Net Income of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition will
be excluded;
(4) the aggregate amount of restructuring charges, write-downs and
reserves taken by the Company in connection with the restructuring of
its operations as described in this offering circular under the
caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Restructuring Activities and Special
Charges" but without regard to the expected timing of such
restructuring charges, write-downs and reserves will be added back;
provided that the aggregate amount added to Consolidated Net Income
pursuant to this clause (4) shall not exceed $350.6 million, which
shall include up to $32.6 million related to the write- down of the
Company's investment in Egreetings Network, Inc., and pre-tax charges
of up to $18.0 million related to changes is contractual relationships
with strategic partners of AmericanGreetings.com, up to $90.0
49
million related to the implementation of scan-based trading at select
retailers, and up to $210.0 million related to corporate
restructuring;
(5) the cumulative effect of a change in accounting principles will be
excluded; and
(6) the Net Income (but not loss) of any Unrestricted Subsidiary will be
excluded (except to the extent distributed to the Company or one of
its Restricted Subsidiaries).
"Consolidated Net Worth" means, with respect to any specified Person as of any
date, the sum of:
(1) the consolidated equity of the common stockholders of such Person and
its consolidated Subsidiaries as of such date; plus
(2) the respective amounts reported on such Person's balance sheet as of
such date with respect to any series of preferred stock (other than
Disqualified Stock) that by its terms is not entitled to the payment
of dividends unless such dividends may be declared and paid only out
of net earnings in respect of the year of such declaration and
payment, but only to the extent of any cash received by such Person
upon issuance of such preferred stock.
"Continuing Directors" means, as of any date of determination, any member of the
Board of Directors of the Company who:
(1) was a member of such Board of Directors on the date of the indenture;
or
(2) was nominated for election or elected to such Board of Directors with
the approval of a majority of the Continuing Directors who were
members of such Board at the time of such nomination or election.
"Convertible Subordinated Notes" means $150 million in aggregate principal
amount of the Company's 7.00% Convertible Subordinated Notes due July 15, 2006
to be issued concurrently with these notes.
"Credit Facilities" means, one or more debt facilities (including, without
limitation, the New Credit Facilities) or commercial paper facilities, in each
case with banks or other institutional lenders providing for revolving credit
loans, term loans, receivables financing (including through the sale of
receivables to such lenders or to special purpose entities formed to borrow from
such lenders against such receivables) or letters of credit, in each case, as
amended, restated, modified, renewed, refunded, replaced or refinanced in whole
or in part from time to time.
"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.
"Designated Senior Debt" means:
(1) any Indebtedness outstanding under the Existing Credit Facility and
any Credit Facility used to refinance or replace at least $25 million
of debt outstanding under the Existing Credit Facility; and
(2) after payment in full of all Obligations under the Existing Credit
Facility and any Credit Facility used to refinance or replace at least
$25 million of debt outstanding under the Existing Credit Facility,
any other Senior Debt permitted under the indenture the principal
amount of which is $25.0 million or more and that has been designated
by the Company as "Designated Senior Debt."
"Disqualified Stock" means any Capital Stock that, by its terms (or by the terms
of any security into which it is
50
convertible, or for which it is exchangeable, in each case at the option of the
holder of the Capital Stock), 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 of the Capital Stock, in whole or in
part, on or prior to the date that is 91 days after the date on which the notes
mature. Notwithstanding the preceding sentence, any Capital Stock that would
constitute Disqualified Stock solely because the holders of the Capital Stock
have the right to require the Company to repurchase such Capital Stock upon the
occurrence of a change of control or an asset sale will not constitute
Disqualified Stock if the terms of such Capital Stock provide that the Company
may not repurchase or redeem any such Capital Stock pursuant to such provisions
unless such repurchase or redemption complies with the covenant described above
under the caption "-- Certain Covenants -- Restricted Payments."
"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).
"Equity Offering" means any offering of common stock of the Company.
"Existing Credit Facility" means the Credit Agreement as described under
"Description of Other Indebtedness -- The Credit Agreement."
"Existing Indebtedness" means Indebtedness of the Company and its Subsidiaries
(other than Indebtedness under Credit Facilities) in existence on the date of
the indenture, until such amounts are repaid.
"Fixed Charges" means, with respect to any specified Person for any period, the
sum, without duplication, of:
(1) the consolidated interest expense of such Person and its Restricted
Subsidiaries for such period, whether paid or accrued, including,
without limitation, amortization of debt issuance costs and 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 of the effect of all
payments made or received pursuant to Hedging Obligations; plus
(2) the consolidated interest of such Person and its Restricted
Subsidiaries that was capitalized during such period; plus
(3) 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;
plus
(4) the product of (a) all dividends, whether paid or accrued and whether
or not in cash, on any series of preferred stock of such Person or any
of its Restricted Subsidiaries, other than dividends on Equity
Interests payable solely in Equity Interests of the Company (other
than Disqualified Stock) or to the Company or a Restricted Subsidiary
of the Company, 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, expressed
as a decimal, in each case, on a consolidated basis and in accordance
with GAAP.
"Fixed Charge Coverage Ratio" means with respect to any specified Person and its
Restricted Subsidiaries for any period, the ratio of the Consolidated Cash Flow
of such Person for such period to the Fixed Charges of such Person for such
period. In the event that the specified Person or any of its Restricted
Subsidiaries incurs, assumes, Guarantees, repays, repurchases or redeems any
Indebtedness (other than ordinary working capital borrowings) or issues,
repurchases or redeems preferred stock subsequent to the commencement of the
period for which the Fixed Charge Coverage Ratio is being calculated and 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 will be calculated giving pro forma effect to such incurrence,
assumption, Guarantee, repayment, repurchase or redemption of Indebtedness, or
such issuance, repurchase or redemption of preferred stock, and the use of the
proceeds therefrom as if the same had occurred at the beginning of the
applicable four-quarter reference period. In addition, for purposes of
calculating the Fixed Charge Coverage Ratio:
51
(1) acquisitions that have been made by the specified Person or any of its
Restricted Subsidiaries, including through mergers or consolidations
and including any related financing transactions, during the
four-quarter reference period or subsequent to such reference period
and on or prior to the Calculation Date will be given pro forma effect
as if they had occurred on the first day of the four-quarter reference
period and Consolidated Cash Flow for such reference period will be
calculated on a pro forma basis in accordance with Regulation S-X
under the Securities Act, but without giving effect to clause (3) of
the proviso set forth in the definition of Consolidated Net Income;
(2) the Consolidated Cash Flow attributable to discontinued operations, as
determined in accordance with GAAP, and operations or businesses
disposed of prior to the Calculation Date, will be excluded; and
(3) the Fixed Charges attributable to discontinued operations, as
determined in accordance with GAAP, and operations or businesses
disposed of prior to the Calculation Date, will be excluded, but only
to the extent that the obligations giving rise to such Fixed Charges
will not be obligations of the specified Person or any of its
Subsidiaries following the Calculation Date.
"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.
"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, by way of a pledge of
assets or through letters of credit or reimbursement agreements in respect
thereof, of all or any part of any Indebtedness.
"Hedging Obligations" means, with respect to any specified Person, the
obligations of such Person under:
(1) interest rate swap agreements, interest rate cap agreements and
interest rate collar agreements; and
(2) other agreements or arrangements designed to protect such Person
against fluctuations in interest rates.
"Indebtedness" means, with respect to any specified Person, any indebtedness of
such Person, whether or not contingent:
(1) in respect of borrowed money;
(2) evidenced by bonds, notes, debentures or similar instruments or
letters of credit (or reimbursement agreements in respect thereof);
(3) in respect of banker's acceptances;
(4) representing Capital Lease Obligations;
(5) representing the balance deferred and unpaid of the purchase price of
any property, except any such balance that constitutes an accrued
expense or trade payable; or
(6) representing any Hedging Obligations,
if and to the extent any of the preceding items (other than letters of credit
and Hedging Obligations) would appear as a liability upon a balance sheet of the
specified Person prepared in accordance with GAAP. In addition, the term
"Indebtedness" includes all Indebtedness of others secured by a Lien on any
asset of the specified Person (whether or not such Indebtedness is assumed by
the specified Person) and, to the extent not otherwise included, the Guarantee
by the specified Person of any indebtedness of any other Person. The amount of
any Indebtedness outstanding as of any date will be:
52
(1) the accreted value of the Indebtedness, in the case of any
Indebtedness issued with original issue discount; and
(2) the principal amount of the Indebtedness, together with any interest
on the Indebtedness that is more than 30 days past due, in the case of
any other Indebtedness.
"Investments" means, with respect to any Person, all direct or indirect
investments by such Person in other Persons (including Affiliates) in the forms
of loans (including Guarantees or other obligations), advances or capital
contributions (excluding commission, travel and similar advances to officers and
employees made in the ordinary course of business), purchases or other
acquisitions for consideration of Indebtedness, Equity Interests or other
securities, together with all items that are or would be classified as
investments on a balance sheet prepared in accordance with GAAP. 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, such Person is no longer a
Subsidiary of the Company, the Company will 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 in an amount
determined as provided in the final paragraph of the covenant described above
under the caption "-- Certain Covenants -- Restricted Payments." The acquisition
by the Company or any Subsidiary of the Company of a Person that holds an
Investment in a third Person will be deemed to be an Investment by the Company
or such Subsidiary in such third Person in an amount equal to the fair market
value of the Investment held by the acquired Person in such third Person in an
amount determined as provided in the final paragraph of the covenant described
above under the caption "-- Certain Covenants -- Restricted Payments." "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, except in connection with any Qualified Receivables Transaction, any filing
of or agreement to give any financing statement under the Uniform Commercial
Code (or equivalent statutes) of any jurisdiction.
"Net Income" means, with respect to any specified 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:
(1) 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; 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
(2) any extraordinary gain (but not loss), together with any related
provision for taxes on such extraordinary 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 sales commissions, and any relocation expenses incurred as a
result of the Asset Sale, taxes paid or payable as a result of the Asset Sale,
in each case, after taking into account any available tax credits or deductions
and any tax sharing arrangements, and amounts required to be applied to the
repayment of Indebtedness, other than Indebtedness under a Credit Facility,
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.
53
"Non-Recourse Debt" means Indebtedness:
(1) 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;
(2) no default with respect to which (including any rights that the
holders of the Indebtedness 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 or cause the payment of the Indebtedness to be
accelerated or payable prior to its stated maturity; and
(3) 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 "Old Notes" means $300.0 million in outstanding
principal amount of the Company's 6.10% Senior Notes due 2028.
"Permitted Business" means any business that derives a majority of its revenues
from the business engaged in by the Company and its Restricted Subsidiaries on
the date of original issuance of the notes and/or activities that are reasonably
similar, ancillary or related to, or a reasonable extension, development or
expansion of, the businesses in which the Company and its Restricted
Subsidiaries are engaged on the date of original issuance of the notes.
"Permitted Investments" means:
(1) any Investment in the Company or in a Restricted Subsidiary of the
Company;
(2) any Investment in Cash Equivalents;
(3) 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 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;
(4) any Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made pursuant to and in
compliance with the covenant described above under the caption
"--Repurchase at the Option of Holders-- Asset Sales;"
(5) any acquisition of assets solely in exchange for the issuance of
Equity Interests (other than Disqualified Stock) of the Company;
(6) any Investments received in compromise of obligations of such persons
incurred in the ordinary course of trade creditors or customers that
were incurred in the ordinary course of business, including pursuant
to any plan of reorganization or similar arrangement upon the
bankruptcy or insolvency of any trade creditor or customer;
(7) Hedging Obligations;
(8) the acquisition by a Receivables Subsidiary in connection with a
Qualified Receivables Transaction of Equity Interests of a trust or
other Person established by such Receivables Subsidiary to effect such
Qualified Receivables Transaction; and any other Investment by the
Company or a Subsidiary of the Company in a Receivables Subsidiary or
any Investment by a Receivables Subsidiary in any other Person in
connection with a Qualified Receivables Transaction; provided, that
such other Investment is in the form of a note or other
54
instrument that the Receivables Subsidiary or other Person is required
to repay as soon as practicable from available cash collections less
amounts required to be established as reserves pursuant to contractual
agreements with entities that are not Affiliates of the Company
entered into as part of a Qualified Receivables Transaction;
(9) any Investment in a Person substantially all of the assets of which
are the party goods and candle businesses currently operated by the
Company (as such businesses are described in this offering circular);
and
(10) other Investments in any Person having an aggregate fair market value
(measured on the date each such Investment was made and without giving
effect to subsequent changes in value), when taken together with all
other Investments made pursuant to this clause (10) that are at the
time outstanding not to exceed $15.0 million.
"Permitted Junior Securities" means:
(1) Equity Interests in the Company; or
(2) debt securities that are subordinated to all Senior Debt and any debt
securities issued in exchange for Senior Debt to substantially the
same extent as, or to a greater extent than, the notes are
subordinated to Senior Debt under the indenture.
"Permitted Liens" means:
(1) Liens of the Company and its Restricted Subsidiaries securing Senior
Debt that was permitted by the terms of the indenture to be incurred;
(2) Liens in favor of the Company;
(3) Liens on property of a Person existing at the time such Person is
merged with or into or consolidated with the Company or any Restricted
Subsidiary of the Company; provided that such Liens were in existence
prior to the contemplation of such merger or consolidation and do not
extend to any assets other than those of the Person merged into or
consolidated with the Company or the Restricted Subsidiary;
(4) Liens on property existing at the time of acquisition of the property
by the Company or any Restricted Subsidiary of the Company, provided
that such Liens were in existence prior to the contemplation of such
acquisition;
(5) Liens to secure the performance of statutory obligations, surety or
appeal bonds, performance bonds or other obligations of a like nature
incurred in the ordinary course of business;
(6) Liens to secure Indebtedness (including Capital Lease Obligations)
permitted by clause (4) of the second paragraph of the covenant
entitled "--Certain Covenants-- Incurrence of indebtedness and
Issuance of Preferred Stock" covering only the assets acquired with
such Indebtedness;
(7) Liens existing on the date of the indenture;
(8) Liens for taxes, assessments or governmental charges or claims that
are not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently concluded,
provided that any reserve or other appropriate provision as is
required in conformity with GAAP has been made therefor;
(9) Liens on assets of the Company or a Receivables Subsidiary incurred in
connection with a Qualified Receivables Transaction;
(10) Liens on assets of Unrestricted Subsidiaries that secure Non-Recourse
Debt of Unrestricted Subsidiaries; and
55
(11) Liens incurred in the ordinary course of business of the Company or
any Restricted Subsidiary of the Company with respect to obligations
that do not exceed $5.0 million at any one time outstanding.
"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 (other than
intercompany Indebtedness); provided that:
(1) 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
extended, refinanced, renewed, replaced, defeased or refunded (plus
all accrued interest on the Indebtedness and the amount of all
expenses and premiums incurred in connection therewith);
(2) such Permitted Refinancing Indebtedness has a final maturity date
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;
(3) 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, 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
(4) 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, joint venture,
association, joint-stock company, trust, unincorporated organization, limited
liability company or government or other entity.
"Principals" means Morry Weiss, Judith A. Weiss, Harry H. Stone, Gary Weiss,
Jeffrey Weiss, Zev Weiss, Elie Weiss and the Irving I. Stone Limited Liability
Co.
"Qualified Receivables Transaction" means any transaction or series of
transactions entered into by the Company or any of its Subsidiaries pursuant to
which the Company or any of its Subsidiaries sells, conveys or otherwise
transfers to (i) a Receivables Subsidiary (in the case of a transfer by the
Company or any of its Subsidiaries) and (ii) any other Person (in the case of a
transfer by a Receivables Subsidiary), or grants a security interest in, any
accounts receivable (whether now existing or arising in the future) of the
Company or any of its Subsidiaries, and any assets related thereto including,
without limitation, all collateral securing such accounts receivable, all
contracts and all guarantees or other obligations in respect of such accounts
receivable, proceeds of such accounts receivable and other assets which are
customarily transferred or in respect of which security interests are
customarily granted in connection with asset securitization transactions
involving accounts receivable.
"Receivables Subsidiary" means a Subsidiary of the Company which engages in no
activities other than in connection with the financing of accounts receivable
and which is designated by the board of directors of the Company (as provided
below) as a Receivables Subsidiary (a) no portion of the Indebtedness or any
other Obligations (contingent or otherwise) of which (i) is guaranteed by the
Company or any Subsidiary of the Company (excluding guarantees of Obligations
(other than the principal of, and interest on, Indebtedness) pursuant to
representations, warranties, covenants and indemnities entered into in the
ordinary course of business in connection with a Qualified Receivables
Transaction), (ii) is recourse to or obligates the Company or any Subsidiary of
the Company in any way other than pursuant to representations, warranties,
covenants and indemnities entered into in the ordinary course of business in
connection with a Qualified Receivables Transaction or (iii) subjects any
property or asset of the Company or any Subsidiary of the Company (other than
accounts receivable and related assets as provided in the definition of
56
"Qualified Receivables Transaction"), directly or indirectly, contingently or
otherwise, to the satisfaction thereof, other than pursuant to representations,
warranties, covenants and indemnities entered into in the ordinary course of
business in connection with a Qualified Receivables Transaction, (b) with which
neither the Company nor any Subsidiary of the Company has any material contract,
agreement, arrangement or understanding other than on terms no less favorable to
the Company or such Subsidiary than those that might be obtained at the time
from Persons who are not Affiliates of the Company, other than fees payable in
the ordinary course of business in connection with servicing accounts receivable
and (c) with which neither the Company nor any Subsidiary of the Company has any
obligation to maintain or preserve such Subsidiary's financial condition or
cause such Subsidiary to achieve certain levels of operating results. Any such
designation by the Board of Directors of the Company will be evidenced to the
trustee by filing with the trustee a certified copy of the resolution of the
board of directors of the Company giving effect to such designation and an
officers' certificate certifying that such designation complied with the
foregoing conditions.
"Related Party" means:
(1) any controlling stockholder, 80% (or more) owned Subsidiary, or
immediate family member (in the case of an individual) of any
Principal; or
(2) any trust, corporation, partnership or other entity, the
beneficiaries, stockholders, partners, owners or Persons beneficially
holding an 80% or more controlling interest of which consist of any
one or more Principals and/or such other Persons referred to in the
immediately preceding clause (1).
"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 an Unrestricted Subsidiary.
"Senior Debt" means:
(1) all Indebtedness of the Company outstanding under Credit Facilities
and all Hedging Obligations with respect thereto;
(2) any other Indebtedness of the Company permitted to be incurred 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; and
(3) all Obligations with respect to the items listed in the preceding
clauses (1) and (2).
Notwithstanding anything to the contrary in the preceding, Senior Debt will
not include:
(1) any liability for federal, state, local or other taxes owed or owing
by the Company;
(2) any intercompany Indebtedness of the Company or any of its
Subsidiaries to the Company or any of its Affiliates;
(3) any trade payables; or
(4) the portion of any Indebtedness that is incurred in violation of the
indenture.
"Significant Subsidiary" means any 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
hereof.
57
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which the payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and will not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"Subsidiary" means, with respect to any specified Person:
(1) 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 of the corporation,
association or other business entity is at the time owned or
controlled, directly or indirectly, by that Person or one or more of
the other Subsidiaries of that Person (or a combination thereof); and
(2) 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 that Person or one or more
Subsidiaries of that Person (or any combination thereof).
"Unrestricted Subsidiary" means any Subsidiary of the Company 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:
(1) has no Indebtedness other than Non-Recourse Debt;
(2) 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;
(3) is a Person with respect to which neither the Company nor any of its
Restricted Subsidiaries has any direct or indirect obligation (a) to
subscribe for additional Equity Interests or (b) to maintain or
preserve such Person's financial condition or to cause such Person to
achieve any specified levels of operating results;
(4) has not guaranteed or otherwise directly or indirectly provided credit
support for any Indebtedness of the Company or any of its Restricted
Subsidiaries; and
(5) has at least one director on its Board of Directors that is not a
director or executive officer of the Company or any of its Restricted
Subsidiaries and has at least one executive officer that is not a
director or executive officer of the Company or any of its Restricted
Subsidiaries.
Any designation of a Subsidiary of the Company as an Unrestricted Subsidiary
will 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 preceding
conditions and was permitted by the covenant described above under the caption
"-- Certain Covenants -- Restricted Payments." If, at any time, any Unrestricted
Subsidiary would fail to meet the preceding requirements as an Unrestricted
Subsidiary, it will thereafter cease to be an Unrestricted Subsidiary for
purposes of the indenture and any Indebtedness of such Subsidiary will 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 the caption "-- Certain Covenants -- Incurrence of
Indebtedness and Issuance of Preferred Stock," the Company will 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 will 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 will only be permitted if (1) such Indebtedness
is permitted under the covenant described under the caption "-- Certain
Covenants --
58
Incurrence of Indebtedness and Issuance of Preferred Stock," calculated on a pro
forma basis as if such designation had occurred at the beginning of the
four-quarter reference period and (2) no Default or Event of Default would be in
existence following such designation.
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness at
any date, the number of years obtained by dividing:
(1) 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 of the Indebtedness, 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
(2) the then outstanding principal amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" of any specified Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) will at
the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person and one or more Wholly Owned Restricted Subsidiaries
of such Person.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the principal United States federal income tax
consequences of the purchase, ownership and disposition of the notes to
beneficial owners of notes who are United States Holders (as defined below) and
the principal United States federal income and estate tax consequences of the
purchase, ownership and disposition of the notes to beneficial owners of notes
who are Foreign Holders (as defined below). This discussion is based on
currently existing provisions of the Internal Revenue Code of 1986, as amended
(the "Code"), Treasury regulations promulgated thereunder, and administrative
and judicial interpretations thereof, all as in effect on the date hereof and
all of which are subject to change possibly with retroactive effect, or
different interpretations. This discussion does not address the tax consequences
to subsequent purchasers of notes and is limited to initial purchasers of notes
who purchase the notes at the offering price and hold the notes as capital
assets, within the meaning of section 1221 of the Code. This discussion also
does not address the tax consequences to Foreign Holders that are subject to
United States federal income tax on a net basis on income realized with respect
to a note because such income is effectively connected with the conduct of a
U.S. trade or business. Such Foreign Holders are generally taxed in a similar
manner to United States Holders, but certain special rules apply, including
branch profits tax. This discussion does not address the tax consequences to
persons who hold the notes through a partnership or similar pass-through entity.
Moreover, this discussion is for general information only and does not address
all of the tax consequences that may be relevant to particular initial
purchasers of notes in light of their personal circumstances or to certain types
of initial purchasers (such as certain financial institutions, insurance
companies, tax-exempt entities, dealers in securities, former U.S. citizens and
long-term residents or persons who have hedged the risk of owning a note) or the
effect of any applicable state, local or foreign tax laws.
YOU ARE URGED TO CONSULT YOUR OWN TAX ADVISORS AS TO THE PARTICULAR TAX
CONSEQUENCES TO YOU OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE NOTES,
INCLUDING THE APPLICABILITY OF ANY FEDERAL TAX LAWS OR ANY STATE, LOCAL OR
FOREIGN TAX LAWS, AND ANY CHANGES (OR PROPOSED CHANGES) IN APPLICABLE TAX LAWS
OR INTERPRETATIONS THEREOF.
UNITED STATES FEDERAL INCOME TAXATION OF UNITED STATES HOLDERS
59
As used herein, the term "United States Holder" means a holder of a note that
is, for United States federal income tax purposes, (a) a citizen or resident of
the United States, (b) a corporation or other entity (other than a partnership)
created or organized in or under the laws of the United States or any political
subdivision thereof, (c) an estate the income of which is subject to United
States federal income taxation regardless of source or (d) a trust if (i) a U.S.
court is able to exercise primary supervision over the administration of the
trust and one or more U.S. persons have authority to control all substantial
decisions of the trust or (ii) the trust has elected to be treated as a United
States Holder pursuant to applicable Treasury regulations.
PAYMENT OF INTEREST
Stated interest paid or accrued on the notes will constitute qualified stated
interest and will be taxable to a United States Holder as ordinary income in
accordance with the holder's method of accounting for U.S. federal income tax
purposes. Alternatively, a United States Holder may elect to include stated
interest on the notes (as well as original issue discount ("OID") and, if any,
market discount, de minimis market discount and unstated interest on the notes,
as adjusted by any amortizable bond premium or acquisition premium) in gross
income on a constant yield basis. The mechanics and implications of such an
election are complex and, as a result, United Stated Holders should consult
their own tax advisors regarding the advisability of making such an election.
ORIGINAL ISSUE DISCOUNT
The notes will have OID for U.S. federal income tax purposes, and accordingly
United States Holders of notes will be subject to special rules relating to the
accrual of income for tax purposes. United States Holders of notes generally
must include OID in gross income for U.S. federal income tax purposes on an
annual basis under a constant yield accrual method regardless of their regular
method of tax accounting. As a result, United States Holders will include OID in
income in advance of the receipt of cash attributable to such income. However,
United States Holders of the notes generally will not be required to include
separately in income cash payments received on such notes, even if denominated
as interest, to the extent such payments constitute payments of previously
accrued OID.
The notes will be treated as issued with OID equal to the excess of a note's
"stated redemption price at maturity" over its issue price. The stated
redemption price at maturity of a note is the total of all payments on the note
that are not payments of "qualified stated interest." A qualified stated
interest payment is a payment of stated interest unconditionally payable, in
cash or property (other than its debt instruments), at least annually at a
single fixed rate during the entire term of the note that appropriately takes
into account the length of intervals between payments. Stated interest on the
notes will be treated as qualified stated interest.
The amount of OID includible in income by an initial United States Holder of a
note is the sum of the "daily portions" of OID with respect to the note for each
day during the taxable year or portion thereof in which such United States
Holder holds such note ("accrued OID"). A daily portion is determined by
allocating to each day in any "accrual period" a pro-rata portion of the OID
that accrued in such period. The "accrual period" of a note may be of any length
and may vary in length over the term of the note, provided that each accrual
period is no longer than one year and each scheduled payment of principal or
interest occurs either on the first or last day of an accrual period. The amount
of OID that accrues with respect to any accrual period is the excess of (i) the
product of the note's adjusted issue price at the beginning of such accrual
period and its yield to maturity, determined on the basis of compounding at the
close of each accrual period and properly adjusted for the length of such
period, over (ii) the amount of qualified stated interest allocable to such
accrual period. The "adjusted issue price" of a note at the start of any accrual
period is equal to its issue price, increased by the accrued OID for each prior
accrual period and reduced by any prior payments made on such note (other than
payments of qualified stated interest).
IMPACT OF APPLICABLE HIGH YIELD DISCOUNT OBLIGATION RULES
60
If the "yield to maturity" on the notes equals or exceeds the sum of 5% and the
appropriate "applicable federal rate" in effect for the month in which the notes
are issued (for debt instruments issued in June 2001, the appropriate
"applicable federal rate" is 4.96%, assuming semi-annual compounding) and the
notes have "significant" OID, the notes will be considered "applicable high
yield discount obligations" ("AHYDOS"). A debt instrument has "significant" OID
if (a) the aggregate amount which would be includible in gross income with
respect to such debt instrument for periods before the close of any accrual
period ending after the date 5 years after the date of issue exceeds (b) the sum
of (i) the aggregate amount of interest to be paid under the instrument before
the close of such accrual period and (ii) the product of the issue price of the
debt instrument and its yield to maturity.
If the notes are AHYDOS, the Company will not be permitted to deduct for U.S.
federal income tax purposes OID accrued on the notes until such time as the
Company actually pays such OID in cash or in property other than its stock or
its debt (or stock or debt of a person related to us). Moreover, the lesser of
(a) the amount of OID on the notes and (b) the product of the total OID on the
notes times the ratio of (i) the excess of the note's yield to maturity over the
sum of the appropriate applicable federal rate plus 6% to (ii) the yield to
maturity (the "Dividend-Equivalent Interest") will not be deductible at any time
by us for U.S. federal income tax purposes (regardless of whether the Company
actually pays such Dividend-Equivalent Interest in cash or other property). A
corporate United States Holder is eligible for the dividends-received deduction
for the portion of the Dividend-Equivalent Interest that would have been treated
as a dividend had it been distributed by us with respect to its stock.
SALE, EXCHANGE OR RETIREMENT OF THE NOTES
Upon the sale, exchange, redemption, retirement at maturity or other disposition
of a note, a United States Holder generally will recognize taxable gain or loss
equal to the difference between the sum of cash plus the fair market value of
all other property received on such disposition (except to the extent such cash
or property is attributable to accrued and unpaid interest, which amount will be
taxable as ordinary income unless previously included in income) and such United
States Holder's adjusted tax basis in the note. A United States Holder's
adjusted tax basis in a note generally will equal the cost of the note to such
United States Holder, increased by OID included in gross income with respect to
the note and decreased by the amount of any payments (other than stated
interest) received by such United States Holder.
Gain or loss recognized on the disposition of a note generally will be capital
gain or loss and will be long-term capital gain or loss if, at the time of such
disposition, the United States Holder's holding period for the note is more than
one year. The deduction of capital losses is subject to certain limitations.
United States Holders of notes should consult tax advisors regarding the
treatment of capital gains and losses.
The exchange of an outstanding note by a United States Holder for a registered
note pursuant to the exchange offer will not constitute a taxable exchange for
United States federal income tax purposes. Accordingly, there will be no United
States federal income tax consequences to holders who participate in the
exchange offer, and any such holder will have the same adjusted tax basis and
holding period in any registered note as it had in the privately-placed,
outstanding note immediately before the exchange.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Backup withholding and information reporting requirements may apply to certain
payments ("reportable payments") of principal and interest on a note, and to
proceeds of the sale or redemption of a note before maturity. The Company, its
agent, a broker, the Trustee or any paying agent, as the case may be, will be
required to withhold from any reportable payment that is subject to backup
withholding a backup withholding tax on such payment if, among other things, a
United States Holder fails to furnish his taxpayer identification number (social
security or employer identification number), certify that such number is
correct, certify that such holder is not subject to backup withholding or
otherwise comply with the applicable requirements of the backup withholding
rules. Certain United States Holders, including all corporations, are not
subject to backup withholding and information reporting requirements for
payments
61
made in respect of the notes. Any amounts withheld under the backup withholding
rules from a reportable payment to a United States Holder will be allowed as a
credit against such United States Holder's United States federal income tax and
may entitle the holder to a refund, provided that the required information is
furnished to the IRS.
The amount of any reportable payments, including interest, made to the record
United States Holders of notes (other than to holders which are exempt
recipients) and the amount of tax withheld, if any, with respect to such
payments will be reported to such United States Holders and to the IRS for each
calendar year.
UNITED STATES FEDERAL INCOME TAXATION OF FOREIGN HOLDERS
As used herein, the term "Foreign Holder" means a holder (other than a
partnership or an entity treated as a partnership for United States federal
income tax purposes) of a note that is, for United States federal income tax
purposes, neither a United States Holder, as defined above nor a former U.S.
citizen or long-term resident, as defined in section 877 of the Code.
PAYMENT OF INTEREST ON NOTES
In general, payments of interest (whether the interest is stated interest or
OID) received by a Foreign Holder will not be subject to a United States federal
withholding tax, provided that (a)(i) the Foreign Holder does not actually or
constructively own 10% or more of the total combined voting power of all classes
of stock of the Company entitled to vote, (ii) the Foreign Holder is not a
controlled foreign corporation that is related to the Company actually or
constructively through stock ownership, (iii) the Foreign Holder is not a bank
receiving interest described in section 881 (c)(3)(A) of the Code, and (iv)
either (A) the beneficial owner of the note, under penalties of perjury,
provides us or its agent with such beneficial owner's name and address and
certifies on IRS Form W-8BEN (or a suitable substitute form) that it is not a
United States Holder or (B) a securities clearing organization, bank or other
financial institution that holds customers' securities in the ordinary course of
its trade or business (a "financial institution") holds the note and provides a
statement to us or its agent under penalties of perjury in which it certifies
that such an IRS Form W-8BEN (or a suitable substitute) has been received by it
from the beneficial owner of the note or qualifying intermediary and furnishes
us or its agent a copy thereof or (b) the Foreign Holder is entitled to the
benefits of an income tax treaty under which interest on the notes is exempt
from United States withholding tax and the Foreign Holder or such Foreign
Holder's agent provides a properly executed IRS Form W-8BEN claiming the
exemption. Payments of interest not exempt from United States federal
withholding tax as described above will be subject to such withholding tax at
the rate of 30% (subject to reduction under an applicable income tax treaty).
Certain Foreign Holders who claim benefits of a treaty may be required in
certain circumstances to obtain a taxpayer identification number and to provide
certain documentary evidence issued by foreign governmental authorities to
establish residence in a foreign county. Special procedures apply to payments
through partnerships or intermediaries.
SALE, EXCHANGE OR RETIREMENT OF THE NOTES
A Foreign Holder generally will not be subject to United States federal income
tax (and generally no tax will be withheld) with respect to gain realized on the
sale, exchange, redemption, retirement at maturity or other disposition of a
note unless (a) the Foreign Holder is an individual who is present in the United
States for a period or periods aggregating 183 or more days in the taxable year
of the disposition and, generally, either has a "tax home" or an "office or
other fixed place of business" in the United States or (b) a portion of the
amount received represents payment of interest, and the Foreign Holder is not
exempt from United States federal withholding tax on payments of interest on the
note, in which case the interest may be subject to withholding tax at the rate
of 30% (subject to reduction under an applicable tax treaty).
BACKUP WITHHOLDING AND INFORMATION REPORTING
62
Backup withholding does not apply to payments of interest made by us or a paying
agent to Foreign Holders if the certification described above under "-- United
States Federal Income Taxation of Foreign Holders -- Payment of Interest on
notes" is received, provided that the payor does not have actual knowledge that
the holder is a United States Holder. Information reporting may apply to
payments of interest even if the certification is provided. If any payments of
sales proceeds are made to the beneficial owner of a note by or through the
foreign office of a foreign custodian, foreign nominee or other foreign agent of
such beneficial owner, or if the foreign office of a foreign "broker" (as
defined in applicable Treasury regulations) pays the proceeds of the sale of a
note to the seller thereof, backup withholding and information reporting will
not apply. Information reporting requirements (but not backup withholding) will
apply, however, to a payment by a foreign office of a broker that is (a) a
United States person, (b) a foreign person that derives 50% or more of its gross
income for certain periods from the conduct of a trade or business in the United
States, (c) a "controlled foreign corporation" (generally, a foreign corporation
controlled by certain United States shareholders) with respect to the United
States, or (d) a foreign partnership with certain connections to the United
States, unless the broker has documentary evidence in its records that the
holder is a Foreign Holder and certain other conditions are met or the holder
otherwise establishes an exemption. Payment by a United States office or a
broker is subject to both backup withholding and information reporting unless
the holder certifies under penalties of perjury that it is a Foreign Holder or
otherwise establishes an exemption.
FEDERAL ESTATE TAXES
Subject to applicable estate tax treaty provisions, notes held at the time of
death (or notes transferred before death but subject to certain retained rights
or powers) by an individual who at the time of death is a Foreign Holder will
not be included in such Foreign Holder's gross estate for United States federal
estate tax purposes provided that the individual does not actually or
constructively own 10% or more of the total combined voting power of all classes
of stock of the Company entitled to vote or hold the notes in connection with a
U.S. trade or business.
THE PRECEDING DISCUSSION OF CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS IS
FOR GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. EACH PROSPECTIVE INVESTOR
SHOULD CONSULT ITS OWN TAX ADVISOR REGARDING THE PARTICULAR U.S. FEDERAL, STATE,
LOCAL AND FOREIGN TAX CONSEQUENCES OF PURCHASING, HOLDING AND DISPOSING OF ITS
NOTES, INCLUDING THE CONSEQUENCES OF ANY PROPOSED CHANGE IN APPLICABLE LAWS.
PLAN OF DISTRIBUTION
Each broker-dealer that receives registered notes for its own account pursuant
to the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of such notes. This prospectus, as it may be amended
or supplemented from time to time, may be used by a broker-dealer in connection
with resales of the registered notes received in exchange for outstanding notes
where such outstanding notes were acquired as a result of market-making
activities or other trading activities. The Company has agreed to keep the
registration statement effective from the time the registered notes are first
issued and ending on the earlier of 180 days after the date the exchange offer
is completed or the date on which any such broker-dealer no longer own any of
the privately-placed outstanding notes. In addition, the Company has agreed
that, until December 26, 2001, none of the Company, any of its Subsidiaries,
other affiliates over which it exercises management or voting control, or any
person acting on their behalf will, without the prior written consent of Goldman
Sachs & Co. offer, sell, contract to sell or otherwise dispose of any securities
substantially similar to the notes other than in connection with this exchange
offer.
The Company will not receive any proceeds from any sale of the registered notes
by broker-dealers. Registered notes received by any broker-dealer for its own
account pursuant to the exchange offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the registered notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at prices
related to such prevailing market prices or negotiated prices. Any such resale
may be made directly to purchasers or to or through brokers or dealers who may
receive compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such registered notes. Any
broker-dealer that
63
resells registered notes that were received by it for its own account pursuant
to the exchange offer and any broker or dealer that participates in a
distribution of such registered notes may be deemed to be an "underwriter"
within the meaning of the Securities Act and any profit on any such resale of
registered notes and any commissions or concessions received by any such persons
may be deemed to be underwriting compensation under the Securities Act. The
Letter of Transmittal states that by acknowledging that it will deliver and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act.
The Company has been advised by the initial purchasers of the outstanding notes
that, following completion of the exchange offer, they intend to make a market
in the registered notes to be issued in the exchange offer; however, they are
under no obligation to do so and any market activities with respect to the
registered notes may be discontinued at any time.
LEGAL MATTERS
The legality of the notes has been passed on for the Company by Brouse McDowell,
Akron, Ohio.
EXPERTS
The consolidated financial statements and schedule of American Greetings
Corporation, appearing in American Greetings Corporation's Annual Report (Form
10-K) for the fiscal year ended February 28, 2001, have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report thereon, included
therein and incorporated herein by reference. Such consolidated financial
statements and schedule are incorporated herein by reference in reliance upon
such report given on the authority of such firm as experts in accounting and
auditing.
64
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The following table sets forth the estimated expenses payable by the registrant
in connection with the issuance and distribution of the notes and the Class A
Common Shares, and do not include fees and expenses incurred in connection with
the initial issuance of the notes in the private sale on June 29, 2001. All the
amounts shown are estimates, except for the Commission registration fee which is
the actual amount paid in connection with the registration of the $260,000,000
principal amount of notes being registered under this registration statement.
Securities and Exchange Commission registration fee $ 65,000
Accounting fees and expenses ..................................... 18,500
Printing fees and expense ......................................... 5,000
Legal fees and expenses ........................................... 50,000
Miscellaneous...................................................... 2,500
===========
Total.................................................... $ 141,000
* To be completed by amendment
Item 15. Indemnification of Directors And Officers.
Section 1701.13(E) of the Ohio Revised Code authorizes the indemnification of
officers and directors in defense of any civil, criminal, administrative or
investigative proceeding. Article IV of the Regulations of the company provides
for indemnification in terms consistent with the statutory authority, and the
company maintains insurance covering certain liabilities of the directors and
the elected and appointed officers of the company and its subsidiaries,
including liabilities under the Securities Act.
Item 16. Exhibits.
See the Exhibit Index at page E-1 of this registration
statement.
Item 17. Undertakings.
The undersigned registrant hereby undertakes that, for purposes of determining
any liability under the Securities Act of 1933, each filing of the registrant's
annual report pursuant to Section 13(a) or Section 15(d) of the Securities
Exchange Act of 1934 that is incorporated by reference in the registration
statement 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.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person of the registrant in connection with the
securities being registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
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The undersigned registrant hereby undertakes 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, 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.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-4 and has duly caused this Amendment No. 1 to
its registration statement No. 333-65836 on Form S-4 to be signed on its behalf
by the undersigned, thereunto duly authorized in the City of Cleveland and State
of Ohio, as of the 21st day of November, 2001.
AMERICAN GREETINGS CORPORATION
By: /s/ Jon Groetzinger, Jr.
----------------------------------
Jon Groetzinger, Jr., Secretary
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities indicated
on November 21, 2001.
SIGNATURE TITLE
/s/Morry Weiss Chairman of the Board; Chief Executive Officer;
-------------- Director (principal executive officer)
Morry Weiss
/s/James C. Spira President; Chief Operating Officer; Director
-----------------
James C. Spira
/s/Scott B. Cowen Director
-----------------
Scott S. Cowen
/s/Stephen R. Hardis Director
--------------------
Stephen R. Hardis
/s/Jack Kahl Director
------------
Jack Kahl
/s/Harriet Mouchly-Weiss Director
------------------------
Harriet Mouchly-Weiss
/s/Charles A. Ratner Director
--------------------
Charles A. Ratner
/S/Harry H. Stone Director
-----------------
Harry H. Stone
/s/Jerry Sue Thornton Director
---------------------
Jerry Sue Thornton
/s/William S. Meyer Senior Vice President; Chief Financial Officer
-------------------- (principal financial officer)
William S. Meyer
/s/Joseph B. Cipollone Vice President; Corporate Controller (principal
---------------------- accounting officer)
Joseph B. Cipollone
AMERICAN GREETINGS CORPORATION
EXHIBIT INDEX
EXHIBIT DOCUMENT NAME
NUMBER
4.1 Indenture dated as of June 29, 2001 between the registrant, as issuer, and National City
Bank, as Trustee, with respect to the registrant's 11.75% Senior Subordinated Notes due 2008
4.2 Form of the registrant's 11.75% Senior Subordinated Notes due 2008 (included in Exhibit 4.1)
5 Opinion of Brouse McDowell, A Legal Professional Association, as to the validity of the
registrant's 11.75% Senior Subordinated Notes due 2008
12 Statement re Computation of Ratio of Earnings to Fixed Charges*
23.1 Consent of Independent Auditors*
23.2 Consent of Brouse McDowell (included in Exhibit 5.1)
24 Power of Attorney
25 Form T-1 Statement of Eligibility and Qualification under the Trust Indenture Act of 1939*
99.1 Form of Letter of Transmittal.*
99.2 Form of Notice of Guaranteed Delivery.*
99.3 Form of Letter from the Registrant to Registered Holders and Depository Trust Company
Participants.*
99.4 Form of Instructions from Beneficial Owners to Registered Holders and Depository
Trust Company Participants.*
99.5 Form of Letter to Clients.*
* FILED WITH THIS AMENDMENT NO. 1
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