-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GkX1XvfIR2Is7LhRbnZiWlvLR2iZWmvNRJdlZl5OQcb1yD/uBQZKeH6Q+v47ootO T/S4nf3tigLbSky3Cue2CA== 0000950123-98-001891.txt : 19980224 0000950123-98-001891.hdr.sgml : 19980224 ACCESSION NUMBER: 0000950123-98-001891 CONFORMED SUBMISSION TYPE: S-4/A PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19980223 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMSCAN HOLDINGS INC CENTRAL INDEX KEY: 0001024729 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-PAPER AND PAPER PRODUCTS [5110] IRS NUMBER: 133911462 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4/A SEC ACT: SEC FILE NUMBER: 333-45457 FILM NUMBER: 98547411 BUSINESS ADDRESS: STREET 1: 80 GRASSLANDS ROAD CITY: ELMSFORD STATE: NY ZIP: 10523 BUSINESS PHONE: 9143452020 MAIL ADDRESS: STREET 1: 80 GRASSLANDS ROAD CITY: ELMSFORD STATE: NY ZIP: 10523 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMSCAN INC CENTRAL INDEX KEY: 0001054354 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 131771359 FILING VALUES: FORM TYPE: S-4/A SEC ACT: SEC FILE NUMBER: 333-45457-01 FILM NUMBER: 98547412 BUSINESS ADDRESS: STREET 1: 80 GRASSLANDS RD CITY: ELMSFORD STATE: NY ZIP: 10523 BUSINESS PHONE: 9143452020 MAIL ADDRESS: STREET 1: 80 GRASSLANDS RD CITY: ELMSFORD STATE: NY ZIP: 10523 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRISAR INC CENTRAL INDEX KEY: 0001054356 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 953420659 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4/A SEC ACT: SEC FILE NUMBER: 333-45457-02 FILM NUMBER: 98547413 BUSINESS ADDRESS: STREET 1: 80 GRASSLANDS RD CITY: ELMSFORD STATE: NY ZIP: 10523 BUSINESS PHONE: 9143452020 MAIL ADDRESS: STREET 1: 80 GRASSLANDS RD CITY: ELMSFORD STATE: NY ZIP: 10523 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AM SOURCE INC CENTRAL INDEX KEY: 0001054358 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 050471630 FILING VALUES: FORM TYPE: S-4/A SEC ACT: SEC FILE NUMBER: 333-45457-03 FILM NUMBER: 98547414 BUSINESS ADDRESS: STREET 1: 80 GRASSLANDS RD CITY: ELMSFORD STATE: NY ZIP: 10523 BUSINESS PHONE: 9143452020 MAIL ADDRESS: STREET 1: 80 GRASSLANDS RD CITY: ELMSFORD STATE: NY ZIP: 10523 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SSY REALTY CORP CENTRAL INDEX KEY: 0001054359 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 133500756 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4/A SEC ACT: SEC FILE NUMBER: 333-45457-04 FILM NUMBER: 98547415 BUSINESS ADDRESS: STREET 1: 80 GRASSLANDS RD CITY: ELMSFORD STATE: NY ZIP: 10523 BUSINESS PHONE: 9143452020 MAIL ADDRESS: STREET 1: 80 GRASSLANDS RD CITY: ELMSFORD STATE: NY ZIP: 10523 FILER: COMPANY DATA: COMPANY CONFORMED NAME: JCS REALTY CORP CENTRAL INDEX KEY: 0001054360 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 133431738 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4/A SEC ACT: SEC FILE NUMBER: 333-45457-05 FILM NUMBER: 98547416 BUSINESS ADDRESS: STREET 1: 80 GRASSLANDS RD CITY: ELMSFORD STATE: NY ZIP: 10523 BUSINESS PHONE: 9143452020 MAIL ADDRESS: STREET 1: 80 GRASSLANDS RD CITY: ELMSFORD STATE: NY ZIP: 10523 S-4/A 1 AMENDMENT NO. 1 TO FORM S-4 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 23, 1998. REGISTRATION NO. 333-45457 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 1 TO FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ AMSCAN HOLDINGS, INC.* (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ------------------------ DELAWARE 5110 13-3911462 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
AMSCAN HOLDINGS, INC. 80 GRASSLANDS ROAD ELMSFORD, NEW YORK 10523 (914) 345-2020 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF THE REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) COPIES OF ALL COMMUNICATION TO: JAMES M. HARRISON PRESIDENT MITCHELL S. PRESSER, ESQ. AMSCAN HOLDINGS, INC. WACHTELL, LIPTON, ROSEN & KATZ 80 GRASSLANDS ROAD 51 WEST 52ND STREET ELMSFORD, NEW YORK 10523 NEW YORK, NEW YORK 10019 (914) 345-2020 (212) 403-1000 (NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: Upon consummation of the Exchange Offer referred to herein. ------------------------ If the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G check the following box. [ ] ------------------------ THE REGISTRANTS HEREBY AMEND THE REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. ================================================================================ 2 * TABLE OF ADDITIONAL REGISTRANTS
PRIMARY STANDARD INDUSTRY I.R.S EMPLOYER NAME, ADDRESS AND STATE OR OTHER JURISDICTION OF CLASSIFICATION IDENTIFICATION TELEPHONE NUMBER INCORPORATION OR ORGANIZATION NUMBER NUMBER - ---------------------------------- ------------------------------ -------------- --------------- Amscan Inc. ...................... New York 5110 13-1771359 Trisar, Inc. ..................... California 5110 95-3420659 Am-Source, Inc. .................. Rhode Island 5110 05-0471630 SSY Realty Corp. ................. New York 6519 13-3500756 JCS Realty Corp. ................. New York 6519 13-3431738
- --------------- * The address of these additional registrants is 80 Grasslands Road, Elmsford, New York 10523. Their telephone number is (914) 345-2020. 3 EXPLANATORY NOTE This Registration Statement covers the registration of an aggregate principal amount of $110,000,000 of 9 7/8% Senior Subordinated Notes due 2007 (the "Exchange Notes") of Amscan Holdings, Inc. ("Amscan" or the "Company"), which will have been registered under the Securities Act pursuant to a Registration Statement of which this Prospectus is a part, that may be exchanged for equal principal amounts of Amscan's outstanding 9 7/8% Senior Subordinated Notes due 2007 (the "Notes") (the "Exchange Offer"). This Registration Statement also covers the registration of the Exchange Notes for resale by Goldman, Sachs & Co. in market-making transactions. The complete Prospectus relating to the Exchange Offer (the "Exchange Offer Prospectus") follows immediately after this Explanatory Note. Following the Exchange Offer Prospectus are certain pages of the Prospectus relating solely to such market-making transactions (the "Market-Making Prospectus"), including alternate front and back cover pages, a section entitled "Risk Factors -- Trading Market for the Exchange Notes" to be used in lieu of the section entitled "Risk Factors -- Lack of Public Market for the Exchange Notes," a new section entitled "Use of Proceeds" and an alternate section entitled "Plan of Distribution." In addition, the Market-Making Prospectus will not include the following captions (or the information set forth under such captions) in the Exchange Offer Prospectus: "Prospectus Summary -- The Note Offering" and "-- The Exchange Offer," "Risk Factors -- Exchange Offer Procedures" and "-- Restrictions on Transfer," "The Exchange Offer," and "Certain Federal Income Tax Consequences of the Exchange Offer". All other sections of the Exchange Offer Prospectus will be included in the Market-Making Prospectus. 4 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED FEBRUARY 23, 1998 [AMSCAN LOGO] OFFER TO EXCHANGE ITS 9 7/8% SENIOR SUBORDINATED NOTES DUE 2007 ($110,000,000 PRINCIPAL AMOUNT) FOR ALL OF ITS OUTSTANDING 9 7/8% SENIOR SUBORDINATED NOTES DUE 2007 ($110,000,000 PRINCIPAL AMOUNT OUTSTANDING) AMSCAN HOLDINGS, INC. THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME ON MARCH _ , 1998, UNLESS EXTENDED. Amscan Holdings, Inc., a Delaware corporation (the "Company"), hereby offers (the "Exchange Offer"), upon the terms and subject to the conditions set forth in this Prospectus and the accompanying Letter of Transmittal (the "Letter of Transmittal"), to exchange up to an aggregate principal amount of $110,000,000 of its 9 7/8% Senior Subordinated Notes due 2007 (the "Exchange Notes"), which will have been registered under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to a Registration Statement of which this Prospectus is a part, for an equal principal amount of its outstanding 9 7/8% Senior Subordinated Notes due 2007 (the "Notes"), in integral multiples of $1,000. The Exchange Notes will be fully and unconditionally guaranteed on a senior subordinated basis, jointly and severally, by certain of the Company's Subsidiaries (the "Guarantors"). The Exchange Notes will be senior subordinated unsecured obligations of the Company and are substantially identical (including principal amount, interest rate, maturity and redemption rights) to the Notes for which they may be exchanged pursuant to this offer, except that (i) the offering and sale of the Exchange Notes will have been registered under the Securities Act and (ii) holders of Exchange Notes will not be entitled to certain rights of holders under the Exchange and Registration Rights Agreement of the Company dated as of December 19, 1997 (the "Registration Rights Agreement"). The Exchange Notes will be general, unsecured obligations of the Company, will be subordinated in right of payment to all Senior Debt of the Company, will rank pari passu with all senior subordinated debt of the Company and will be senior in right of payment to all existing and future subordinated debt of the Company, if any. The claims of Holders of the Exchange Notes will be effectively subordinated to the Senior Debt, which, as of September 30, 1997, on a pro forma basis giving effect to the Transaction and the Transaction Financings would have been approximately $128 million, $117 million of which would have been fully secured borrowings under the Bank Credit Agreement. The claims of Holders will be effectively subordinated to the indebtedness and other liabilities of the Company's Non-Guarantor Subsidiaries through which the Company conducts a portion of its operations, which indebtedness and other liabilities were approximately $3 million as of September 30, 1997. See "The Transaction" and "Capitalization". --------------------- SEE "RISK FACTORS" BEGINNING ON PAGE 20 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY HOLDERS WHO TENDER NOTES IN THE EXCHANGE OFFER. --------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this Prospectus is February _ , 1998 (Cover text continued on next page) 5 The Notes have been, and the Exchange Notes will be, issued under an Indenture dated as of December 19, 1997 (the "Indenture"), among the Company, the Guarantors and IBJ Schroder Bank & Trust Company, as trustee (the "Trustee"). See "Description of Exchange Notes". There will be no proceeds to the Company from this offering; however, pursuant to the Registration Rights Agreement, the Company will bear certain offering expenses. The Company will accept for exchange any and all Notes validly tendered or prior to 5:00 p.m. New York City time, on March , 1998, unless the Exchange Offer is extended (the "Expiration Date"). Tenders of Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date; otherwise such tenders are irrevocable. IBJ Schroder Bank & Trust Company will act as Exchange Agent with respect to the Notes (in such capacity, the "Exchange Agent") in connection with the Exchange Offer. The Exchange Offer is not conditioned upon any minimum principal amount of Notes being tendered for exchange, but is otherwise subject to certain customary conditions. The Notes were sold by the Company on December 19, 1997 in transactions not registered under the Securities Act in reliance upon the exemption provided in Section 4(2) of the Securities Act. A portion of the Notes were subsequently resold to qualified institutional buyers in reliance upon Rule 144A under the Securities Act. The remainder of the Notes were resold outside the United States in reliance on Regulation S under the Securities Act. Accordingly, the Notes may not be reoffered, resold or otherwise transferred in the United States unless registered under the Securities Act or unless an applicable exemption from the registration requirements of the Securities Act is available. The Exchange Notes are being offered hereunder in order to satisfy certain obligations of the Company under the Registration Rights Agreement. See "The Exchange Offer". The Exchange Notes will bear interest from December 19, 1997, the date of issuance of the Notes that are tendered in exchange for the Exchange Notes (or the most recent Interest Payment Date (as defined herein) to which interest on such Notes has been paid), at a rate equal to 9 7/8% per annum. Interest on the Exchange Notes will be payable semi-annually on June 15 and December 15 of each year, commencing June 15, 1998. The Exchange Notes are redeemable at the option of the Company, in whole or in part, at any time on or after December 15, 2002, at the redemption prices set forth herein, plus accrued and unpaid interest to the date of redemption. See "Description of Exchange Notes". In addition, at any time prior to December 15, 2000, up to an aggregate of 35% of the principal amount of Exchange Notes will be redeemable at the option of the Company, on one or more occasions, from the net proceeds of public or private sales of common stock of, or contributions to the common equity capital of, the Company at a price of 109.875% of the principal amount of the Exchange Notes, together with accrued and unpaid interest, if any, to the date of redemption; provided that at least $65.0 million in aggregate principal amount of Notes and Exchange Notes remains outstanding immediately after each such redemption. At any time on or prior to December 15, 2002 the Exchange Notes may also be redeemed as a whole but not in part at the option of the Company upon the occurrence of a Change of Control at a redemption price equal to 100% of the principal amount thereof plus the Applicable Premium, together with accrued and unpaid interest, if any, to the date of redemption. If the Company does not redeem the Exchange Notes upon a Change of Control, the Company will be obligated to make an offer to purchase the Exchange Notes, in whole or in part, at a price equal to 101% of the aggregate principal amount of the Exchange Notes, plus accrued and unpaid interest, if any, to the date of purchase. If a Change of Control were to occur, the Company may not have the financial resources to repay all of its obligations under the Bank Credit Agreement, the Indenture and the other indebtedness that would become payable upon the occurrence of such Change of Control. See "Risk Factors -- Payment Upon a Change of Control" and "Description of Exchange Notes". The Exchange Offer is being made in reliance on certain no-action positions that have been published by the staff of the Securities and Exchange Commission (the "Commission"), which ii 6 require each tendering noteholder to represent that it acquired the Notes in the ordinary course of its business and that such holder does not intend to participate and has no arrangement or understanding with any person to participate in a distribution of the Exchange Notes. In some cases, certain broker-dealers may be required to deliver a prospectus in connection with the resale of Exchange Notes that they receive in the Exchange Offer. See "Prospectus Summary -- The Note Offering -- The Exchange Offer". The Company does not intend to list the Exchange Notes on any national securities exchange or to seek admission thereof to trading in any automated quotation system. Goldman, Sachs & Co. ("Goldman Sachs") has advised the Company that it intends to make a market in the Exchange Notes; however, it is not obligated to do so and any market-making may be discontinued at any time. As a result, the Company cannot determine whether an active public market will develop for the Exchange Notes. ANY NOTES NOT TENDERED AND ACCEPTED IN THE EXCHANGE OFFER WILL REMAIN OUTSTANDING. TO THE EXTENT ANY NOTES ARE TENDERED AND ACCEPTED IN THE EXCHANGE OFFER, A HOLDER'S ABILITY TO SELL UNTENDERED NOTES COULD BE ADVERSELY AFFECTED. FOLLOWING CONSUMMATION OF THE EXCHANGE OFFER, THE HOLDERS OF NOTES WILL CONTINUE TO BE SUBJECT TO THE EXISTING RESTRICTIONS UPON TRANSFER THEREOF AND THE COMPANY WILL HAVE FULFILLED ONE OF ITS OBLIGATIONS UNDER THE REGISTRATION RIGHTS AGREEMENT. HOLDERS OF NOTES WHO DO NOT TENDER THEIR NOTES GENERALLY WILL NOT HAVE ANY FURTHER REGISTRATION RIGHTS UNDER THE REGISTRATION RIGHTS AGREEMENT OR OTHERWISE. SEE "THE EXCHANGE OFFER -- CONSEQUENCES OF FAILURE TO EXCHANGE". The Exchange Notes issued pursuant to this Exchange Offer generally will be issued in the form of Global Exchange Notes (as defined herein), which will be deposited with, or on behalf of, The Depository Trust Company (the "Depository" or "DTC") and registered in its name or in the name of Cede & Co., its nominee. Beneficial interests in the Global Exchange Notes representing the Exchange Notes will be shown on, and transfers thereof will be effected through, records maintained by the Depository and its participants. Notwithstanding the foregoing, Notes held in certificated form will be exchanged solely for Exchange Notes in certificated form. After the initial issuance of the Global Exchange Notes, Exchange Notes in certificated form will be issued in exchange for the Global Exchange Notes only on the terms set forth in the Indenture. See "Description of Exchange Notes -- Book-Entry, Delivery and Form". ------------------------ NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE EXCHANGE NOTES OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY OF THE EXCHANGE NOTES TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. UNTIL MAY , 1998 (90 DAYS AFTER COMMENCEMENT OF THIS OFFERING), ALL DEALERS EFFECTING TRANSACTIONS IN THE EXCHANGE NOTES, WHETHER OR NOT PARTICIPATING IN THE EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A PROSPECTUS. iii 7 AVAILABLE INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-4 under the Securities Act for the registration of the Exchange Notes offered hereby (the "Registration Statement"). This Prospectus, which constitutes a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement, certain items of which are contained in exhibits and schedules to the Registration Statement as permitted by the rules and regulations of the Commission. For further information with respect to the Company or the Exchange Notes offered hereby, reference is made to the Registration Statement, including the exhibits and financial statement schedules thereto. With respect to each such document filed with the Commission as an exhibit to the Registration Statement, reference is made to the exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference. The Company is presently subject to the information requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance therewith, files reports and other information with the Commission. The Registration Statement, such reports and other information filed by the Company can be inspected and copied at the public reference facilities of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and the regional offices of the Commission located at 7 World Trade Center, New York, New York 10048 and 500 West Madison Street, 14th Floor, Chicago, Illinois 60661. Copies of such materials may be obtained from the Public Reference Section of the Commission, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at its public reference facilities in New York, New York and Chicago, Illinois at prescribed rates. The Company makes its filings with the Commission electronically. The Commission maintains an Internet site that contains reports, proxy and information statements and other information regarding registrants that file electronically, which information can be accessed at ,http://www.sec.gov.. As a result of the offering of the Exchange Notes, each of the Guarantors will become subject to the informational requirements of the Exchange Act. The Company will fulfill its obligations with respect to such requirements by filing periodic reports with the Commission on its own behalf or, in the case of the Guarantors, by including information regarding the Guarantors in the Company's periodic reports. In addition, the Company will send to each holder of Exchange Notes copies of annual reports and quarterly reports containing the information required to be filed under the Exchange Act. So long as the Company is subject to the periodic reporting requirements of the Exchange Act, it is required to furnish the information required to be filed with the Commission to the Trustee and the holders of the Notes and the Exchange Notes. The Company has agreed that, even if it is not required under the Exchange Act to furnish such information to the Commission, it will nonetheless continue to furnish information that would be required to be furnished by the Company by Section 13 of the Exchange Act to the Trustee and the holders of the Notes or Exchange Notes as if it were subject to such periodic reporting requirements. iv 8 PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in connection with, the more detailed information and financial statements and notes thereto appearing elsewhere in this Prospectus. THE COMPANY Amscan Holdings, Inc. ("Amscan" or the "Company") designs, manufactures and distributes decorative party goods, offering one of the broadest and deepest product lines in the industry. The Company's products include paper and plastic tableware (such as plates, napkins, tablecovers, cups and cutlery), accessories (such as invitations, thank-you cards, table and wall decorations and balloons) and novelties (such as games and party favors). The Company's products are sold to party goods superstores, independent card and gift retailers, mass merchandisers and other distributors which sell Amscan products in more than 20,000 retail outlets throughout the world, including North America, Australia, the United Kingdom, Germany and Sweden. The Company currently offers over 250 product ensembles, generally containing 30 to 150 coordinated items. These ensembles comprise a wide variety of products to accessorize a party including matching invitations, tableware, decorations, party favors and thank-you cards. The Company designs, manufactures and markets party goods for a wide variety of occasions including seasonal holidays, special events and themed celebrations. The Company's seasonal ensembles enliven holiday parties throughout the year including New Year's, Valentine's Day, St. Patrick's Day, Easter, Passover, Fourth of July, Halloween, Thanksgiving, Hanukkah and Christmas. The Company's special event ensembles include birthdays, christenings, first communions, bar mitzvahs, confirmations, graduations, baby and bridal showers and anniversaries, while its theme-oriented ensembles include Hawaiian luaus, Mardi Gras and '50s rock-and-roll parties. In addition to its long-standing relationships with independent card and gift retailers, the Company is a leading supplier to the party superstore distribution channel. Party goods superstores are growing rapidly by providing consumers with a one-stop source for all of their party needs, generally at discounted prices. The retail party goods business has historically been fragmented among independent stores and drug, discount or department store chains. However, according to industry analysts, there has been a significant shift of sales since 1990 to the party goods superstore channel. Company sales to superstores represented approximately 44% of total sales in 1996. While the number of party superstores that Amscan supplies has grown at a compound annual growth rate ("CAGR") in excess of 20% from 1993 to 1996, the Company's sales to superstores have grown by a 47% CAGR during the same period. With Amscan products occupying an increasing share of superstore shelf space in many product categories, Amscan believes it is well positioned to take advantage of continued growth in the party superstore channel. Amscan's sales and cash flows have grown substantially over the past five years. From 1991 to 1996, sales and Adjusted EBITDA (adjusted for non-recurring items relating to the IPO, other income or expenses, and minority interests) have grown at compound annual rates of 20% and 28%, respectively. During the same period, Adjusted EBITDA margins increased from approximately 14% to 20% due in part to the Company achieving greater economies of scale in manufacturing and distribution, and significantly reducing selling expenses as a percentage of sales. Sales and Adjusted EBITDA for the twelve months ended September 30, 1997 were approximately $207 million and $42 million, respectively, representing an Adjusted EBITDA margin of approximately 20%. 1 9 PARTY GOODS INDUSTRY OVERVIEW According to industry analyst reports, the U.S. decorative party goods industry (including tableware, accessories and novelties) generated approximately $3.5 billion in retail sales in 1996 and has grown approximately 10% annually over the past several years. The Company believes this growth is driven by several factors including favorable demographics and consumer spending patterns, the emergence of the party superstore channel and growth in the number of party events celebrated and party products available to consumers. The Company believes that demographic trends favor continued growth in decorative party goods sales. According to the United States Bureau of the Census ("The Census Bureau"), between 1997 and 2005, population in the 10-19 year old age bracket is expected to increase by approximately 10%, and population in the 20-24 year old age bracket is expected to increase by approximately 15%. This suggests an increase in celebrations revolving around teenagers and young adults including confirmations, bar mitzvahs, graduations and bridal and baby showers. In addition, the 45-54 year old age bracket is expected to increase by over 20% by 2005. According to The Census Bureau and the United States Bureau of Labor Statistics, this population segment enjoyed the highest median household income and spent the most money on entertainment in 1995. The Company believes that this population segment is a key buying group of party goods for children and grandchildren, as well as products for adult milestone events including birthdays, anniversaries and retirements. Another factor contributing to growth in the decorative party goods industry has been the emergence of party goods superstores which, according to industry analysts, are poised for expansion as national penetration continues. The Company believes that superstores are popular among consumers because of the large variety of merchandise and substantial discounts they offer. Industry analysts report that, over the past several years, the marketplace has begun to accept a move toward the party goods superstore merchandising concept, similar to earlier merchandising shifts in such product categories as toys, office supplies, home furnishings and home improvements. The Company believes that party goods sales volumes have also increased, in part, as a result of: - the creation of new product ensembles both in response to consumer demand and as a means of stimulating customer purchases; - the broadening of product lines through the addition of new items and new accessories within ensembles; - larger retail environments allowing retailers to employ marketing techniques which result in increased average sales per customer; and - the celebration of an increased number of party themes and events, such as Hawaiian luaus, Mardi Gras and '50s rock-and-roll parties. The Company believes that by introducing products for new types of celebrations, offering multiple product ensembles for individual celebrations (such as multiple Halloween or birthday ensembles) and increasing the number of "add-on" accessories, party goods suppliers have increased the frequency and volume of consumer purchases of decorative party goods. COMPETITIVE STRENGTHS Leading Supplier to the High Growth and High Volume Party Goods Superstore Channel. In addition to its long-standing base of business with independent card and party retailers, the Company believes that its products account for an increasing portion of the retail sales by major superstore chains, including Party City Corporation ("Party City"), Party Stores Holdings, Inc. ("Party Stores Holdings"), Big Party Corporation, The Paper Factory, The Half-Off Card Shop, 2 10 Paper Warehouse Inc., and Factory Card Outlet Corp. Approximately 44% of the Company's sales were generated from superstores last year, and based on indications from these chains that they intend to continue to expand nationwide, the Company expects that sales to this segment will continue to grow significantly. Single Source Supplier of Decorative Party Goods. The Company provides one of the most extensive product lines of decorative party goods in the industry, serving a wide variety of occasions. Amscan produces over 250 different ensembles, generally containing 30 to 150 coordinated SKUs within each ensemble. With 14,000 stock keeping units ("SKUs"), the Company is a one-stop shopping, single-source supplier to retailers of decorative party goods. The Company believes this breadth of product line provides enough variety that competing retailers can each purchase Amscan products and still differentiate themselves by the product they market to the end consumer. Strong Customer Relationships. The Company has built strong relationships with its customer base which operates more than 20,000 retail outlets. The Company strives to provide superior service and, by involving retailers in product development and marketing, seeks to become a strategic partner to its customers. Product Design Leadership. The Company believes one of its strengths is its leadership in creating innovative designs and party items. The Company believes its product designs have a level of color, complexity and style that are attractive to consumers and difficult to replicate. The Company offers coordinated accessories and novelties which, the Company believes, complement its tableware designs, enhancing the appeal of its tableware products and encouraging "add on" impulse purchases. Strong and Committed Management Team. The Company's management team has built the business into an industry leader with integrated design, manufacturing, and distribution capabilities. Current management has been instrumental in building the Company's strong industry position and in the Company achieving a 28% CAGR in Adjusted EBITDA since 1991. The management team and other key employees committed $6.4 million (including restricted stock grants) to the Transaction. OPERATIONAL REVIEW - Design. Amscan's design staff of approximately 70 people develops and manages the Company's broad line of party goods and keeps the product line contemporary and fresh by introducing new ensembles each year. For example, the Company introduced approximately 50 new ensembles for 1997. - Manufactured Products. The Company is a vertically integrated manufacturer enabling it to better control costs, monitor quality, manage inventory and respond quickly to customer needs. The Company's state-of-the-art facilities in New York, Kentucky, Rhode Island and California manufacture paper and plastic plates, napkins, cups and other products. These products constitute approximately 50% of the Company's net sales. Over the past five years, the Company has purchased or leased new plant and equipment having an aggregate value of approximately $47 million to support expansion and provide for future growth. Consequently, the Company believes it is able to expand production by utilizing its current facilities and equipment. - Purchased Products. The Company sources approximately 50% of its products from independently-owned manufacturers, many of whom are located in the Far East and with whom the Company has long-standing relationships. The two largest such suppliers operate as exclusive suppliers to the Company and represent relationships which have been in place for more than ten years. The Company believes that the quality and prices of the products manufactured by these suppliers provide a significant competitive advantage. 3 11 The Company's business, however, is not dependent upon any single source of supply for products manufactured for the Company by third parties. - Sales and Distribution. Amscan's sales and distribution capabilities are designed to provide a high level of customer service. A domestic direct employee sales force of approximately 60 professionals services over 5,000 retail accounts. In addition to this seasoned sales team, the Company utilizes a select group of manufacturers' representatives to handle specific account situations. International customers are generally serviced by employees of the Company's foreign subsidiaries. To support its marketing effort, the Company produces three catalogues annually, two for seasonal products and one for everyday products. Products are shipped from the Company's distribution centers using computer assisted systems that permit the Company to receive and fill customer orders efficiently and quickly. COMPANY STRATEGY Amscan seeks to become the primary source for consumers' party goods requirements. The key elements of the Company's strategy are as follows: - Strengthen Position as a Leading Provider to Party Superstores. The Company offers convenient "one-stop shopping" for large superstore buyers and seeks to increase its proportionate share of sales volume and shelf space in the superstores. - Offer the Broadest and Deepest Product Line in the Industry. The Company strives to offer the broadest and deepest product line in the industry. Amscan helps retailers boost average purchase volume per consumer through coordinated ensembles that promote "add on" purchases. - Diversify Distribution Channels, Product Offering and Geographic Presence. Amscan will seek, through internal growth and acquisitions, to expand its distribution capabilities internationally, increase its presence in additional retail channels and further broaden and deepen its product line. - Provide Superior Customer Service. The Company strives to achieve high average fill rates in excess of 95% and ensure short turnaround times. - Maintain Product Design Leadership. Amscan will continue investing in art and design to support a steady supply of fresh ideas and create complex, unique ensembles that appeal to consumers and are difficult to replicate. - Maintain State-of-the-Art Manufacturing and Distribution Technology. Amscan intends to maintain technologically advanced production and distribution systems in order to enhance product quality, manufacturing efficiency, cost control and customer satisfaction. - Pursue Attractive Acquisitions. The Company believes that opportunities exist to make acquisitions of complementary businesses to leverage the Company's existing marketing, distribution and production capabilities, expand its presence in the various retail channels, further broaden and deepen its product line and penetrate international markets. The Company receives inquiries from time to time with respect to the possible acquisition by the Company of other entities and the Company intends to pursue acquisition opportunities aggressively. GS CAPITAL PARTNERS II, L.P. GS Capital Partners II, L.P. ("GSCP II") and its affiliated investment funds (together with GSCP II, "GSCP") are the primary vehicles of The Goldman Sachs Group, L.P. ("The Goldman Sachs Group"), for making privately negotiated equity and equity-related investments in non-real estate transactions. GSCP II was formed in May 1995 with total committed capital of $1.75 billion, 4 12 $300 million of which was committed by The Goldman Sachs Group, with the remainder committed by institutional and individual investors. Since 1982, The Goldman Sachs Group, directly or through investment partnerships that it manages, has invested more than $3.7 billion in a diversified portfolio of over 175 long-term principal investments. GSCP has invested approximately $61.9 million in the Transaction, representing approximately 82.5% of the total equity investment. THE TRANSACTION Pursuant to an Agreement and Plan of Merger (the "Transaction Agreement"), dated as of August 10, 1997, by and between the Company and Confetti Acquisition, Inc. ("MergerCo"), a Delaware corporation affiliated with GSCP, on December 19, 1997 (the "Effective Time"), MergerCo was merged with and into the Company (the "Transaction"), with the Company as the surviving corporation. At the Effective Time, each share of the Common Stock, par value $0.10 per share, of the Company (the "Company Common Stock"), issued and outstanding immediately prior to the Effective Time (other than shares of Company Common Stock owned, directly or indirectly, by the Company or by MergerCo) were converted, at the election of each of the Company's stockholders, into the right to receive from the Company either (A) $16.50 in cash (the "Cash Consideration") or (B) $9.33 in cash plus a retained interest in the Company equal to one share of Company Common Stock for every 150,000 shares held by such stockholder (the "Mixed Consideration"), with fractional shares of Company Common Stock paid in cash. (Together, the Cash Consideration and the Mixed Consideration comprised the "Transaction Consideration".) The Estate of John A. Svenningsen (the "Estate"), which owned approximately 72% of the outstanding Company Common Stock immediately prior to the Effective Time, elected to retain almost 10% of the outstanding shares of Company Common Stock. No stockholder other than the Estate elected to retain shares. Also pursuant to the Transaction Agreement, at the Effective Time each outstanding share of Common Stock, par value $0.10 per share, of MergerCo ("MergerCo Common Stock"), was converted into an equal number of shares of Company Common Stock as surviving corporation in the Transaction. Pursuant to certain employment arrangements, certain employees of the Company purchased an aggregate of 10 shares of Company Common Stock following the Effective Time. Accordingly, in the Transaction the 825 shares of MergerCo Common Stock owned by GSCP immediately prior to the Effective Time were converted into 825 shares of Company Common Stock, representing approximately 81.7% of the 1,010 issued and outstanding shares of the Company immediately following the Effective Time. 5 13 The following table sets forth the sources and uses of cash related to the Transaction:
(DOLLARS IN THOUSANDS) SOURCES OF CASH Term Loan............................................................. $117,000 Senior Subordinated Notes............................................. 110,000 -------- Total debt....................................................... 227,000 GSCP equity contribution(a)........................................... 61,875 -------- Total....................................................... $288,875 ======== USES OF CASH Purchase equity in the Transaction.................................... $235,916 Redeem Company Stock Options.......................................... 1,901 Repay certain existing debt(b)........................................ 23,908 Debt retirement costs................................................. 1,010 Transaction costs..................................................... 17,152 Cash for working capital purposes..................................... 8,988 -------- Total....................................................... $288,875 ========
- --------------- (a) In addition to the GSCP equity contribution, certain employees have made an equity investment in the Company totaling $6.4 million (including restricted stock grants and $0.8 million contributed by certain employees immediately following consummation of the Transaction) and the Estate has retained an interest in the Company of $7.5 million, together constituting $13.9 million valued at the price per share paid by GSCP. (b) Excludes existing mortgages on real property owned by Subsidiaries of the Company in the amount of approximately $5.9 million, capital lease obligations of approximately $4.6 million, and borrowings under a revolving credit agreement of a Non-Guarantor Subsidiary of approximately $0.6 million each as of December 19, 1997. All other outstanding debt of the Company was extinguished at or prior to the completion of the Transaction. The senior debt portion of the financing for the Transaction was provided pursuant to a credit agreement (the "Bank Credit Agreement") with Goldman Sachs Credit Partners L.P. ("GS Credit Partners") and certain other lenders. In connection with such financing, Goldman Sachs acted as Syndication Agent, Documentation Agent and Arranger, and Fleet National Bank ("Fleet") is acting as Administrative Agent. See "Description of Senior Debt" and "Certain Transactions". The senior debt financing and the financing provided by the Note Offering is referred to as the "Transaction Financings". 6 14 CAPITALIZATION The following table sets forth the historical consolidated capitalization of the Company as of September 30, 1997, and on a pro forma basis to give effect to the Transaction, including the Transaction Financings and the application of the proceeds therefrom, as if they had occurred on September 30, 1997. See "Use of Proceeds". The information set forth below should be read in conjunction with the Company's Transaction Pro Forma Consolidated Financial Data, the Company's Consolidated Financial Statements and the related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained elsewhere in this Prospectus.
AS OF SEPTEMBER 30, 1997 ---------------------------- TRANSACTION HISTORICAL PRO FORMA ---------- ----------- (DOLLARS IN THOUSANDS) Cash and cash equivalents.......................................... $ 684 $ 3,975 Total debt (including current portion) Revolving Credit Facility(1)..................................... $ -- $ -- Term Loan........................................................ -- 117,000 Existing revolving credit facility............................... 9,550 -- Senior Subordinated Notes........................................ -- 110,000 Mortgages........................................................ 6,072 6,072 Capital leases and other......................................... 24,782 4,727 --------- --------- Total debt.................................................... 40,404 237,799 Stockholders' equity (deficit)(2).................................. 89,002 (95,288) --------- --------- Total capitalization............................................. $ 129,406 $ 142,511 ========= =========
- --------------- (1) The Company has the ability to borrow up to $50 million pursuant to its Revolving Credit Facility. The Revolving Credit Facility is available to the Company for working capital purposes and acquisitions, subject to certain limitations and restrictions. See "Description of Senior Debt". (2) Upon completion of the Transaction, the Company had a negative net worth for accounting purposes. In the Transaction, GSCP paid $61.9 million for approximately 82.5% of the Company Common Stock. In addition, certain employees of the Company acquired and the Estate retained approximately 7.5% and almost 10%, respectively, of the Company Common Stock which, based upon the price per share paid by GSCP, has an aggregate value of approximately $13.1 million. Combined with GSCP's payment of $61.9 million, these holdings have an aggregate value of approximately $75.0 million. 7 15 THE NOTE OFFERING THE NOTES.................. The Notes were sold by the Company on December 19, 1997, and were subsequently resold to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to certain persons in transactions outside the United States in reliance on Regulation S under the Securities Act (the "Note Offering"). REGISTRATION RIGHTS AGREEMENT................ In connection with the Note Offering, the Company entered into the Registration Rights Agreement, which grants holders ("Holders") of the Notes certain exchange and registration rights. The Exchange Offer is intended to satisfy such exchange and registration rights, which generally terminate upon the consummation of the Exchange Offer. THE EXCHANGE OFFER SECURITIES OFFERED......... $110,000,000 aggregate principal amount of 9 7/8% Senior Subordinated Notes due December 15, 2007. THE EXCHANGE OFFER......... $1,000 principal amount of the Exchange Notes in exchange for each $1,000 principal amount of Notes. As of the date hereof, $110,000,000 principal amount of Notes are outstanding. The Company will issue the Exchange Notes to holders on or promptly after the Expiration Date. Based on an interpretation by the staff of the Commission set forth in no-action letters issued to third parties, the Company believes that Exchange Notes issued pursuant to the Exchange Offer in exchange for Notes may be offered for resale, resold and otherwise transferred by any Holder thereof (other than any such Holder which is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such Exchange Notes are acquired in the ordinary course of such holder's business and that such holder does not intend to participate and has no arrangement or understanding with any person to participate in the distribution of such Exchange Notes. Each broker-dealer that receives Exchange Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of such Exchange Notes. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of Exchange Notes received in exchange for Notes where such Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Company has agreed that for a period of 195 days after the Registration Statement is declared effective, it will make this 8 16 Prospectus available to any broker-dealer for use in connection with any such resale. Any Holder who tenders in the Exchange Offer with the intention to participate, or for the purpose of participating, in a distribution of the Exchange Notes may not rely on the position of the staff of the Commission enunciated in Exxon Capital Holdings Corporation (available April 13, 1989), Morgan Stanley & Co., Inc. (available June 5, 1991) or similar no-action letters and, in the absence of an exemption therefrom, must comply with the registration and prospectus delivery requirements of the Securities Act in connection with the resale of the Exchange Notes. Failure to comply with such requirements in such instance may result in such Holder incurring liability under the Securities Act for which the Holder is not indemnified by the Company. The Exchange Offer is not being made to, nor will the Company accept surrenders for exchange from, Holders of Notes in any jurisdiction in which the Exchange Offer or the acceptance thereof would not be in compliance with the securities or blue sky laws of such jurisdiction. Prior to the Exchange Offer, however, the Company will take such actions it deems necessary or advisable to register or qualify the Exchange Notes for offer and sale under the securities or blue sky laws of such jurisdictions as is necessary to permit consummation of the Exchange Offer and to enable the offer and sale in such jurisdiction of the Exchange Notes. EXPIRATION DATE............ 5:00 p.m., New York City time, on March , 1998, unless the Exchange Offer is extended, in which case the term "Expiration Date" means the latest date and time to which the Exchange Offer is extended. INTEREST ON THE EXCHANGE NOTES AND THE NOTES...... The Exchange Notes will bear interest from December 19, 1997, the date of issuance of the Notes that are tendered in exchange for the Exchange Notes (or the most recent Interest Payment Date (as defined below in the Summary of Terms of Exchange Notes) to which interest on such Notes has been paid). Accordingly, Holders of Notes that are accepted for exchange will not receive interest on the Notes that is accrued but unpaid at the time of tender, but such interest will be payable on the first Interest Payment Date after the Expiration Date. CONDITIONS TO THE EXCHANGE OFFER.................... Notwithstanding any other term of the Exchange Offer, the Company shall not be required to accept for exchange, or to exchange Exchange Notes for, any Notes, and may terminate or amend the Exchange Offer as provided herein before the acceptance of such Notes, if: (a) any law, statute, rule, regulation or interpretation by the staff of the Commission is proposed, adopted or enacted, which, in the reasonable judgment of the Company, might materially impair the ability of the Company to proceed with the Exchange Offer or materially impair the contemplated benefits of the Exchange Offer to the Company; or (b) any governmental approval has not been obtained, which approval the Company shall, 9 17 in its reasonable judgment, deem necessary for the consummation of the Exchange Offer as contemplated hereby. See "The Exchange Offer -- Conditions". PROCEDURES FOR TENDERING NOTES.................... Each Holder of Notes wishing to accept the Exchange Offer must complete, sign and date the accompanying Letter of Transmittal, or a facsimile thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver such Letter of Transmittal, or such facsimile, together with the Notes and any other required documentation to the Exchange Agent at the address set forth in the Letter of Transmittal. By executing the Letter of Transmittal, each Holder will represent to the Company that, among other things, the Holder or the person receiving such Exchange Notes, whether or not such person is the Holder, is acquiring the Exchange Notes in the ordinary course of business and that neither the Holder nor any such other person has any arrangement or understanding with any person to participate in the distribution of such Exchange Notes. In lieu of physical delivery of the certificates representing Notes, tendering Holders may transfer Notes pursuant to the procedure for book-entry transfer as set forth under "The Exchange Offer -- Procedures for Tendering". SPECIAL PROCEDURES FOR BENEFICIAL OWNERS........ Any beneficial owner whose Notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender should contact such registered Holder promptly and instruct such registered Holder to tender on such beneficial owner's behalf. If such beneficial owner wishes to tender on such owner's own behalf, such owner must, prior to completing and executing the Letter of Transmittal and delivering its Notes, either make appropriate arrangements to register ownership of the Notes in such owner's name or obtain a properly completed bond power from the registered holder. The transfer of registered ownership may take considerable time. GUARANTEED DELIVERY PROCEDURES............... Holders of Notes who wish to tender their Notes and whose Notes are not immediately available or who cannot deliver their Notes, the Letter of Transmittal or any other documents required by the Letter of Transmittal to the Exchange Agent (or comply with the procedures for book-entry transfer) prior to the Expiration Date must tender their Notes according to the guaranteed delivery procedures set forth in "The Exchange Offer -- Guaranteed Delivery Procedures". WITHDRAWAL RIGHTS.......... Tenders may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date pursuant to the procedures described under "The Exchange Offer -- Withdrawals of Tenders". 10 18 ACCEPTANCE OF NOTES AND DELIVERY OF EXCHANGE NOTES........... The Company will accept for exchange any and all Notes that are properly tendered in the Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date. The Exchange Notes issued pursuant to the Exchange Offer will be delivered promptly following the Expiration Date. See "The Exchange Offer -- Terms of the Exchange Offer". FEDERAL INCOME TAX CONSEQUENCES............. The issuance of the Exchange Notes to Holders of the Notes pursuant to the terms set forth in this Prospectus will not constitute an exchange for federal income tax purposes. Consequently, no gain or loss would be recognized by Holders of the Notes upon receipt of the Exchange Notes. See "Certain Federal Income Tax Consequences of the Exchange Offer". EFFECT ON HOLDERS OF NOTES...................... As a result of the making of this Exchange Offer, the Company will have fulfilled certain of its obligations under the Registration Rights Agreement, and Holders of Notes who do not tender their Notes will generally not have any further registration rights under the Registration Rights Agreement or otherwise. Such Holders will continue to hold the untendered Notes and will be entitled to all the rights and will be subject to all the limitations applicable thereto under the Indenture, except to the extent such rights or limitations, by their terms, terminate or cease to have further effectiveness as a result of the Exchange Offer. All untendered Notes will continue to be subject to certain restrictions on transfer. Accordingly, if any Notes are tendered and accepted in the Exchange Offer, the trading market for the untendered Notes could be adversely affected. EXCHANGE AGENT............. IBJ Schroder Bank & Trust Company. 11 19 SUMMARY OF TERMS OF EXCHANGE NOTES The form and terms of the Exchange Notes are the same as the form and terms of the Notes (which they replace) except that (i) the Exchange Notes have been registered under the Securities Act of 1933, as amended (the "Securities Act") and, therefore, will not bear legends restricting the transfer thereof and (ii) the Holders of Exchange Notes generally will not be entitled to further registration rights under the Registration Rights Agreement, which rights generally will be satisfied when the Exchange Offer is consummated. The Exchange Notes will evidence the same debt as the Notes and will be entitled to the benefits of the Indenture. See "Description of Exchange Notes". ISSUER..................... Amscan Holdings, Inc. SECURITIES OFFERED......... $110.0 million principal amount of 9 7/8% Senior Subordinated Notes due December 15, 2007 (the "Exchange Notes"). MATURITY DATE.............. December 15, 2007 GUARANTEES................. The Company's payment obligations under the Exchange Notes will be jointly and severally guaranteed on a senior subordinated basis (the "Senior Subordinated Guarantees") by the current domestic Subsidiaries of the Company and by each other Subsidiary of the Company that acts as a guarantor under the Bank Credit Agreement (collectively, the "Guarantors"). The Senior Subordinated Guarantees will be subordinated to the guarantees of Senior Debt (as defined herein) issued by the Guarantors under the Bank Credit Agreement. See "Description of Notes -- Senior Subordinated Guarantees". INTEREST PAYMENT DATES..... Interest accrues from December 19, 1997 at an annual rate of 9 7/8% and will be payable in cash semi-annually in arrears on June 15 and December 15 of each year, commencing June 15, 1998. OPTIONAL REDEMPTION........ Except as described below, the Exchange Notes are not redeemable at the Company's option prior to December 15, 2002. From and after December 15, 2002, the Exchange Notes will be subject to redemption at the option of the Company, in whole or in part, from time to time, at the redemption prices set forth herein, together with accrued and unpaid interest, if any, to the date of redemption. In addition, at any time prior to December 15, 2000, up to an aggregate of 35% of the principal amount of Notes and Exchange Notes will be redeemable at the option of the Company, on one or more occasions, from the net proceeds of public or private sales of common stock of, or contributions to the common equity capital of, the Company, at a price of 109.875% of the principal amount of the Notes and Exchange Notes, together with accrued and unpaid interest, if any, to the date of redemption; provided that at least $65.0 million in aggregate principal amount of Notes and Exchange Notes remains outstanding immediately after each such redemption. CHANGE OF CONTROL.......... At any time on or prior to December 15, 2002, the Exchange Notes may also be redeemed as a whole but not in part at the option of the Company upon the occurrence of a Change of Control at a redemption price equal to 100% of the principal amount thereof 12 20 plus the Applicable Premium, together with accrued and unpaid interest, if any, to the date of redemption. If the Company does not redeem the Exchange Notes upon a Change of Control, the Company will be obligated to make an offer to purchase the Exchange Notes, in whole or in part, at a price equal to 101% of the aggregate principal amount of the Exchange Notes, plus accrued and unpaid interest, if any, to the date of purchase. If a Change of Control were to occur, the Company may not have the financial resources to repay all of its obligations under the Bank Credit Agreement, the Indenture and the other indebtedness that would become payable upon the occurrence of such Change of Control. See "Risk Factors -- Payment Upon a Change of Control" and "Description of Exchange Notes". RANKING.................... The Exchange Notes will be general, unsecured obligations of the Company, will be subordinated in right of payment to all Senior Debt of the Company, will rank pari passu with all senior subordinated debt of the Company and will be senior in right of payment to all existing and future subordinated debt of the Company. The claims of Holders of the Exchange Notes will be subordinated to the Senior Debt, which, as of September 30, 1997, on a pro forma basis giving effect to the Transaction and the Transaction Financings, would have been approximately $128 million, $117 million of which would have been fully secured borrowings under the Bank Credit Agreement. The claims of Holders will be effectively subordinated to indebtedness and other liabilities of the Company's Non-Guarantor Subsidiaries (as defined herein) through which the Company conducts a portion of its operations which indebtedness and other liabilities were approximately $3 million as of September 30, 1997. See "The Transaction", "Capitalization" and "Description of Exchange Notes -- Subordination". CERTAIN COVENANTS.......... The Indenture contains certain covenants that, among other things, limit the ability of the Company and its Restricted Subsidiaries (as defined herein) to incur additional indebtedness and issue Disqualified Stock (as defined herein), pay dividends or distributions or make investments or make certain other Restricted Payments (as defined herein), enter into certain transactions with affiliates, dispose of assets (including limitations on the form of consideration to be received and the use of proceeds therefrom), incur liens securing pari passu and subordinated indebtedness of the Company and engage in mergers and consolidations. See "Description of Exchange Notes". EXCHANGE OFFER; REGISTRATION RIGHTS........ If any Holder of Transfer Restricted Securities (as defined in the Registration Rights Agreement) notifies the Company on or prior to the 20th Business Day following consummation of the Exchange Offer that it alone or together with Holders who hold in the aggregate at least $1.0 million in principal amount of Notes (A) is prohibited by law or Commission policy from participating in the Exchange Offer or (B) may not resell the Exchange Notes acquired by it in the Exchange Offer to the public without deliver- 13 21 ing a prospectus and the prospectus contained in the Exchange Offer Registration Statement is not appropriate or available for such resales or (C) is a broker-dealer and owns Notes acquired directly from the Company or an affiliate of the Company, the Company and the Guarantors will use their best efforts to file with the Commission a shelf registration statement (the "Shelf Registration Statement") to cover resales of the Notes by the Holders thereof who satisfy certain conditions relating to the provision of information in connection with the Shelf Registration Statement. Notwithstanding the foregoing, at any time after Consummation (as defined in the Registration Rights Agreement) of the Exchange Offer, the Company and the Guarantors may allow the Shelf Registration Statement to cease to be effective and usable if (i) the Board of Directors of the Company determines in good faith that such action is in the best interests of the Company, and the Company notifies the Holders within a certain period of time after the Board of Directors makes such determination or (ii) the prospectus contained in the Shelf Registration Statement or the Shelf Registration Statement contains an untrue statement of a material fact required to be stated therein or omits to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; provided that the period referred to in the Registration Rights Agreement during which the Shelf Registration Statement is required to be effective and usable will be extended by the number of days during which such registration statement was not effective or usable pursuant to the foregoing provisions. If (a) the Company and the Guarantors fail to file either of the Registration Statements required by the Registration Rights Agreement on or before the date specified for such filing, (b) either of such Registration Statements is not declared effective by the Commission on or prior to the date specified for such effectiveness (the "Effectiveness Target Date"), (c) the Company and the Guarantors fail to consummate the Exchange Offer within 45 days of the Effectiveness Target Date with respect to the Exchange Offer Registration Statement, or (d) the Shelf Registration Statement or the Exchange Offer Registration Statement is declared effective but thereafter ceases to be effective or usable in connection with resales of Transfer Restricted Securities during the periods specified in the Registration Rights Agreement (each such event referred to in clauses (a) through (d) above a "Registration Default"), then, subject to the last sentence of the preceding paragraph, the Company will pay Liquidated Damages to each Holder of Transfer Restricted Securities, with respect to the first 90-day period immediately following the occurrence of such Registration Default in an amount equal to $0.05 per week per $1,000 in principal amount of Notes constituting Transfer Restricted Securities held by such Holder. The amount of the Liquidated Damages will increase by an additional $0.05 per week per $1,000 in principal amount of Notes constituting Transfer Restricted Securities with respect to each subsequent 90-day period until all Registration 14 22 Defaults have been cured, up to a maximum amount of Liquidated Damages of $0.50 per week per $1,000 in principal amount of Notes constituting Transfer Restricted Securities. All accrued Liquidated Damages will be paid by the Company in cash on each Damages Payment Date (as defined in the Registration Rights Agreement) to the Global Note Holder (and any Holder of Certificated Securities who has given wire transfer instructions to the Company at least 10 Business Days prior to the Damages Payment Date) by wire transfer of immediately available funds and to all other Holders of Certificated Securities by mailing checks to their registered addresses. Following the cure of all Registration Defaults, the accrual of Liquidated Damages will cease. RISK FACTORS See "Risk Factors" beginning on page 20 for a discussion of certain factors that should be considered in evaluating an investment in the Exchange Notes. 15 23 SELECTED HISTORICAL AND TRANSACTION PRO FORMA CONSOLIDATED AND COMBINED FINANCIAL AND OTHER DATA The following table sets forth selected historical and Transaction pro forma consolidated and combined financial and other data for the Company. The historical consolidated and combined financial statements for the Company's four most recent fiscal years have been audited. The selected historical income statement data for the three years ended December 31, 1996 and balance sheet data as of December 31, 1996 and 1995 have been derived from, and should be read in conjunction with, the audited consolidated and combined financial statements of the Company and the related notes thereto appearing elsewhere in this Prospectus. The selected historical data presented below as of December 31, 1992, and for the year then ended, are derived from unaudited combined financial statements of Amscan Inc. and certain affiliated companies. The selected historical financial data for the nine month periods ended September 30, 1997 (unaudited) and 1996 (previously audited) have been derived from, and should be read in conjunction with, the consolidated and combined financial statements of the Company and the related notes thereto appearing elsewhere in this Prospectus. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included in the unaudited consolidated and combined financial statements of the Company. Results for the nine months ended September 30, 1997 are not necessarily indicative of results that can be expected for the entire 1997 fiscal year. See "Index to Financial Statements". The selected Transaction pro forma data is unaudited and intended to present the effect of certain transactions that have occurred in connection with the consummation of the Transaction. The selected Transaction pro forma consolidated statement of income data for the periods presented give effect to the Transaction as if it were consummated as of January 1, 1996. The selected Transaction pro forma consolidated statement of income data for the year ended December 31, 1996 and the twelve months ended September 30, 1997 also include supplemental pro forma adjustments to give effect to certain events that occurred in conjunction with the organization of the Company and its subsidiaries (the "Organization") and the Company's initial public offering in December 1996 (the "IPO") as if they had occurred as of January 1, 1996. The selected Transaction pro forma consolidated balance sheet data gives effect to the Transaction as though it had occurred on September 30, 1997. The historical and the Transaction pro forma consolidated and combined data should be read in conjunction with "Capitalization", "Unaudited Transaction Pro Forma Consolidated Financial Data" and the notes thereto, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other financial information contained elsewhere in this Prospectus. 16 24 SELECTED HISTORICAL AND TRANSACTION PRO FORMA CONSOLIDATED AND COMBINED FINANCIAL AND OTHER DATA (DOLLARS IN MILLIONS)
NINE MONTHS TWELVE MONTHS ENDED ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, -------------------------------------------------------- ------------------------------ ------------- TRANSACTION TRANSACTION TRANSACTION PRO FORMA PRO FORMA PRO FORMA 1992 1993 1994 1995 1996 1996 1996 1997 1997 1997 ----- ------ ------ ------ ------- ----------- ------ ------- ----------- ------------- IN COME STATEMENT DATA: Net sales............. $86.9 $108.9 $132.0 $167.4 $ 192.7 $ 192.7 $147.0 $ 161.3 $ 161.3 $ 207.0 Cost of sales......... 56.5 72.6 86.7 108.7 123.9 123.9 92.9 103.5 103.5 134.5 ----- ----- ----- ----- ----- ---------- ----- ----- ------- --- ------- --- Gross profit.......... 30.4 36.3 45.3 58.7 68.8 68.8 54.1 57.8 57.8 72.5 Selling expenses...... 8.8 9.8 11.3 12.2 11.8 11.8 8.7 9.6 9.6 12.7 General and administrative costs................ 9.3 11.1 14.5 15.0 19.3 20.0 14.1 13.2 13.3 18.7 Art and development costs................ 1.6 2.6 2.8 4.3 5.2 5.2 3.6 3.9 3.9 5.4 Nonrecurring compensation in connection with the IPO(a)............... 15.5 Special bonuses(b).... 0.8 1.1 2.2 2.5 4.2 3.3 ----- ----- ----- ----- ----- ---------- ----- ----- ------- --- ------- --- Income from operations........... 9.9 11.7 14.5 24.7 12.8 31.8 24.4 31.1 31.0 35.7 Interest expense, net.................. 2.1 2.3 3.8 5.8 6.7 23.0 4.6 2.7 16.9 23.1 Other (income) expense, net......... 0.0 0.3 0.1 (0.3) 0.4 0.4 (0.3) (0.2) (0.2) 0.4 ----- ----- ----- ----- ----- ---------- ----- ----- ------- --- ------- --- Income before income taxes and minority interests............ 7.8 9.1 10.6 19.2 5.7 8.4 20.1 28.6 14.3 12.2 Income taxes.......... 0.3 0.3 0.4 0.7 2.0 3.6 0.8 11.6 5.8 4.9 Minority interests.... 0.0 0.3 0.2 1.1 1.6 0.2 1.2 0.1 0.1 0.2 ----- ----- ----- ----- ----- ---------- ----- ----- ------- --- ------- --- Net income............ $ 7.5 $ 8.5 $ 10.0 $ 17.4 $ 2.1 $ 4.6 $ 18.1 $ 16.9 $ 8.4 $ 7.1 ===== ===== ===== ===== ===== ========== ===== ===== ========== ========== Pro forma net income per share............ $ 4,556 $16,734 $ 8,284 $ 6,984 Pro forma weighted average common shares outstanding(e)....... 1,010 1,010 1,010 1,010 PRO FORMA DATA (RELATING TO CHANGE IN TAX STATUS PRIOR TO ORGANIZATION AND IPO: Income before income taxes................ $ 7.7 $ 8.8 $ 10.4 $ 18.2 $ 4.1 $ 18.9 Pro forma income taxes(c)............. 3.2 3.6 4.2 7.4 1.8 7.9 ----- ----- ----- ----- ----- ----- Pro forma net income(c)............ $ 4.5 $ 5.2 $ 6.2 $ 10.8 $ 2.3 $ 11.0 ===== ===== ===== ===== ===== ===== Pro forma net income used for pro forma net income per share calculation(d)....... $12,010 Pro forma net income per share............ $11,891 Pro forma weighted average common shares outstanding(e)....... 1,010 NON-GAAP FINANCIAL DATA: Adjusted EBITDA(f).... $12.6 $ 15.5 $ 20.4 $ 31.6 $ 37.7 $ 37.2 $ 31.3 $ 35.6 $ 35.5 $ 41.8 Adjusted EBITDA margin............... 14.5% 14.2% 15.4% 18.9% 19.5% 19.3% 21.3% 22.1% 22.0% 20.2% Adjusted EBITDA to cash interest expense.............. 1.9x Adjusted EBITDA minus cash capital expenditures to cash interest expense..... 1.5 Total debt to Adjusted EBITDA(g)............ 5.7 OTHER FINANCIAL DATA: Gross margin.......... 34.9% 33.3% 34.3% 35.1% 35.7% 35.7% 36.8% 35.9% 35.9% 35.0% Depreciation and amortization......... $ 1.8 $ 2.6 $ 3.7 $ 4.3 $ 5.1 $ 5.4 $ 3.6 $ 4.5 $ 4.5 $ 6.1 Cash capital expenditures......... 3.1 4.7 7.4 4.5 7.6 7.6 5.6 6.9 6.9 8.9 Earnings to fixed charges(h)........... 4.0x 3.7x 3.2x 3.8x 1.7x 1.3x 4.3x 7.7x 1.8x 1.5x CASH FLOW STATEMENT DATA: Cash flow from operations........... $ 5.3 $ 9.9 $ 5.1 $ 4.7 $ 12.3 $ 1.6 $ 8.5 Cash flows from investing............ (3.1) (6.9) (7.3) (4.5) (7.6) (5.6) (6.8) Cash flows from financing............ (3.2) (1.9) 2.8 0.1 (6.0) 5.0 (2.5) BALANCE SHEET DATA: Working capital....... $ 7.8 $ 4.7 $ (0.4) $ 8.4 $ 45.4 $ 2.1 $ 74.9 $ 96.3 Total assets.......... 60.7 80.1 93.9 114.6 140.3 138.3 162.8 171.5 Total debt............ 37.1 49.1 59.7 70.8 48.3 98.6 40.4 237.8 Stockholders' equity (deficit)............ 15.6 18.5 20.8 27.2 67.9 24.6 89.0 (95.3)
17 25 NOTES TO SELECTED HISTORICAL AND TRANSACTION PRO FORMA CONSOLIDATED AND COMBINED FINANCIAL AND OTHER DATA (DOLLARS IN MILLIONS) (a) In conjunction with the IPO, the Company recorded non-recurring compensation expense of $15.5 in 1996, including stock and cash payments of $12.5 to certain executives in connection with the termination of prior employment agreements and $3.0 for the establishment of an Employee Stock Ownership Plan for the benefit of the employees of Amscan Holdings, Inc. and the payment of stock bonuses to certain of such employees. (b) In each of the five years ended December 31, 1996 and for the nine months ended September 30, 1996, special bonus arrangements existed with certain members of management. In connection with the IPO, such special bonus arrangements were substantially modified and generally replaced by incentives tied to the value of Company Common Stock. (c) Prior to the consummation of the IPO, Amscan Inc., Am-Source, Inc. and certain other subsidiaries of the Company elected to be taxed as S corporations under the Internal Revenue Code of 1986, as amended. The pro forma net income amounts give effect to pro forma income tax amounts for each of the periods shown at statutory rates (40.5%) assuming these subsidiaries had not elected S corporation status. (d) Pro forma net income used for the pro forma net income per share calculation for the year ended December 31, 1996 is higher than the pro forma net income shown for such period due to adjustments described in Note (16) of the Notes to Consolidated Financial Statements. See "Notes to Consolidated Financial Statements -- December 31, 1996." (e) Represents the number of common shares outstanding after the Effective Time as described in Note (16) of the Notes to Consolidated Financial Statements. See "Notes to Consolidated Financial Statements -- December 31, 1996." (f) "EBITDA" represents earnings before interest, income taxes, depreciation and amortization. "Adjusted EBITDA" represents EBITDA adjusted for certain items reflected in the following table. Neither EBITDA nor Adjusted EBITDA is intended to represent cash flow from operations as defined by generally accepted accounting principles and should not be considered as an alternative to net income as an indicator of the Company's operating performance or to cash flows as a measure of liquidity. EBITDA and Adjusted EBITDA are presented because they are widely accepted financial indicators of a leveraged company's ability to service and/or incur indebtedness and because management believes EBITDA and Adjusted EBITDA are relevant measures of the Company's ability to generate cash without regard to the Company's capital structure or working capital needs. EBITDA and Adjusted EBITDA as presented may not be comparable to similarly titled measures used by other companies, depending upon the non-cash charges included. When evaluating EBITDA and Adjusted EBITDA, investors should consider that EBITDA and Adjusted EBITDA (i) should not be considered in isolation but together with other factors which may influence operating and investing activities such as changes in operating assets and liabilities and purchases of property and equipment, (ii) are not a measure of performance calculated in accordance with generally accepted accounting principles, (iii) should not be construed as an alternative or substitute for income from operations, net income or cash flows from operating activities in analyzing the Company's operating performance, financial position or cash flows and (iv) should not be used as an indicator of the Company's operating performance or as a measure of its liquidity. 18 26
TWELVE MONTHS NINE MONTHS ENDED ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, ------------------------------------------------------- ----------------------------- ------------- TRANSACTION TRANSACTION TRANSACTION PRO FORMA PRO FORMA PRO FORMA 1992 1993 1994 1995 1996 1996 1996 1997 1997 1997 ----- ------ ------ ------ ------ ----------- ------ ------ ----------- ------------- EBITDA.................. $11.8 $ 13.8 $ 17.9 $ 28.3 $ 15.9 $ 36.6 $ 27.1 $ 35.7 $ 35.6 $ 41.2 Adjustments-increase (decrease): Special bonuses and non-recurring compensation......... 0.8 1.1 2.2 2.5 19.8 3.3 Other (income) expense, net.................. 0.3 0.1 (0.3) 0.4 0.4 (0.3) (0.2) (0.2) 0.4 Minority interests..... 0.3 0.2 1.1 1.6 0.2 1.2 0.1 0.1 0.2 ----- ----- ----- ----- ----- ---------- ----- ----- ------- --- ------- --- Adjusted EBITDA......... $12.6 $ 15.5 $ 20.4 $ 31.6 $ 37.7 $ 37.2 $ 31.3 $ 35.6 $ 35.5 $ 41.8 ===== ===== ===== ===== ===== ========== ===== ===== ========== ==========
(g) For purposes of determining the ratio of total debt to Adjusted EBITDA for the twelve months ended September 30, 1997, total debt on a pro forma basis reflects $10.8 of aggregate principal indebtedness under existing mortgage notes on real property owned by subsidiaries of the Company and capital lease obligations, $117.0 in aggregate principal amount of indebtedness under the Term Loan, and $110.0 in aggregate principal amount of the Exchange Notes offered hereby. (h) For purposes of determining the ratio of earnings to fixed charges, earnings are defined as earnings before income taxes and minority interests plus fixed charges. Fixed charges consist of interest expense on all obligations, amortization of deferred financing costs and one-third of the rental expense on operating leases representing that portion of rental expense deemed by the Company to be attributable to interest. 19 27 RISK FACTORS SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE INDEBTEDNESS The Company is, and will continue to be, highly leveraged as a result of the substantial indebtedness it has incurred in connection with the Transaction. As of September 30, 1997, after giving pro forma effect to the Transaction and the Transaction Financings and the application of the net proceeds therefrom, the Company (i) would have had approximately $238 million of consolidated indebtedness and (ii) because the distribution to stockholders and all of the expenses relating to the Transaction will be charged to earnings and stockholders' equity, would have had a deficit of approximately $95 million of consolidated stockholders' equity. Of the total of approximately $289 million used to consummate the Transaction, approximately $227 million (79%) was funded with debt, and approximately $62 million (21%) was funded by new equity, with current stockholders of the Company retaining almost 10% of the Company. After giving pro forma effect to such transactions, the Company's ratio of earnings to fixed charges would have been 1.5x for the twelve months ended September 30, 1997. Pro forma interest expense for the twelve months ended September 30, 1997 would have been approximately $23 million. The Company may incur additional indebtedness in the future, subject to limitations imposed by the Indenture and the Bank Credit Agreement. See "Capitalization" and "Transaction Pro Forma Consolidated Financial Data". The Company's ability to make scheduled payments of principal of, or to pay interest on, or to refinance its indebtedness (including the Exchange Notes) and to satisfy its other obligations will depend upon its future performance, which, to a certain extent, will be subject to general economic, financial, competitive, business and other factors beyond its control. Based upon the current level of operations and anticipated growth, the Company believes that available cash flow, together with available borrowings under the Bank Credit Agreement, will be adequate to meet its anticipated future requirements for working capital and operating expenses, to finance potential acquisitions and to service its debt requirements as they become due. However, a portion of the principal payments at maturity on the Exchange Notes may require refinancing. There can be no assurance that the Company's business will generate sufficient cash flow from operations or that future borrowings will be available in an amount sufficient to enable the Company to service its indebtedness, including the Exchange Notes, or make necessary or desirable capital expenditures or acquisitions, or that any refinancing would be available on commercially reasonable terms or at all. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources". The degree to which the Company is now leveraged could have important consequences to the Company, including the following: (a) the Company's ability to obtain additional financing for acquisitions, working capital, capital expenditures or other purposes may be impaired and any such financing, if available, may not be on terms favorable to the Company; (b) any interest expense or other debt service may reduce the funds that would otherwise be available to the Company for its operations and future business opportunities; (c) certain of the Company's borrowings are at variable rates of interest, which could result in higher interest expense in the event of increases in interest rates; (d) a substantial decrease in cash flows from operations or an increase in expenses of the Company could make it difficult for the Company to meet its debt service requirements or force it to modify its operations; and (e) high leverage may place the Company at a competitive disadvantage and may make it vulnerable to a downturn in its business or the economy generally. In addition, the Bank Credit Agreement and the Indenture contain financial and other restrictive covenants that limit the ability of the Company to, among other things, borrow additional funds and dispose of assets, and require the Company to maintain certain financial ratios. Failure by the Company to comply with these covenants could result in an event of default which, if not cured or waived, could have a material adverse effect on the Company. In addition, the degree to which the Company is leveraged could prevent it from repurchasing all of the Exchange Notes tendered to it 20 28 upon the occurrence of a Change of Control. See "Description of Senior Debt" and "Description of Exchange Notes". SUBORDINATION; ASSET ENCUMBRANCES The Exchange Notes will be subordinated in right of payment to all existing and future Senior Debt, including the principal of (and premium, if any) and interest on and all other amounts due on or payable in connection with Senior Debt. At September 30, 1997, on a pro forma basis after giving effect to the Transaction and the Transaction Financings, there would have been outstanding approximately $128 million of Senior Debt, $117 million of which would have been fully secured borrowings under the Bank Credit Agreement. In addition, the Exchange Notes will be effectively subordinated to indebtedness and other liabilities of the Company's Non-Guarantor Subsidiaries through which the Company conducts a portion of its operations, which indebtedness and other liabilities were approximately $3 million as of September 30, 1998. By reason of such subordination, in the event of the insolvency, liquidation, reorganization, dissolution or other winding-up of the Company or upon a default in payment with respect to, or the acceleration of, any Senior Debt, the holders of such accelerated Senior Debt and any other creditors who are holders of Senior Debt and creditors of Non-Guarantor Subsidiaries must be paid in full before Holders of the Exchange Notes may be paid. In addition, no payments may be made with respect to the principal of (and premium, if any) or interest on the Exchange Notes if a payment default exists with respect to Senior Debt and, under certain circumstances, no payments may be made with respect to the principal of (and premium, if any) or interest on the Exchange Notes for a period of up to 179 days if a non-payment default exists with respect to Senior Debt. In addition, the Indenture permits Subsidiaries of the Company to incur debt under certain circumstances. Any debt incurred by a Non-Guarantor Subsidiary of the Company will be structurally senior to the Exchange Notes. See "Description of Exchange Notes". The Company has granted to the lenders under the Bank Credit Agreement security interests in substantially all of the current and future assets of the Company, including a pledge of all of the issued and outstanding shares of capital stock of certain of the Company's Subsidiaries. In addition, the Guarantors have granted to such lenders security interests in substantially all of the current and future assets of the Guarantors. In the event of a default on secured indebtedness, including the Senior Subordinated Guarantees (whether as a result of the failure to comply with a payment or other covenant, a cross-default, or otherwise), the parties granted security interests will have a prior secured claim on the assets of the Company and the Guarantors. If these parties should attempt to foreclose on their collateral, the Company's financial condition and the value of the Exchange Notes will be materially adversely affected. See "Description of Senior Debt". HOLDING COMPANY STRUCTURE The Company conducts all of its business through Subsidiaries and has no operations of its own. The Company is dependent on the cash flow of its Subsidiaries and distributions thereof from its Subsidiaries to the Company in order to meet its debt service obligations. It is not expected that the Company will have any assets other than the common stock of its Subsidiaries. As of September 30, 1997, on a pro forma basis after giving effect to the Transaction and the Transaction Financings, the aggregate amount of indebtedness and other obligations of the Non-Guarantor Subsidiaries would have been approximately $3 million. As a result of the holding company structure of the Company, Holders of the Exchange Notes will be structurally junior to all creditors of the Non-Guarantor Subsidiaries, except to the extent that the Company or a Guarantor is itself recognized as a creditor of such Non-Guarantor Subsidiary, in which case the claims of the Company or such Guarantor would still be subordinate to any security in the assets of such Non-Guarantor Subsidiary and any indebtedness of such Non-Guarantor Subsidiary senior to that held by the Company or a Guarantor. In the event of the insolvency, liquidation, reorganization, dissolution or other winding-up of the Non-Guarantor Subsidiaries, the Company will not receive 21 29 funds available to pay to Holders of the Exchange Notes in respect of the Exchange Notes until after the payment in full of the claims of the creditors of the Non-Guarantor Subsidiaries. DEPENDENCE ON KEY PERSONNEL The Company's success will continue to depend to a significant extent on its executives, managers and other key personnel. Although the Company has entered into employment agreements with certain employees, pursuant to which such employees acquired an equity interest in the Company, there can be no assurance that the Company will be able to retain these executives or other managers and key personnel or to attract additional qualified management in the future. The loss of the services of Gerald C. Rittenberg, Chief Executive Officer, William S. Wilkey, Senior Vice President -- Sales and Marketing of the Company or James M. Harrison, President, Chief Financial Officer and Treasurer of the Company, could have an adverse effect on the Company's financial condition or results of operations. The Company does not maintain key-man life insurance on any of these executives. CONTROL BY GSCP; CERTAIN PAYMENTS TO GOLDMAN, SACHS & CO. Goldman Sachs and its affiliates have certain interests in the Transaction and in the Company. Terence M. O'Toole and Sanjeev K. Mehra are Managing Directors of Goldman Sachs, and Joseph P. DiSabato is an Associate of Goldman Sachs, and each is a director of the Company. The general and managing partners of each of the GSCP funds (the "GS Fund Partners"), which are affiliates of Goldman Sachs and The Goldman Sachs Group, will each be deemed to be an "affiliate" of GSCP, and therefore of the Company. See "Ownership of Capital Stock". Goldman Sachs received an underwriting discount of approximately $3.3 million in connection with its purchase and resale of the Notes. Goldman Sachs also served as financial advisor to MergerCo in connection with the Transaction and received certain fees and had expenses reimbursed in connection therewith as described herein. Moreover, GS Credit Partners acted as Syndication Agent, Documentation Agent and Arranger in connection with the Bank Credit Agreement and received certain fees and had expenses reimbursed in connection therewith. Goldman Sachs received certain fees for other services rendered to the Company. See "Certain Transactions". In excess of 80% of the outstanding shares of Company Common Stock is held by GSCP. As a result of such ownership, GSCP controls the Company and has the ability to elect all of its directors, appoint new management and approve any action requiring the approval of the holders of Company Common Stock, including adopting amendments to the Company's certificate of incorporation and approving mergers or sales of all or substantially all of the Company's assets, in each case subject to whatever contractual restrictions, including pursuant to the Indenture and the Bank Credit Agreement, apply to the Company. There can be no assurance that the interests of GSCP will not conflict with the interests of Holders of the Exchange Notes. See "Management", "Ownership of Capital Stock" and "Certain Transactions". PAYMENT UPON A CHANGE OF CONTROL Upon the occurrence of a Change of Control, each Holder of Exchange Notes may require the Company to repurchase all or a portion of such Holder's Exchange Notes at 101% of the principal amount of the Exchange Notes, together with accrued and unpaid interest, if any, to the date of repurchase. If a Change of Control were to occur, the Company may not have the financial resources to repay all of its obligations under the Bank Credit Agreement, the Indenture and the other indebtedness that would become payable upon the occurrence of such Change of Control. 22 30 RISKS RELATING TO THE COMPANY'S BUSINESS Concentration of Customer Sales and Credit Risk. The concentration of sales by the Company to party goods superstore chains has resulted in a significant concentration of sales and unsecured trade receivables with such customers. Combined sales to the Company's two largest customers, Party City, a public company with stock listed on the Nasdaq National Market, and Party Stores Holdings, an independent and privately held party goods superstore chain, accounted in the aggregate for approximately 10%, 17% and 21% of the Company's sales in 1994, 1995 and 1996, respectively. In addition, at September 30, 1997, these two customers together accounted for approximately 14% of the Company's accounts receivable. Although the Company believes its relationships with these customers are good, should either of them significantly reduce their volume of purchases from the Company, the Company's financial condition and results of operations could be adversely affected. Moreover, while the Company believes that adequate provisions for bad debts have been made in its financial statements, should it be unable to collect receivables from its party superstore customers to any significant extent, the Company's financial condition and results of operations could be adversely affected. In January 1998, Party Stores Holdings filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code. From time to time, the Company has provided additional reserves or restructured accounts receivables because of the credit condition of certain customers. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources". Importance of Identifying Design Trends and Consumer Preferences. In manufacturing and distributing party goods, the Company's success depends in part on its ability to anticipate the tastes and preferences of party goods retailers and consumers. The Company's strategy has depended to a significant extent on the regular introduction of new designs which are attractive and distinctive. The Company's failure to anticipate, identify or react appropriately to changes in consumer tastes could, among other things, lead to excess inventories and significant markdowns or a shortage of products and foregone sales, any of which could have an adverse effect on the Company's financial condition or results of operations. Competition. The party goods industry is highly competitive. The Company competes with many other companies, including smaller, independent specialty manufacturers as well as divisions or subsidiaries of larger companies with greater financial and other resources than those of the Company. Certain of these competitors control licenses for widely recognized images, such as cartoon or motion picture characters, which could provide them with a competitive advantage. The Company has pursued a strategy of developing its own designs and generally has not pursued licensing opportunities. Impact of Changing Raw Material Costs. The principal raw material used by the Company in its products is paper, which historically accounts for approximately 35-40% of the annual cost of production of the Company's paper plates, cups and napkins. The price of paper is subject to change due to numerous factors beyond the control of the Company. Any significant increase in the cost of paper would adversely affect the Company's raw material costs. Competitive conditions will determine how much of any raw material cost increase can be passed on to party goods retailers. While historically the Company has been able to pass on raw material cost increases to its customers, if the Company is unable to pass future raw materials cost increases to the party goods retailers, the Company's financial condition and results of operations would be adversely affected. Risks Associated with Further Expansion Through Acquisitions. The Company has from time to time expanded its product line and further vertically integrated its operations, through strategic acquisitions. The Company believes that opportunities exist to make acquisitions of complementary businesses to leverage the Company's existing marketing, distribution and production capabilities, expand its presence in the various retail channels, further broaden and deepen its product line and penetrate international markets. The Company receives inquiries from time to time with respect to 23 31 the possible acquisition by the Company of other entities and such inquiries have been received since the announcement of the Transaction. As of the date of this Prospectus, the Company has not entered into any agreements to acquire other companies or businesses; however, the Company intends to pursue acquisition opportunities aggressively. See "Business -- Company Strategy". There are various risks associated with pursuing acquisitions. The risks include problems inherent in integrating new businesses, including potential loss of customers and key personnel and potential disruption of operations. There can be no assurance that businesses acquired by the Company will generate significant revenues or profits or satisfy the Company's strategic objectives. Moreover, there can be no assurance that suitable acquisition candidates will be available, that acquisitions can be completed on reasonable terms, that the Company will successfully integrate the operations of any acquired entities or that the Company will have access to adequate funds to effect any desired acquisitions. The amount of debt financing available for future acquisitions will be limited by restrictions contained in the Bank Credit Agreement and the Indenture for the Exchange Notes. SEASONALITY Due to the number of holidays falling in the fourth quarter of the calendar year, the Company's business is somewhat seasonal, and, as a result, the quarterly results of operations may not be indicative of those for a full year. Third quarter sales are generally the highest of the year due to a combination of increased sales to consumers of the Company's products during summer months as well as initial shipments of seasonal holiday merchandise as retailers build inventory. Conversely, fourth quarter sales are generally lower as retailers sell through inventories purchased during the third quarter. The overall growth rate of the Company's sales in recent years has, in part, offset this sales variability. Promotional activities, including special dating and pricing terms, particularly with respect to Halloween and Christmas products, result in generally lower margins and profitability in the fourth quarter, as well as higher accounts receivable balances and associated higher interest costs to support these balances. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Quarterly Results". LACK OF PUBLIC MARKET FOR THE EXCHANGE NOTES The Notes are currently owned by a relatively small number of beneficial owners. The Notes have not been registered under the Securities Act and will be subject to restrictions on transferability to the extent that they are not exchanged for the Exchange Notes. The Exchange Notes will constitute a new issue of securities with no established trading market. Although the Exchange Notes will generally be permitted to be resold or otherwise transferred by Holders who are not affiliates of the Company without compliance with the registration requirements under the Securities Act, the Company does not intend to list the Exchange Notes on any national securities exchange or to seek the admission thereof to trading in any automated quotation system. The Company has been advised by Goldman Sachs that it presently intends to make a market in the Exchange Notes. However, Goldman Sachs is not obligated to do so and any market-making activity with respect to the Exchange Notes may be discontinued at any time without notice. In addition, such market-making activity will be subject to the limits imposed by the Securities Act and the Exchange Act. Accordingly, no assurance can be given that an active public or other market will develop for the Exchange Notes or as to the liquidity of or the trading market for the Exchange Notes. If such a market were to develop, the Exchange Notes could trade at prices that may be higher or lower than the initial offering price of the Notes depending on many factors, including prevailing interest rates, the Company's operating results and the market for similar securities. Goldman Sachs may be deemed to be an affiliate of the Company and, as such, may be required to deliver a "market-maker" prospectus in connection with its market-making activities in the Exchange Notes. Pursuant to the Registration Rights Agreement, the Company agreed to file and maintain a registration statement that would allow Goldman Sachs to engage in market-making 24 32 transactions in the Exchange Notes. The registration statement will remain effective for as long as Goldman Sachs may be required to deliver a prospectus in connection with secondary transactions in the Exchange Notes. Notwithstanding the foregoing, at any time after consummation of the Exchange Offer, the Company and the Guarantors may allow such "market-maker" prospectus and the related registration statement to cease to be effective and usable if (i) the Board of Directors of the Company determines in good faith that such action is in the best interests of the Company, and the Company notifies the Holders within a certain period of time after the Board of Directors makes such determination or (ii) such prospectus or such related registration statement contains an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The Company has agreed to bear substantially all the costs and expenses related to such registration statement. FRAUDULENT CONVEYANCE Management of the Company believes that the indebtedness represented by the Notes and the Senior Subordinated Guarantees, and to the extent exchanged for the Notes, the Exchange Notes, was incurred for proper purposes and in good faith, and that as a result of, and after giving effect to, the Note Offering and the Exchange Offer, based on forecasts, asset valuations and other financial information, the Company was and will be solvent, had and will have sufficient capital for carrying on its business and was and is able to pay its debts as they mature. See "Risk Factors -- Substantial Leverage; Ability to Service Indebtedness". Notwithstanding management's belief, however, if a court of competent jurisdiction in a suit by an unpaid creditor or a representative of creditors (such as a trustee in bankruptcy or a debtor-in-possession) were to find that, at the time of the incurrence of such indebtedness, the Company or the Guarantors were insolvent, were rendered insolvent by reason of such incurrence, were engaged in a business or transaction for which its remaining assets constituted unreasonably small capital, intended to incur, or believed that they would incur, debts beyond their ability to pay such debts as they matured, or intended to hinder, delay or defraud their creditors, and that the indebtedness was incurred for less than reasonably equivalent value, then such court could, among other things, (a) void all or a portion of the Company's or the Guarantors' obligations to Holders of the Exchange Notes, the effect of which would be that Holders of the Exchange Notes may not be repaid in full and/or (b) subordinate the Company's or the Guarantors' obligations to Holders of the Exchange Notes to other existing and future indebtedness of the Company to a greater extent than would otherwise be the case, the effect of which would be to entitle such other creditors to be paid in full before any payment could be made on the Exchange Notes or the Senior Subordinated Guarantees. EXCHANGE OFFER PROCEDURES Issuance of the Exchange Notes in exchange for Notes pursuant to the Exchange Offer will be made only after a timely receipt by the Exchange Agent of such Notes, a properly completed and duly executed Letter of Transmittal and all other required documents. Therefore, holders of the Notes desiring to tender such Notes in exchange for Exchange Notes should allow sufficient time to ensure timely delivery. The Company is under no duty to give notification of defects or irregularities with respect to the tenders of Notes for exchange. Notes that are not tendered or are tendered but not accepted will, following the consummation of the Exchange Offer, continue to be subject to the existing restrictions upon transfer thereof and, upon consummation of the Exchange Offer, the registration rights under the Registration Rights Agreement generally will terminate. In addition, any holder of Notes who tenders in the Exchange Offer for the purpose of participating in a distribution of the Exchange Notes may be deemed to have received restricted securities and, if so, will be required to comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale. Each broker-dealer that receives Exchange Notes for its own account 25 33 in exchange for Notes, where such Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. To the extent that Notes are tendered and accepted in the Exchange Offer, the trading market for untendered and tendered but unaccepted Notes could be adversely affected. See "The Exchange Offer". RESTRICTIONS ON TRANSFER The Notes were offered and sold by the Company in a private offering exempt from registration pursuant to the Securities Act and have been resold pursuant to Rule 144A and Regulation S under the Securities Act. As a result, the Notes may not be reoffered or resold by purchasers except pursuant to an effective registration statement under the Securities Act, or pursuant to an applicable exemption from such registration, and the Notes are legended to restrict transfer as aforesaid. Each Holder (other than any Holder who is an affiliate or promoter of the Company) who duly exchanges Notes for Exchange Notes in the Exchange Offer will receive Exchange Notes that are freely transferable under the Securities Act. Holders of Notes who participate in the Exchange Offer should be aware, however, that if they accept the Exchange Offer for the purpose of engaging in a distribution, the Exchange Notes may not be publicly reoffered or resold without complying with the registration and prospectus delivery requirements of the Securities Act. As a result, each Holder of Notes accepting the Exchange Offer will be deemed to have represented, by its acceptance of the Exchange Offer, that it acquired the Exchange Notes in the ordinary course of business and that it is not engaged in, and does not intend to engage in, a distribution of the Exchange Notes. If existing Commission interpretations permitting free transferability of the Exchange Notes following the Exchange Offer are changed prior to consummation of the Exchange Offer, the Company will use its best efforts to register the Notes for resale under the Securities Act. See "Prospectus Summary -- The Exchange Offer" and "Description of Exchange Notes -- Registration Rights". The Notes currently may be sold pursuant to the restrictions set forth in Rule 144A or Regulation S, or pursuant to another available exemption under the Securities Act, without registration under the Securities Act. To the extent that Notes are tendered and accepted in the Exchange Offer, the trading market for the untendered and tendered but unaccepted Notes could be adversely affected. 26 34 THE EXCHANGE OFFER The following discussion sets forth or summarizes what the Company believes are the material terms of the Exchange Offer, including those set forth in the Letter of Transmittal distributed with this Prospectus. This summary is qualified in its entirety by reference to the full text of the documents underlying the Exchange Offer, copies of which are filed as exhibits to the Registration Statement of which this Prospectus is a part, and are incorporated by reference herein. PURPOSE AND EFFECT OF THE EXCHANGE OFFER The Notes were sold by the Company on December 19, 1997, and were subsequently resold to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to certain persons in transactions outside the United States in reliance on Regulation S under the Securities Act. In connection with the Note Offering, the Company entered into the Registration Rights Agreement, which requires, among other things, that promptly following the completion of the Transaction, the Company and the Guarantors (i) file with the Commission a registration statement under the Securities Act with respect to an issue of new notes of the Company identical in all material respects to the Notes, (ii) use their best efforts to cause such registration statement to become effective under the Securities Act and (iii) upon the effectiveness of that registration statement, offer to the Holders of the Notes the opportunity to exchange their Notes for a like principal amount of Exchange Notes, which would be issued without a restrictive legend and may be reoffered and resold by the holder without restrictions or limitations under the Securities Act (other than any such holder that is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act). A copy of the Registration Rights Agreement has been filed as an exhibit to the Registration Statement of which this Prospectus is a part. The term "Holder" with respect to the Exchange Offer means any person in whose name the Notes are registered on the books of the Company or any other person who has obtained a properly completed bond power from the registered holder. Because the Exchange Offer is for any and all Notes, the number of Notes tendered and exchanged in the Exchange Offer will reduce the principal amount of Notes outstanding. Following the consummation of the Exchange Offer, Holders of the Notes who did not tender their Notes generally will not have any further registration rights under the Registration Rights Agreement, and such Notes will continue to be subject to certain restrictions on transfer. Accordingly, the liquidity of the market for such Notes could be adversely affected. The Notes are currently eligible for sale pursuant to Rule 144A through the PORTAL System of the National Association of Securities Dealers, Inc. Because the Company anticipates that most holders of Notes will elect to exchange such Notes for Exchange Notes due to the absence of restrictions on the resale of Exchange Notes under the Securities Act, the Company anticipates that the liquidity of the market for any Notes remaining after the consummation of the Exchange Offer may be substantially limited. TERMS OF THE EXCHANGE OFFER Upon the terms and subject to the conditions set forth in this Prospectus and in the Letter of Transmittal, the Company will accept any and all Notes validly tendered and not withdrawn prior to 5:00 p.m. New York City time, on the Expiration Date. The Company will issue $1,000 principal amount of Exchange Notes in exchange for each $1,000 principal amount of outstanding Notes accepted in the Exchange Offer. Holders may tender some or all of their Notes pursuant to the Exchange Offer. However, Notes may be tendered only in integral multiples of $1,000. The form and terms of the Exchange Notes are the same as the form and terms of the Notes except that (i) the Exchange Notes have been registered under the Securities Act and hence will not bear legends restricting the transfer thereof and (ii) the holders of the Exchange Notes generally will not be entitled to certain rights under the Registration Rights Agreement, which rights generally will terminate upon consummation of the Exchange Offer. The Exchange Notes will evidence the same debt as the Notes and will be entitled to the benefits of the Indenture. 27 35 Holders of Notes do not have any appraisal or dissenters' rights under the General Corporation Law of the State of Delaware or the Indenture in connection with the Exchange Offer. The Company intends to conduct the Exchange Offer in accordance with the applicable requirements of the Exchange Act and the rules and regulations of the Commission thereunder, including Rule 14e-1 thereunder. The Company shall be deemed to have accepted validly tendered Notes when, as and if the Company has given oral or written notice thereof to the Exchange Agent. The Exchange Agent will act as agent for the tendering Holders for the purpose of receiving the Exchange Notes from the Company. If any tendered Notes are not accepted for exchange because of an invalid tender, the occurrence of certain other events set forth herein or otherwise, the certificates for any such unaccepted Notes will be returned, without expense, to the tendering Holder thereof as promptly as practicable after the Expiration Date. Holders who tender Notes in the Exchange Offer will not be required to pay brokerage commissions or fees or, subject to the instructions in the Letter of Transmittal, transfer taxes with respect to the exchange of Notes pursuant to the Exchange Offer. The Company will pay all charges and expenses, other than transfer taxes in certain circumstances, in connection with the Exchange Offer. See "-- Fees and Expenses". EXPIRATION DATE; EXTENSIONS; AMENDMENTS The term "Expiration Date" shall mean 5:00 p.m., New York City time, on March , 1998, unless the Company, in its sole discretion, extends the Exchange Offer, in which case the term "Expiration Date" shall mean the latest date and time to which the Exchange Offer is extended. To extend the Exchange Offer, the Company will notify the Exchange Agent of any extension by oral or written notice, followed by a public announcement thereof no later than 9:00 a.m., New York City time, on the next business day after the previously scheduled expiration date. The Company reserves the right, in its reasonable judgment, (i) to delay accepting any Notes, to extend the Exchange Offer or to terminate the Exchange Offer if any of the conditions set forth below under "-- Conditions" shall not have been satisfied, by giving oral or written notice of such delay, extension or termination to the Exchange Agent or (ii) to amend the terms of the Exchange Offer in any manner. Any such delay in acceptance, extension, termination or amendment will be followed as promptly as practicable by a public announcement thereof. If the Exchange Offer is amended in a manner determined by the Company to constitute a material change, the Company will promptly disclose such amendment by means of a prospectus supplement that will be distributed to the registered Holders, and, depending upon the significance of the amendment and the manner of disclosure to the registered Holders, the Company will extend the Exchange Offer for a period of five to ten business days if the Exchange Offer would otherwise expire during such five to ten business-day period. If the Company does not consummate the Exchange Offer, or, in lieu thereof, the Company does not file and cause to become effective a resale shelf registration for the Notes within the time periods set forth herein, liquidated damages will accrue and be payable on the Notes either temporarily or permanently. See "Description of Exchange Notes -- Registration Rights; Liquidated Damages". Without limiting the manner in which the Company may choose to make public announcement of any delay, extension, amendment or termination of the Exchange Offer, the Company shall have no obligation to publish, advertise or otherwise communicate any such public announcement, other than by making a timely release to the Dow Jones News Service. 28 36 INTEREST ON EXCHANGE NOTES The Exchange Notes will bear interest from December 19, 1997, the date of issuance of the Notes that are tendered in exchange for the Exchange Notes (or the most recent Interest Payment Date to which interest on such Notes has been paid). Accordingly, holders of Notes that are accepted for exchange will not receive interest that is accrued but unpaid on the Notes at the time of tender, but such interest will be payable on the first Interest Payment Date after the Expiration Date. Interest on the Exchange Notes will be payable semiannually on each June 15 and December 15, commencing June 15, 1998. PROCEDURES FOR TENDERING Only a Holder of Notes may tender such Notes in the Exchange Offer. To tender in the Exchange Offer, a Holder must complete, sign and date the Letter of Transmittal, or a facsimile thereof, have the signatures thereon guaranteed if required by the Letter of Transmittal and mail or otherwise deliver such Letter of Transmittal or such facsimile, together with the Notes and any other required documents, to the Exchange Agent so as to be received by the Exchange Agent at the address set forth below prior to 5.00 p.m., New York City time, on the Expiration Date. Delivery of the Notes may be made by book-entry transfer in accordance with the procedures described below. Confirmation of such book-entry transfer must be received by the Exchange Agent prior to the Expiration Date. By executing the Letter of Transmittal, each Holder will make to the Company the representation set forth below in the second paragraph under the heading "-- Resale of Exchange Notes". The tender by a Holder and the acceptance thereof by the Company will constitute an agreement between such Holder and the Company in accordance with the terms and subject to the conditions set forth herein and in the Letter of Transmittal. THE METHOD OF DELIVERY OF NOTES AND THE LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS. Any beneficial owner whose Notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender should contact the registered Holder promptly and instruct such registered Holder to tender on such beneficial owner's behalf. Signatures on the Letter of Transmittal or a notice of withdrawal, as the case may be, must be guaranteed by an Eligible Institution (as defined below) unless the Notes tendered pursuant thereto are tendered (i) by a registered Holder who has not completed the box entitled "Special Registration Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or (ii) for the account of an Eligible Institution. In the event that signatures on a Letter of Transmittal or a notice of withdrawal, as the case may be, are required to be guaranteed, such guarantee must be by a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., a commercial bank or trust company having an office or correspondent in the United States or an "eligible guarantor institution" within the meaning of Rule 17Ad-15 under the Exchange Act (an "Eligible Institution"). If the Letter of Transmittal is signed by a person other than the registered Holder of any Notes listed therein, such Notes must be endorsed or accompanied by a properly completed bond power, 29 37 signed by such registered Holder as such registered Holder's name appears on such Notes with the signature thereon guaranteed by an Eligible Institution. If the Letter of Transmittal or any Notes or bond powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and unless waived by the Company, evidence satisfactory to the Company of their authority to so act must be submitted with the Letter of Transmittal. The Company understands that the Exchange Agent will make a request promptly after the date of this Prospectus to establish accounts with respect to the Notes at the Depository for the purpose of facilitating the Exchange Offer, and subject to the establishment thereof, any financial institution that is a participant in the Depository's system may make book-entry delivery of the Notes by causing the Depository to transfer such Notes into the Exchange Agent's account with respect to the Notes in accordance with the Depository's procedures for such transfer. Although delivery of the Notes may be effected through book-entry transfer into the Exchange Agent's account at the Depository, an appropriate Letter of Transmittal properly completed and duly executed with any required signature guarantee and all other required documents must in each case be transmitted to and received or confirmed by the Exchange Agent at its address set forth below on or prior to the Expiration Date, or, if the guaranteed delivery procedures described below are complied with, within the time period provided under such procedures. Delivery of documents to the Depository does not constitute delivery to the Exchange Agent. All questions as to the validity, form, eligibility (including time of receipt), acceptance of tendered Notes and withdrawal of tendered Notes will be determined by the Company in its sole discretion, which determination will be final and binding. The Company reserves the absolute right to reject any and all Notes not properly tendered or any Notes the Company's acceptance of which would, in the opinion of counsel for the Company, be unlawful. The Company also reserves the right, in its reasonable judgment, to waive any defects, irregularities or conditions of tender as to particular Notes. The Company's interpretation of the terms and conditions of the Exchange Offer (including the instructions in the Letter of Transmittal) will be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of Notes must be cured within such time as the Company shall determine. Although the Company intends to notify Holders of defects or irregularities with respect to tenders of Notes, neither the Company, the Exchange Agent nor any other person shall incur any liability for failure to give such notification. Tenders of Notes will not be deemed to have been made until such defects or irregularities have been cured or waived. Any Notes received by the Exchange Agent that are not properly tendered and as to which the defects or irregularities have not been cured or waived will be returned by the Exchange Agent to the tendering Holders, unless otherwise provided in the Letter of Transmittal, as soon as practicable following the Expiration Date. GUARANTEED DELIVERY PROCEDURES Holders who wish to tender their Notes and (i) whose Notes are not immediately available, (ii) who cannot deliver their Notes, the Letter of Transmittal or any other required documents to the Exchange Agent or (iii) who cannot complete the procedures for book-entry transfer, prior to the Expiration Date, may effect a tender if: (a) the tender is made through an Eligible Institution; (b) prior to the Expiration Date, the Exchange Agent receives from such Eligible Institution a properly completed and duly executed notice of guaranteed delivery ("Notice of Guaranteed Delivery") (by facsimile transmission, mail or hand delivery) setting forth the name and address of the Holder, the certificate number(s) of such Notes and the principal amount of Notes tendered, stating that the tender is being made thereby and guaranteeing that, within three New York Stock Exchange trading days after the Expiration Date, the Letter of Transmittal (or facsimile thereof), together with the certificate(s) representing the Notes (or a confirma- 30 38 tion of book-entry transfer of such Notes into the Exchange Agent's account at the Depository) and any other documents required by the Letter of Transmittal, will be deposited by the Eligible Institution with the Exchange Agent; and (c) such properly completed and executed Letter of Transmittal (or facsimile thereof), as well as the certificate(s) representing all tendered Notes in proper form for transfer (or a confirmation of book-entry transfer of such Notes into the Exchange Agent's account at the Depository) and all other documents required by the Letter of Transmittal, are received by the Exchange Agent within three New York Stock Exchange trading days after the Expiration Date. Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be sent to Holders who wish to tender their Notes according to the guaranteed delivery procedures set forth above. WITHDRAWALS OF TENDERS Except as otherwise provided herein, tenders of Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. To withdraw a tender of Notes in the Exchange Offer, a written or facsimile transmission notice of withdrawal must be received by the Exchange Agent at its address set forth herein prior to 5:00 p.m., New York City time, on the Expiration Date. Any such notice of withdrawal must (i) specify the name of the person having deposited the Notes to be withdrawn (the "Depositor"), (ii) identify the Notes to be withdrawn (including the certificate number(s) and principal amount of such Notes, or, in the case of notes transferred by book-entry transfer, the name and number of the account at the Depository to be credited), (iii) be signed by the Holder in the same manner as the original signature on the Letter of Transmittal by which such Notes were tendered (including any required signature guarantees) or be accompanied by documents of transfer sufficient to have the Trustee with respect to the Notes register the transfer of such Notes into the name of the person withdrawing the tender and (iv) specify the name in which any such Notes are to be registered, if different from that of the Depositor. All questions as to the validity, form and eligibility (including time of receipt) of such notices will be determined by the Company, whose determination shall be final and binding on all parties. Any Notes so withdrawn will be deemed not to have been validly tendered for purposes of the Exchange Offer and no Exchange Notes will be issued with respect thereto unless the Notes so withdrawn are validly retendered. Any Notes which have been tendered but which are not accepted for exchange will be returned to the Holder thereof without cost to such Holder as soon as practicable after withdrawal, rejection of tender or termination of the Exchange Offer. Properly withdrawn Notes may be retendered by following one of the procedures described above under "-- Procedures for Tendering" at any time prior to the Expiration Date. CONDITIONS Notwithstanding any other term of the Exchange Offer, the Company shall not be required to accept for exchange, or to exchange Exchange Notes for, any Notes, and may terminate or amend the Exchange Offer as provided herein before the acceptance of such Notes, if: (a) any law, statute, rule, regulation or interpretation by the staff of the Commission is proposed, adopted or enacted, which, in the reasonable judgment of the Company, might materially impair the ability of the Company to proceed with the Exchange Offer or materially impair the contemplated benefits of the Exchange Offer to the Company; or (b) any governmental approval has not been obtained, which approval the Company shall, in its reasonable judgment, deem necessary for the consummation of the Exchange Offer as contemplated hereby. If the Company determines in its reasonable judgment that any of the conditions are not satisfied, the Company may (i) refuse to accept any Notes and return all tendered Notes to the tendering Holders, (ii) extend the Exchange Offer and retain all Notes tendered prior to the 31 39 expiration of the Exchange Offer, subject, however, to the rights of Holders to withdraw such Notes (see "-- Withdrawals of Tenders") or (iii) waive such unsatisfied conditions with respect to the Exchange Offer and accept all properly tendered Notes which have not been withdrawn. If such waiver constitutes a material change to the Exchange Offer, the Company will promptly disclose such waiver by means of a prospectus supplement that will be distributed to the registered Holders, and, depending upon the significance of the waiver and the manner of disclosure to the registered Holders, the Company will extend the Exchange Offer for a period of five to ten business days if the Exchange Offer would otherwise expire during such five to ten business-day period. EXCHANGE AGENT IBJ Schroder Bank & Trust Company will act as Exchange Agent for the Exchange Offer (the "Exchange Agent"). Questions and requests for assistance, requests for additional copies of this Prospectus or of the Letter of Transmittal and requests for copies of the Notice of Guaranteed Delivery should be directed to the Exchange Agent, addressed as follows: By Registered or Certified Mail: IBJ Schroder Bank & Trust Company P.O. Box 84 Bowling Green Station New York, New York 10274-0084 Attention: Reorganization Operations Department By Overnight Courier or By Hand: IBJ Schroder Bank & Trust Company One State Street New York, New York 10004 Attention: Securities Processing Window, Subcellar One (SC-1) By Facsimile: (212) 858-2611 Confirm by Telephone: (212) 858-2103 FEES AND EXPENSES The expenses of soliciting tenders will be borne by the Company. The principal solicitation is being made by mail; however, additional solicitation may be made by telegraph, telephone, facsimile or in person by officers and regular employees of the Company and its affiliates. The Company has not retained any dealer-manager in connection with the Exchange Offer and will not make any payments to brokers or other persons soliciting acceptances of the Exchange Offer. The Company, however, will pay the Exchange Agent reasonable and customary fees for its services and reimburse it for its reasonable out-of-pocket expenses in connection therewith and pay other registration expenses, including fees and expenses of the Trustee, filing fees, blue sky fees and printing and distribution expenses. The Company will pay all transfer taxes, if any, applicable to the exchange of the Notes pursuant to the Exchange Offer. If, however, certificates representing the Exchange Notes or the Notes for principal amounts not tendered or accepted for exchange are to be delivered to, or are to be issued in the name of, any person other than the registered Holder of the Notes tendered, or if tendered Notes are registered in the name of any person other than the person signing the Letter of Transmittal, or if a transfer tax is imposed for any reason other than the exchange of the Notes 32 40 pursuant to the Exchange Offer, then the amount of any such transfer taxes (whether imposed on the registered Holder or any other person) will be payable by the tendering Holder. ACCOUNTING TREATMENT The Exchange Notes will be recorded at the same carrying value as the Notes, which is the aggregate principal amount of the Notes, as reflected in the Company's accounting records on the date of exchange. Accordingly, no gain or loss for accounting purposes will be recognized in connection with the Exchange Offer. The expenses of the Exchange Offer will be amortized over the term of the Exchange Notes. RESALE OF EXCHANGE NOTES Based on an interpretation by the staff of the Commission set forth in no-action letters issued to third parties, the Company believes that Exchange Notes issued pursuant to the Exchange Offer in exchange for Notes may be offered for resale, resold and otherwise transferred by any Holder of such Exchange Notes (other than any such Holder which is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such Exchange Notes are acquired in the ordinary course of such Holder's business and such Holder does not intend to participate, and has no arrangement or understanding with any person to participate, in the distribution of such Exchange Notes. Any Holder who tenders in the Exchange Offer with the intention to participate, or for the purpose of participating, in a distribution of the Exchange Notes may not rely on the position of the staff of the Commission enunciated in Exxon Capital Holdings Corporation (available April 13, 1989), Morgan Stanley & Co., Incorporated (available June 5, 1991) or similar no-action letters, but rather must comply with the registration and prospectus delivery requirements of the Securities Act in connection with the resale of the Exchange Notes. In addition, any such resale transaction should be covered by an effective registration statement containing the selling security holders information required by Item 507 of Regulation S-K of the Securities Act. Each broker-dealer that receives Exchange Notes for its own account in exchange for Notes, where such Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities, may be a statutory underwriter and must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. By tendering in the Exchange Offer, each Holder will represent to the Company that, among other things, (i) the Exchange Notes acquired pursuant to the Exchange Offer are being obtained in the ordinary course of business of the person receiving such Exchange Notes, whether or not such person is a Holder, (ii) neither the Holder nor any such other person is engaged or intends to engage in, or has an arrangement or understanding with any person to participate in, the distribution of such Exchange Notes and (iii) the Holder and such other person acknowledge that if they participate in the Exchange Offer for the purpose of distributing the Exchange Notes (a) they must, in the absence of an exemption therefrom, comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale of the Exchange Notes and cannot rely on the no-action letters referenced above and (b) failure to comply with such requirements in such instance could result in such Holder or such other person incurring liability under the Securities Act for which such persons are not indemnified by the Company. Further, by tendering in the Exchange Offer, each Holder or person receiving the Exchange Notes acquired pursuant thereto that may be deemed an "affiliate" (as defined under Rule 405 of the Securities Act) of the Company will represent to the Company that such Holder understands and acknowledges that the Exchange Notes may not be offered for resale, resold or otherwise transferred by that Holder or such other person without registration under the Securities Act or an exemption therefrom. As set forth above, affiliates of the Company are not entitled to rely on the foregoing interpretations of the staff of the Commission with respect to resales of the Exchange Notes without compliance with the registration and prospectus delivery requirements of the Securities Act. 33 41 In connection with the Note Offering, the Company entered into the Registration Rights Agreement pursuant to which the Company agreed to file and maintain, subject to certain limitations, a registration statement that would allow Goldman Sachs to engage in market-making transactions with respect to the Notes or the Exchange Notes. The Company has agreed to bear all registration expenses incurred under such agreement, including printing and distribution expenses, reasonable fees of counsel, blue sky fees and expenses, reasonable fees of independent accountants in connection with the preparation of comfort letters, and Commission and the National Association of Securities Dealers, Inc. filing fees and expenses. CONSEQUENCES OF FAILURE TO EXCHANGE As a result of the making of this Exchange Offer, the Company will have fulfilled one of its obligations under the Registration Rights Agreement, and Holders of Notes who do not tender their Notes generally will not have any further registration rights under the Registration Rights Agreement or otherwise. Accordingly, any Holder of Notes that does not exchange that Holder's Notes for Exchange Notes will continue to hold the untendered Notes and will be entitled to all the rights and limitations applicable thereto under the Indenture, except to the extent that such rights or limitations, by their terms, terminate or cease to have further effectiveness as a result of the Exchange Offer. The Notes that are not exchanged for Exchange Notes pursuant to the Exchange Offer will remain restricted securities. Accordingly, such Notes may be resold only (i) to the Company (upon redemption thereof or otherwise), (ii) pursuant to an effective registration statement under the Securities Act, (iii) so long as the Notes are eligible for resale pursuant to Rule 144A, to a qualified institutional buyer within the meaning of Rule 144A under the Securities Act in a transaction meeting the requirements of Rule 144A, (iv) outside the United States to a foreign person pursuant to the exemption from the registration requirements of the Securities Act provided by Regulation S thereunder, (v) pursuant to an exemption from registration under the Securities Act provided by Rule 144 thereunder (if available) or (vi) to an institutional accredited investor in a transaction exempt from the registration requirements of the Securities Act, in each case in accordance with any applicable securities laws of any state of the United States. See "Risk Factors -- Restrictions on Transfer". OTHER Participation in the Exchange Offer is voluntary and holders should carefully consider whether to accept. Holders of the Notes are urged to consult their financial and tax advisors in making their own decision on what action to take. The Company may in the future seek to acquire untendered Notes in open market or privately negotiated transactions, through subsequent exchange offers or otherwise. The Company has no present plans to acquire any Notes that are not tendered in the Exchange Offer or to file a registration statement to permit resales of any untendered Notes. The Exchange Offer is not being made to, nor will the Company accept surrenders for exchange from, Holders of Notes in any jurisdiction in which the Exchange Offer or the acceptance thereof would not be in compliance with the securities or blue sky laws of such jurisdiction. Prior to the Exchange Offer, however, the Company will take such actions it deems necessary or advisable to register or qualify the Exchange Notes for offer and sale under the securities or blue sky laws of such jurisdictions as is necessary to permit consummation of the Exchange Offer and to enable the offer and sale in such jurisdiction of the Exchange Notes. 34 42 CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE EXCHANGE OFFER The following discussion is based upon current provisions of the Internal Revenue Code of 1986, as amended, (the "Code"), applicable Treasury regulations, judicial authority and administrative rulings and practice. There can be no assurance that the Internal Revenue Service (the "IRS") will not take a contrary view, and no ruling from the IRS has been or will be sought. Legislative, judicial or administrative changes or interpretations may be forthcoming that could alter or modify the statements and conditions set forth herein. Any such changes or interpretations may or may not be retroactive and could affect the tax consequences to Holders. Certain Holders of the Notes (including insurance companies, tax-exempt organizations, financial institutions, broker-dealers, foreign corporations and persons who are not citizens or residents of the United States) may be subject to special rules not discussed below. Each Holder of a Note should consult his, her or its own tax advisor as to the particular tax consequences of exchanging such Holder's Notes for Exchange Notes, including the applicability and effect of any state, local or foreign tax laws. The issuance of the Exchange Notes to Holders of the Notes pursuant to the terms set forth in this Prospectus will not constitute an exchange for federal income tax purposes. Consequently, no gain or loss would be recognized by Holders of the Notes upon receipt of the Exchange Notes, and ownership of the Exchange Notes will be considered a continuation of ownership of the Notes. For purposes of determining gain or loss upon the subsequent sale or exchange of the Exchange Notes, a Holder's basis in the Exchange Notes should be the same as such Holder's basis in the Notes exchanged therefor. A Holder's holding period for the Exchange Notes should include the Holder's holding period for the Notes exchanged therefor. The issue price and other tax characteristics of the Exchange Notes should be identical to the issue price and other tax characteristics of the Notes exchanged therefor. See also "Description of Certain Federal Income Tax Consequences of an Investment in the Exchange Notes". 35 43 THE TRANSACTION CERTAIN AGREEMENTS Pursuant to the Transaction Agreement, and following the approval and adoption of the Transaction Agreement by the vote of a majority of the shares of Company Common Stock entitled to vote thereon and the satisfaction or waiver of the other conditions to the Transaction, on December 19, 1997, MergerCo was merged with and into the Company with the Company as the surviving corporation. Concurrent with entering into the Transaction Agreement, the Company entered into the Tax Indemnification Agreement, dated as of August 10, 1997, with the Estate and Christine Svenningsen (together, the "Svenningsen Stockholders") (the "Tax Indemnification Agreement"), pursuant to which the parties agreed to indemnify one another with respect to certain tax liabilities that may arise in connection with the election by certain Subsidiaries of the Company to have been treated and operated under the Code as S corporations (as "S corporation" is defined in the Code). The Tax Indemnification Agreement provides that the Company will indemnify the Svenningsen Stockholders for any increase in certain tax liabilities attributable to an understatement of income previously reported by such Subsidiaries to the extent of any actual reduction in taxes on the Company or its Subsidiaries for a taxable year after December 18, 1996, the date of the Company's initial public offering. The Tax Indemnification Agreement also provides that the Svenningsen Stockholders will indemnify the Company for certain tax liabilities arising out of or resulting from a claim by any taxing authority that any such Subsidiary was not an S corporation under the Code at a time when it took such a position. Any payments made under the Tax Indemnification Agreement will be reduced by any payments made pursuant to the Tax Indemnification Agreement (the "Prior Tax Indemnification Agreement"), by and between John A. Svenningsen and the Company, dated as of December 18, 1996, regarding certain similar matters, which Prior Tax Indemnification Agreement remains a separate valid and binding agreement. See "Management -- Certain Relationships and Related Transactions". Concurrent with the execution of the Transaction Agreement, MergerCo entered into agreements with certain employees of the Company relating, for certain of such employees, to their employment with the Company following the Effective Time and relating to their ownership of Company Common Stock and options to purchase shares of Company Common Stock following the Transaction (collectively, the "New Employment Arrangements"). At the Effective Time, certain of the New Employment Arrangements replaced and superseded prior employment agreements for such employees. See "Management -- New Employment Arrangements". In addition, upon consummation of the Transaction, the Company entered into a Stockholders' Agreement (the "Stockholders' Agreement") with GSCP and the Estate and certain employees of the Company listed as parties thereto (including the Estate, the "Non-GSCP Investors"). See "Ownership of Capital Stock". 36 44 The following table sets forth the sources and uses of cash related to the Transaction:
(DOLLARS IN THOUSANDS) ----------- SOURCES OF CASH Term Loan...................................................................... $ 117,000 Senior Subordinated Notes...................................................... 110,000 -------- Total debt................................................................... 227,000 GSCP equity contribution(a).................................................... 61,875 -------- Total..................................................................... $ 288,875 ======== USES OF CASH Purchase equity in the Transaction............................................. $ 235,916 Redeem Company Stock Options................................................... 1,901 Repay certain existing debt(b)................................................. 23,908 Debt retirement costs.......................................................... 1,010 Transaction costs.............................................................. 17,152 Cash for working capital purposes.............................................. 8,988 -------- Total..................................................................... $ 288,875 ========
- --------------- (a) In addition to the equity contribution, certain employees have made an equity investment in the Company totaling $6.4 million (including restricted stock grants and $0.8 million contributed by certain employees immediately following consummation of the Transaction) and the Estate has retained an interest in the Company of $7.5 million, together constituting $13.9 million valued at the price per share paid by GSCP. (b) Excludes existing mortgages on real property owned by Subsidiaries of the Company in the amount of approximately $5.9 million, capital lease obligations of approximately $4.6 million, and borrowings under a revolving credit agreement of a Non-Guarantor Subsidiary of approximately $0.6 million each as of December 19, 1997. All other outstanding debt of the Company was extinguished at or prior to the completion of the Transaction. 37 45 CAPITALIZATION The following table sets forth the historical consolidated capitalization of the Company as of September 30, 1997, and on a pro forma basis to give effect to the Transaction, including the Transaction Financings and the application of the proceeds therefrom, as if they had occurred on September 30, 1997. See "The Transaction". The information set forth below should be read in conjunction with the Company's Transaction Pro Forma Consolidated Financial Data, the Company's Consolidated Financial Statements and the related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained elsewhere in this Prospectus.
AS OF SEPTEMBER 30, 1997 --------------------------- TRANSACTION HISTORICAL PRO FORMA ---------- ----------- (DOLLARS IN THOUSANDS) Cash and cash equivalents........................................... $ 684 $ 3,975 ======== ======== Total debt (including current portion) Revolving Credit Facility(1)...................................... $ -- $ -- Term Loan......................................................... -- 117,000 Existing revolving credit facility................................ 9,550 -- Senior Subordinated Notes......................................... -- 110,000 Mortgages......................................................... 6,072 6,072 Capital leases and other.......................................... 24,782 4,727 -------- -------- Total debt..................................................... 40,404 237,799 Stockholders' equity (deficit)(2)................................... 89,002 (95,288) -------- -------- Total capitalization........................................... $ 129,406 $ 142,511 ======== ========
- ------------------ (1) The Company has the ability to borrow up to $50 million pursuant to its Revolving Credit Facility. The Revolving Credit Facility is available to the Company for working capital purposes and acquisitions, subject to certain limitations and restrictions. See "Description of Senior Debt". (2) Upon completion of the Transaction, the Company had a negative net worth for accounting purposes. In the Transaction, GSCP paid $61.9 million for approximately 82.5% of the Company Common Stock. In addition, certain employees of the Company acquired and the Estate retained approximately 7.5% and almost 10%, respectively, of the Company Common Stock which, based upon the price per share paid by GSCP, has an aggregate value of approximately $13.1 million. Combined with GSCP's payment of $61.9 million, these holdings have an aggregate value of approximately $75.0 million. 38 46 TRANSACTION PRO FORMA CONSOLIDATED FINANCIAL DATA (UNAUDITED) The following unaudited Transaction Pro Forma Consolidated Financial Data have been derived by the application of pro forma adjustments to the Company's historical consolidated financial statements appearing elsewhere in this Prospectus giving effect to the merger of MergerCo with and into the Company. The Transaction Pro Forma Consolidated Statements of Income for the year ended December 31, 1996 and the nine and twelve month periods ended September 30, 1997 give effect to the Transaction as if it was consummated as of January 1, 1996. The Transaction Pro Forma Consolidated Statements of Income for the year ended December 31, 1996 and the twelve months ended September 30, 1997 include supplemental pro forma adjustments to give effect to certain events that occurred in conjunction with the Organization and the IPO as if such events had occurred as of January 1, 1996. The Transaction Pro Forma Consolidated Balance Sheet gives effect to the Transaction as if it had occurred as of September 30, 1997. The adjustments are described in the accompanying notes. The Transaction Pro Forma Consolidated Financial Statements should not be considered indicative of actual results that would have been achieved had the Transaction been consummated on the date or for the periods indicated and do not purport to indicate balance sheet data or results of operations as of any future date or for any future period. The Transaction Pro Forma Consolidated Financial Statements should be read in conjunction with the Company's historical consolidated financial statements and the related notes thereto appearing elsewhere in this Prospectus. See "Index to Financial Statements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations". As a result of the Transaction, the Company incurred various costs of approximately $27.6 million (pre-tax) in connection with consummation of the Transaction and the transactions contemplated by the Transaction Agreement. These costs consist primarily of professional, advisory and investment banking fees, registration costs, compensation costs and other expenses of approximately $22.1 million and deferred financing costs of approximately $5.5 million. The Company has recorded a one-time pre-tax charge of approximately $22.1 million ($17.7 million after tax) in the fourth quarter of 1997 and, as a result, the Company incurred a significant net loss in that quarter. Because this loss resulted directly from the one-time charge incurred in connection with the Transaction, and this charge was funded entirely through the proceeds of the Transaction Financings, the Company does not expect this loss to materially impact its liquidity, ongoing operations or market position. See "Risk Factors - -- Substantial Leverage; Ability to Service Indebtedness" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources". The pro forma adjustments giving effect to the Transaction were applied to the respective historical consolidated financial statements to reflect and account for the Transaction as a recapitalization. Accordingly, the historical basis of the Company's assets and liabilities has not been impacted by the Transaction. 39 47 TRANSACTION PRO FORMA CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1996 (DOLLARS IN THOUSANDS) (UNAUDITED)
PRO FORMA AND SUPPLEMENTAL PRO FORMA SUPPLEMENTAL ADJUSTMENTS PRO FORMA TO GIVE TO GIVE PRO FORMA EFFECT TO EFFECT ADJUSTMENTS TO THE TO THE GIVE EFFECT TO ORGANIZATION ORGANIZATION THE TRANSACTION HISTORICAL AND THE IPO AND THE IPO TRANSACTION(F) PRO FORMA ---------- ------------ ------------ -------------- ----------- Net sales...................... $ 192,705 $192,705 $ 192,705 Cost of sales.................. 123,913 123,913 123,913 ------- ------- ------- Gross profit................. 68,792 68,792 68,792 OPERATING EXPENSES: Selling expenses............. 11,838 11,838 11,838 General and administrative expenses.................. 19,266 $ 250(a) 19,516 $ 435(g) 19,951 Art and development costs.... 5,173 5,173 5,173 Non-recurring compensation in connection with the IPO... 15,535 (15,535)(b) -- -- Special bonuses.............. 4,222 (4,222)(c) -- -- ------- ------- ------- Income from operations....... 12,758 32,265 31,830 Interest expense, net.......... 6,691 (2,228)(d) 4,463 18,583(h) 23,046 Other expense, net............. 335 335 335 ------- ------- ------- Income before income taxes and minority interests.... 5,732 27,467 8,449 Income taxes................... 1,952 9,347(e) 11,299 (7,702)(i) 3,597 Minority interests............. 1,653 (1,403)(a) 250 250 ------- ------- ------- Net income..................... $ 2,127 $ 15,918 $ 4,602 ======= ======= ======= Pro forma net income per share........................ $ 4,556 Pro forma weighted average common shares outstanding(j)............... 1,010 NON-GAAP FINANCIAL DATA: Adjusted EBITDA(k)............. $ 37,652 $ 37,217 Adjusted EBITDA margin......... 19.5% 19.3% OTHER FINANCIAL DATA: Gross margin................... 35.7% 35.7% Depreciation and amortization................. $ 5,137 $ 5,387 Cash capital expenditures...... 7,613 7,613 Earnings to fixed charges(l)... 1.7x 1.3x
See Notes to Transaction Pro Forma Consolidated Statement of Income. 40 48 NOTES TO TRANSACTION PRO FORMA CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1996 (DOLLARS IN THOUSANDS) (UNAUDITED) The pro forma financial data giving effect to the Transaction have been derived by the application of pro forma, supplemental pro forma and Transaction pro forma adjustments to the Company's historical consolidated financial statements for the period noted. The adjustments give effect to certain events that occurred in conjunction with the Organization and the IPO and to certain events that occurred in connection with the Transaction, as if those events had occurred as of January 1, 1996, including pro forma adjustments intended to present the historical results as if certain subsidiaries had terminated their treatment as S corporations for tax purposes. The Transaction has been accounted for as a recapitalization, which will have no impact on the historical basis of the Company's assets and liabilities. (a) To reflect $250 amortization of goodwill per annum over thirty years and the elimination of $1,403 for minority interest related to the acquisition of an additional 50% of Am-Source, Inc. as if it were acquired at the beginning of the period. (b) To reflect reductions in compensation expense of $15,535, including stock and cash of $12,535 for payments to certain executives in connection with the termination of prior employment agreements and $3,000 for the establishment of an ESOP for the benefit of the employees of Amscan Inc. and the payment of stock bonuses to certain of such employees. (c) To reflect the elimination of special bonuses that will not be recurring due to the termination of certain employment agreements in connection with the IPO. No adjustments are reflected or are necessary with respect to performance-based compensation as the provisions in the employment agreements entered into in connection with the IPO would have resulted in performance-based compensation materially equivalent to that reflected in the historical accounts under the prior employment agreements. (d) To reflect the reduction of actual interest expense assuming a repayment of $8,100 of bank loans at the actual rate in effect and an average balance of $20,000 of loans from Mr. Svenningsen at the actual rate in effect. (e) To provide for income taxes at a statutory rate of 40.5% on earnings as if Amscan Inc., Am-Source, Inc. and certain other subsidiaries of the Company had not been treated as S corporations during the period presented and to give effect to the tax effect of these adjustments. (f) The pro forma adjustments to the historical Consolidated Statement of Income exclude the following items, as described in the notes to the Transaction Pro Forma Consolidated Balance Sheet, (i) the write-off of $20 of deferred financing costs associated with the debt being repaid, (ii) $1,010 of debt retirement costs, (iii) $7,500 of non-recurring compensation expense to be paid by the Estate and the Svenningsen Trusts, (iv) $1,901 of non-recurring compensation expense for the redemption of Company Stock Options, and (v) $11,652 of transaction fees and expenses incurred in connection with the Transaction. Such amounts represent non-recurring expenses which will be reflected in the Consolidated Statement of Income for the period in which the Transaction is included. (g) To reflect the amortization over a ten-year period of $1,125 of restricted shares of Company Common Stock issued to an officer of the Company in connection with the Transaction. See "The Transaction -- Interests of Certain Persons in the Transaction". 41 49 (h) To adjust interest expense to reflect the following:
Interest on historical debt repaid in Transaction...................... $(2,869) Interest expense on the Term Loan (8.5% rate).......................... 9,945 Interest expense on the Senior Subordinated Notes (9.875% rate)........ 10,863 Amortization of deferred financing costs (7-10 years) on new indebtedness......................................................... 644 ------- Total adjustment..................................................... $18,583 =======
For the year ended December 31, 1996, a 0.125% increase or decrease in the interest rate on the Term Loan would change the Transaction pro forma interest expense and net income by $146 and $87, respectively. (i) To reflect the tax effects of the Transaction pro forma adjustments at a 40.5% statutory income tax rate. (j) Pro forma weighted average common shares outstanding represents the shares outstanding after the Effective Time (see Notes to the Consolidated Financial Statements -- December 31, 1996, note (18)). (k) "Adjusted EBITDA" represents earnings before interest, income taxes, depreciation and amortization adjusted for special bonuses, non-recurring compensation, other expenses (income), net and minority interests. Adjusted EBITDA is presented because it is a widely accepted financial indicator of a leveraged company's ability to service and/or incur indebtedness and because management believes Adjusted EBITDA is a relevant measure of the Company's ability to generate cash without regard to the Company's capital structure or working capital needs. Adjusted EBITDA as presented may not be comparable to similarly titled measures used by other companies, depending upon the non-cash charges included. When evaluating Adjusted EBITDA, investors should consider that Adjusted EBITDA (i) should not be considered in isolation but together with other factors which may influence operating and investing activities such as changes in operating assets and liabilities and purchases of property and equipment, (ii) is not a measure of performance calculated in accordance with generally accepted accounting principles, (iii) should not be construed as an alternative or substitute for income from operations, net income or cash flows from operating activities in analyzing the Company's operating performance, financial position or cash flows and (iv) should not be used as an indicator of the Company's operating performance or as a measure of its liquidity. (l) For purposes of determining the ratio of earnings to fixed charges, earnings are defined as earnings before income taxes and minority interests plus fixed charges. Fixed charges consist of interest expense on all obligations, amortization of deferred financing costs and one-third of rental expense on operating leases representing that portion of rental expense deemed by the Company to be attributable to interest. 42 50 TRANSACTION PRO FORMA CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (DOLLARS IN THOUSANDS) (UNAUDITED)
PRO FORMA ADJUSTMENTS TO GIVE EFFECT TO THE TRANSACTION HISTORICAL TRANSACTION(A) PRO FORMA ---------- -------------- ----------- Net sales............................................ $ 161,286 $ 161,286 Cost of sales........................................ 103,460 103,460 -------- -------- Gross profit....................................... 57,826 57,826 Operating expenses: Selling expenses................................... 9,598 9,598 General and administrative expenses................ 13,225 $ 104(b) 13,329 Art and development costs.......................... 3,891 3,891 -------- -------- Income from operations.......................... 31,112 31,008 Interest expense, net................................ 2,654 14,238(c) 16,892 Other income, net.................................... (219) (219) -------- -------- Income before income taxes and minority interests....................................... 28,677 14,335 Income taxes......................................... 11,627 (5,808)(d) 5,819 Minority interests................................... 149 149 -------- -------- Net income......................................... $ 16,901 $ 8,367 ======== ======== Pro forma net income per share....................... $ 8,284 Pro forma weighted average common shares outstanding(e)..................................... 1,010 NON-GAAP FINANCIAL DATA: Adjusted EBITDA(f)................................... $ 35,617 $ 35,513 Adjusted EBITDA margin............................... 22.1% 22.0% OTHER FINANCIAL DATA: Gross margin......................................... 35.9% 35.9% Depreciation and amortization........................ $ 4,505 $ 4,505 Cash capital expenditures............................ 6,895 6,895 Earnings to fixed charges(g)......................... 7.7x 1.8x
See Notes to Transaction Pro Forma Consolidated Statement of Income. 43 51 NOTES TO TRANSACTION PRO FORMA CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (DOLLARS IN THOUSANDS) (UNAUDITED) The pro forma financial data giving effect to the Transaction have been derived by the application of pro forma adjustments to the Company's historical consolidated financial statements for the period noted. The adjustments give effect to certain events that occurred in connection with the Transaction, as if those events had occurred as of January 1, 1996. The Transaction has been accounted for as a recapitalization, which will have no impact on the historical basis of the Company's assets and liabilities. (a) The pro forma adjustments to the historical Consolidated Statement of Income exclude the following items, as described in the notes to the Transaction Pro Forma Consolidated Balance Sheet, (i) the write-off of $20 of deferred financing costs associated with the debt being repaid, (ii) $1,010 of debt breakage costs, (iii) $7,500 of non-recurring compensation expense to be paid by the Estate and the Svenningsen Trusts, (iv) $1,901 of non-recurring compensation expense for the redemption of Company Stock Options, and (v) $11,652 of the transaction fees and expenses incurred in connection with the Transaction. Such amounts represent non-recurring expenses which the Company anticipates will be reflected in the Consolidated Statement of Income for the period in which the Transaction is included. (b) To reflect the amortization over a ten-year period of $1,125 of restricted shares of Company Common Stock issued to an officer of the Company in connection with the Transaction. See "The Transaction -- Interests of Certain Persons in the Transaction". (c) To adjust interest expense, net to reflect the following: Interest on historical debt repaid in Transaction................. $(1,852) Interest expense on the Term Loan (8.5% rate)..................... 7,459 Interest expense on the Senior Subordinated Notes (9.875% rate)... 8,147 Amortization of deferred financing costs (7-10 years) on new indebtedness.................................................... 484 ------- Total adjustment............................................. $14,238 =======
For the nine months ended September 30, 1997, a 0.125% increase or decrease in the interest rate on the Term Loan would change the Transaction pro forma interest expense and net income by $110 and $65, respectively. (d) To reflect the tax effects of the Transaction pro forma adjustments at a 40.5% statutory income tax rate. (e) Pro forma weighted average common shares outstanding represents the shares outstanding following the Effective Time (see Notes to Consolidated Financial Statements -- September 30, 1997, note (7)). (f) "Adjusted EBITDA" represents earnings before interest, income taxes, depreciation and amortization adjusted for special bonuses, non-recurring compensation, other expenses (income), net and minority interests. Adjusted EBITDA is presented because it is a widely accepted financial indicator of a leveraged company's ability to service and/or incur indebtedness and because management believes Adjusted EBITDA is a relevant measure of the Company's ability to generate cash without regard to the Company's capital structure or working capital needs. Adjusted EBITDA as presented may not be comparable to similarly titled measures used by other companies, depending upon the non-cash charges included. When evaluating Adjusted EBITDA, investors should consider that Adjusted EBITDA (i) should not be considered in isolation but together with other factors which may influence operating and 44 52 investing activities such as changes in operating assets and liabilities and purchases of property and equipment, (ii) is not a measure of performance calculated in accordance with generally accepted accounting principles, (iii) should not be construed as an alternative or substitute for income from operations, net income or cash flows from operating activities in analyzing the Company's operating performance, financial position or cash flows and (iv) should not be used as an indicator of the Company's operating performance or as a measure of its liquidity. (g) For purposes of determining the ratio of earnings to fixed charges, earnings are defined as earnings before income taxes and minority interests plus fixed charges. Fixed charges consist of interest expense on all obligations, amortization of deferred financing costs and one-third of the rental expense on operating leases representing that portion of rental expense deemed by the Company to be attributable to interest. 45 53 TRANSACTION PRO FORMA CONSOLIDATED BALANCE SHEET SEPTEMBER 30, 1997 (DOLLARS IN THOUSANDS) (UNAUDITED)
PRO FORMA ADJUSTMENTS TO GIVE EFFECT TO THE TRANSACTION HISTORICAL TRANSACTION PRO FORMA ---------- -------------- ----------- ASSETS Current assets: Cash and cash equivalents............................. $ 684 $ 3,291(a) $ 3,975 Accounts receivable, net.............................. 56,276 56,276 Inventories........................................... 48,736 48,736 Deposits and other.................................... 9,680 9,680 -------- -------- Total current assets................................ 115,376 118,667 Property, plant and equipment, net.................... 37,157 37,157 Intangible assets, net................................ 7,540 7,540 Deferred financing costs.............................. -- 5,500(b) 5,500 Other assets, net..................................... 2,687 (20)(c) 2,667 -------- -------- Total assets........................................ $ 162,760 $ 171,531 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY(DEFICIT) Current liabilities: Loans and notes payable............................... $ 10,020 (10,020)(d) $ -- Accounts payable...................................... 11,153 11,153 Accrued expenses...................................... 7,317 7,317 Income taxes payable.................................. 6,458 (4,334)(e) 2,124 Current portions of long-term obligations............. 5,556 (3,771)(d) 1,785 -------- -------- Total current liabilities........................... 40,504 22,379 Long-term obligations, excluding current portion...... 24,828 211,186(d) 236,014 Deferred tax liabilities.............................. 5,585 5,585 Other................................................. 2,841 2,841 -------- -------- Total liabilities................................... 73,758 266,819 Stockholders' Equity (deficit): Common Stock(f)....................................... 2,112 (2,112)(g) -- Additional paid-in capital............................ 65,985 63,000(h) .................................................... 7,500(i) .................................................... (136,485)(g) -- Unamortized restricted Common Stock award............. (1,125)(h) (1,125) Retained earnings (deficit)........................... 21,649 (97,609)(g) .................................................... (17,749)(e) (93,709) Foreign currency translation adjustment............... (454) (454) Treasury stock, at cost............................... (290) 290(g) -- -------- -------- Total stockholders' equity (deficit)................ 89,002 (95,288) -------- -------- Total liabilities and stockholders' equity (deficit)........................................ $ 162,760 $ 171,531 ======== ========
See Notes to Transaction Pro Forma Consolidated Balance Sheet. 46 54 NOTES TO TRANSACTION PRO FORMA CONSOLIDATED BALANCE SHEET SEPTEMBER 30, 1997 (DOLLARS IN THOUSANDS) (UNAUDITED) The pro forma financial data giving effect to the Transaction have been derived by the application of pro forma adjustments to the historical consolidated balance sheet as of September 30, 1997. The Transaction has been accounted for as a recapitalization, which will have no impact on the Company's historical basis of assets and liabilities. (a) To increase cash by $3,291 to reflect the following: USES OF CASH: Purchase equity.................................................. $235,916 Redeem Company Stock Options(1).................................. 1,901 Repay historical debt............................................ 29,605 Debt retirement costs(2)......................................... 1,010 -------- Transaction fees and expenses, including deferred financing costs(3)....................................................... 17,152 -------- Total uses....................................................... 285,584 -------- SOURCES OF CASH: New debt......................................................... 227,000 New equity....................................................... 61,875 -------- Total sources.................................................... 288,875 -------- Net.............................................................. $ 3,291 ========
(b) To reflect the portion of transaction fees which will be recorded as deferred financing costs and will be amortized over the life of the debt to be issued. (c) To reflect the write-off of deferred financing costs associated with the historical debt being repaid and the termination of the Company's existing term loan agreement. (d) To adjust indebtedness to reflect the following: Repayment of loans and notes payable............................. $(10,020) Repayment of current portion of long-term obligations............ (3,771) Adjustments to long-term obligations: Repayment of long-term obligations (excluding current portion of $3,771).................................................. (15,814) Term Loan...................................................... 117,000 Senior Subordinated Notes...................................... 110,000 -------- Net adjustments to long-term obligations....................... 211,186 -------- Total.......................................................... $197,395 ========
47 55 (e) To adjust retained earnings to reflect the following items as a result of the Transaction and the related events: Transaction fees and expenses(3)................................. $(11,652) Redemption of Company Stock Options(1)........................... (1,901) Debt retirement costs(2)......................................... (1,010) One-time compensation charge payable by the Estate (see (i) below)......................................................... (7,500) Write-off of deferred financing costs(2)......................... (20) -------- Total expenses(3).............................................. (22,083) Income tax benefit attributable to deductible costs and expenses....................................................... 4,334 -------- Total.......................................................... $(17,749) ========
(f) At September 30, 1997, the Company's authorized capital stock consisted of 5,000,000 shares of Preferred Stock, at $0.10 par value, of which no shares were issued or outstanding, and 50,000,000 shares of Company Common Stock, $0.10 par value, of which 21,120,476 shares were issued and 21,098,785 shares were outstanding. Immediately following the Transaction, 1,000 shares of Company Common Stock were outstanding. (g) To reflect the purchase of 5,801,441 shares of Company Common Stock for the Cash Consideration of $16.50 per share ($95,724), the cash portion of the Mixed Consideration paid for the 15,024,616 shares of Company Common Stock held by the Estate ($140,192) and the retirement of 21,691 shares of treasury stock ($290). (h) To reflect the equity contribution of GSCP of $61,875 and the issuance of $1,125 of restricted stock to an officer of the Company. (i) To reflect a one-time compensation charge of $7,500 paid by the Estate and the Svenningsen Trusts to Mr. Rittenberg under the terms of the Stock Agreement. Such amount is reflected as compensation expense in the Company's financial statements for the fourth quarter of 1997. The income tax benefit attributable to the compensation expense is included in the income tax adjustment of $4,334 in (e) above. - --------------- (1) The cost to redeem Company Stock Options is calculated based on the number of options outstanding and the difference between the weighted average exercise price of the options and the Cash Consideration of $16.50 per share. (2) The costs associated with the early extinguishment of historical debt will be recognized as an extraordinary loss, net of the related tax benefit, in the Company's financial statements for the period in which the Transaction is included. (3) Total expenses of $22,083 included $11,652 of (i) professional, advisory and investment banking fees and expenses, (ii) compensation costs and (iii) miscellaneous fees and expenses, such as printing and filing fees which were paid, together with $5,500 of deferred financing costs from the proceeds from the Transaction Financings. 48 56 TRANSACTION PRO FORMA CONSOLIDATED STATEMENT OF INCOME FOR THE TWELVE MONTHS ENDED SEPTEMBER 30, 1997 (DOLLARS IN THOUSANDS) (UNAUDITED)
PRO FORMA AND SUPPLEMENTAL PRO FORMA SUPPLEMENTAL ADJUSTMENTS PRO FORMA TO GIVE TO GIVE PRO FORMA EFFECT TO EFFECT TO ADJUSTMENTS TO THE THE GIVE EFFECT ORGANIZATION ORGANIZATION TO THE TRANSACTION HISTORICAL AND THE IPO AND THE IPO TRANSACTION(F) PRO FORMA ---------- ------------ ------------ -------------- ----------- Net sales........................ $ 206,983 $206,983 $ 206,983 Cost of sales.................... 134,512 134,512 134,512 -------- -------- -------- Gross profit................... 72,471 72,471 72,471 Operating expenses: Selling expenses............... 12,745 12,745 12,745 General and administrative expenses..................... 18,378 $ 62(a) 18,440 $ 213(g) 18,653 Art and development costs........ 5,393 5,393 5,393 Non-recurring compensation in connection with the IPO...... 15,535 (15,535)(b) -- -- Special bonuses................ 922 (922)(c) -- -- -------- -------- -------- Income from operations......... 19,498 35,893 35,680 Interest expense, net............ 4,775 (557)(d) 4,218 18,884(h) 23,102 Other expense, net............... 417 417 417 Income before income taxes and minority interests............. 14,306 31,258 12,161 Income taxes..................... 12,812 (180)(e) 12,632 (7,734)(i) 4,898 Minority interests............... 560 (351)(a) 209 209 -------- -------- -------- Net income..................... $ 934 $ 18,417 $ 7,054 ======== ======== ======== Pro forma net income per share... $ 6,984 Pro forma weighted average common shares outstanding(j).......... 1,010 NON-GAAP FINANCIAL DATA: Adjusted EBITDA(k)............... $ 42,018 Adjusted EBITDA margin........... 20.3% 20.2% OTHER FINANCIAL DATA: Gross margin..................... 35.0% 35.0% Depreciation and amortization.... $ 6,063 $ 6,125 Cash capital expenditures........ 8,934 8,934 Earnings to fixed charges(l)..... 2.8x 1.5x
See Notes to Transaction Pro Forma Consolidated Statement of Income. 49 57 NOTES TO TRANSACTION PRO FORMA CONSOLIDATED STATEMENT OF INCOME FOR THE TWELVE MONTHS ENDED SEPTEMBER 30, 1997 (DOLLARS IN THOUSANDS) (UNAUDITED) The pro forma financial data giving effect to the Transaction have been derived by the application of pro forma, supplemental pro forma and Transaction pro forma adjustments to the Company's historical consolidated financial statements for the period noted. The adjustments give effect to certain events that occurred in conjunction with the Organization and the IPO and to certain events that occurred in connection with the Transaction, as if those events had occurred as of January 1, 1996, including pro forma adjustments intended to present the historical results as if certain subsidiaries had terminated their treatment as S corporations for tax purposes. The Transaction has been accounted for as a recapitalization, which will have no impact on the historical basis of the Company's assets and liabilities. (a) To reflect $62 amortization of goodwill and the elimination of $351 for minority interest for the quarter ended December 31, 1996, related to the acquisition of an additional 50% of Am-Source, Inc. as if it were acquired as of January 1, 1996. (b) To reflect reductions in compensation expense of $15,535, including stock and cash of $12,535 for payments to certain executives in connection with the termination of prior employment agreements and $3,000 for the establishment of an ESOP for the benefit of the employees of Amscan Inc. and the payment of stock bonuses to certain of such employees. (c) To reflect the elimination of special bonuses that will not be recurring due to the termination of certain employment agreements in connection with the IPO. No adjustments are reflected or are necessary with respect to performance-based compensation as the provisions in the employment agreements entered into in connection with the IPO would have resulted in performance-based compensation materially equivalent to that reflected in the historical accounts under the prior employment agreements. (d) To reflect the reduction of interest expense during the quarter ended December 31, 1996, assuming the repayment of bank loans and loans from Mr. Svenningsen from net proceeds of the IPO, as if the IPO occurred at January 1, 1996. (e) To provide for income taxes at a statutory rate of 40.5% on earnings during the quarter ended December 31, 1996 as if Amscan Inc., Am-Source, Inc. and certain other subsidiaries of the Company had not been treated as S corporations during the period and to give effect to the tax effect of these adjustments. (f) The pro forma adjustments to the historical Consolidated Statement of Income exclude the following items, as described in the notes to the Transaction Pro Forma Consolidated Balance Sheet, (i) the write-off of $20 of deferred financing costs associated with the debt being repaid, (ii) $1,010 of debt retirement costs, (iii) $7,500 of non-recurring compensation expense to be paid by the Estate and the Svenningsen Trusts, (iv) $1,901 of non-recurring compensation expense for the redemption of Company Stock Options, and (v) $11,652 of transaction fees and expenses incurred in connection with the Transaction. Such amounts represent non-recurring expenses which the Company anticipates will be reflected in the Consolidated Statement of Income for the period in which the Transaction is included. (g) To reflect the amortization over a ten-year period of $1,125 of restricted shares of Company Common Stock issued to an officer of the Company in connection with the Transaction. See "The Transaction -- Interests of Certain Persons in the Transaction". 50 58 (h) To adjust interest expense to reflect the following: Interest on historical debt repaid in Transaction................. $(2,568) Interest expense on the Term Loan (8.5% rate)..................... 9,945 Interest expense on the Senior Subordinated Notes (9.875% rate)... 10,863 Amortization of deferred financing costs (7-10 years) on new indebtedness.................................................... 644 ------- Total adjustment............................................. $18,884 =======
For the twelve months ended September 30, 1997, a 0.125% increase or decrease in the interest rate on the Term Loan would change the Transaction pro forma interest expense and net income by $146 and $87, respectively. (i) To reflect the tax effects of the Transaction pro forma adjustments at a 40.5% statutory income tax rate. (j) Pro forma weighted average common shares outstanding represents the shares outstanding following the Effective Time (see Notes to Consolidated Financial Statements -- September 30, 1997, note (7)). (k) "Adjusted EBITDA" represents earnings before interest, income taxes, depreciation and amortization adjusted for special bonuses, non-recurring compensation, other expenses (income), net and minority interests. Adjusted EBITDA is presented because it is a widely accepted financial indicator of a leveraged company's ability to service and/or incur indebtedness and because management believes Adjusted EBITDA is a relevant measure of the Company's ability to generate cash without regard to the Company's capital structure or working capital needs. Adjusted EBITDA as presented may not be comparable to similarly titled measures used by other companies, depending upon the non-cash charges included. When evaluating Adjusted EBITDA, Investors should consider that Adjusted EBITDA (i) should not be considered in isolation but together with other factors which may influence operating and investing activities such as changes in operating assets and liabilities and purchases of property and equipment, (ii) is not a measure of performance calculated in accordance with generally accepted accounting principles, (iii) should not be construed as an alternative or substitute for income from operations, net income or cash flows from operating activities in analyzing the Company's operating performance, financial position or cash flows and (iv) should not be used as an indicator of the Company's operating performance or as a measure of its liquidity. (l) For purposes of determining the ratio of earnings to fixed charges, earnings are defined as earnings before income taxes and minority interests plus fixed charges. Fixed charges consist of interest expense on all obligations, amortization of deferred financing costs and one-third of rental expense on operating leases representing that portion of rental expense deemed by the Company to be attributable to interest. 51 59 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The party goods industry has experienced significant changes in both distribution channels and product offerings over the last several years. The retail distribution of party goods has begun to shift from smaller independent stores and designated departments within drug, discount or department store chains to superstores dedicated to retailing party goods. In part due to the success of the superstore channel, party goods manufacturers broadened their product lines to support the celebration of a greater number of occasions. The industry's growth has been directly affected by these changes. The Company's revenues have increased from $132.0 million in 1994 to $192.7 million in 1996, a compound annual growth rate of approximately 21%. The Company attributes this growth to its ability to create a broad range of unique and innovative designs for its products and to work closely with its customers to market and merchandise its products to consumers. In particular, the Company experienced significant growth with its party superstore customers. Between 1993 and 1996, sales to party superstore customers increased from $26.8 million to $85.1 million, a 47% compound annual growth rate. Revenues are generated from sales of approximately 14,000 SKUs consisting of paper and plastic tableware, accessories and novelties for all occasions. Tableware (plates, cups, cutlery, napkins and tablecovers) is the Company's core product category, generating approximately 59% of revenues in 1996. Coordinated accessories (e.g., balloons and banners) and novelties (e.g., party favors) are offered to complement the Company's tableware products. To serve its customers better, the Company has made significant additions to its product line. Through increased spending on internal product development as well as through acquisitions, the Company has had a net increase of approximately 6,300 SKUs since 1991. Revenue growth primarily has been the result of increased orders from its party superstore customers (new stores and increased same-store sales), increased international sales and price increases. The Company's gross profit is influenced by its product mix and paper costs. Products manufactured by the Company, primarily tableware, represented approximately 50% of the Company's 1996 sales. The Company has made significant additions to its manufacturing capacity which have allowed it to improve gross margins. The Company believes that its manufacturing capabilities enable it to lower product cost, ensure product quality and be more responsive to customer demands. Paper and pulp related products are the Company's principal raw materials. The Company has historically been able to adjust its prices in response to changes in paper prices. FINANCIAL IMPACT OF ORGANIZATION OF THE COMPANY In connection with the IPO in December 1996 and the Organization, certain events occurred which affected the financial position and results of the Company. The following is a discussion of these events and the related financial impact. ORGANIZATION OF FOUNDER'S INTERESTS The Company was formed for the purpose of becoming the holding company for the businesses previously conducted by Amscan Inc., certain affiliated companies individually owned and independently controlled by Mr. Svenningsen, and certain affiliated companies less than 100% owned by Mr. Svenningsen, including Am-Source, Inc., the Company's supplier of plastic plates, cups and bowls. The transfer of Mr. Svenningsen's ownership in these companies in exchange for shares of Common Stock of the Company was accounted for in a manner similar to a pooling of interests and, as such, the historical cost basis of the accounts was carried over thereby not giving rise to any goodwill. 52 60 ACQUISITION OF AM-SOURCE, INC. The Company and the stockholders of Am-Source, Inc., other than Mr. Svenningsen, entered into an agreement pursuant to which such stockholders transferred their ownership in Am-Source, Inc. in exchange for shares of Company Common Stock. The transaction was accounted for as the purchase of the 50% ownership of Am-Source, Inc. not owned and gave rise to $7.4 million of goodwill, which is being amortized over 30 years. TERMINATION OF PRIOR EMPLOYMENT AGREEMENTS Pursuant to an agreement between Amscan Inc. and Mr. Rittenberg, the Company's President, Mr. Rittenberg entered into a new employment agreement, effective upon consummation of the IPO for a period of three years at a base compensation of approximately $220,000 per year to be increased annually by 5%. Mr. Rittenberg agreed to the termination of his prior employment agreement upon consummation of the IPO. The agreement which was terminated provided for Mr. Rittenberg to receive bonuses equal to approximately 10% of the aggregate net profits of Amscan Inc. and certain affiliates (as defined in the agreement) in each of the next three years and an amount equal to 5% of the value of Amscan Inc. in the event of a change in control or an initial public offering. In exchange for relinquishing these rights, Mr. Rittenberg received a special one-time payment of $3.5 million in cash and shares of Company Common Stock equal to approximately 3% of the total shares outstanding (excluding shares issued upon exercise of the underwriters' over-allotment option) immediately following the IPO. The aggregate value paid to Mr. Rittenberg in cash and stock was $11.5 million. During the periods presented, certain other executives also had employment agreements which entitled them to receive a percentage of the pre-tax profits. These arrangements for Mr. Rittenberg and such other executives between 1994 and 1996 ranged from 18% to 20% of pre-tax profits in the aggregate. In conjunction with the IPO, these agreements were substantially modified and these bonus arrangements replaced by a combination of specific incentive plans and/or cash payments and stock option grants. The aggregate of the special bonuses to Mr. Rittenberg and the other executives and senior managers were $2.2 million, $2.6 million and $4.2 million for the years ended December 31, 1994, 1995 and 1996, respectively. ESTABLISHMENT OF AN EMPLOYEE STOCK OWNERSHIP PLAN AND PAYMENT OF STOCK BONUSES In conjunction with the IPO, the Company incurred a compensation expense of $3.0 million for the establishment of the Company's Employee Stock Ownership Plan (the "ESOP") for the benefit of the employees of Amscan Inc. and the payment of stock bonuses to certain of such employees. At the time of the IPO, there was a special one-time contribution of 250,000 shares of Company Common Stock to the ESOP, subject to reduction as described in the next sentence, allocated to participant accounts based upon a formula which was weighted based upon both years of service and compensation. To the extent that application of this formula resulted in a contribution to the ESOP on behalf of a participant which exceeded the maximum contribution permitted under applicable law, the contribution to the ESOP for such participant was reduced to the maximum permitted and the balance determined under the formula was paid to such participant in the form of a stock bonus. The ESOP will be amended in certain respects in connection with the Transaction. CHANGE IN TAX STATUS OF CORPORATIONS Prior to the IPO, Amscan Inc., Am-Source, Inc. and certain other subsidiaries of the Company were operated as S corporations for federal income and, where available, for state income tax purposes. As a result, these corporations did not record or pay any federal or state income tax except in states which do not recognize S corporation status. Following the IPO, the Company has been taxed as a C corporation under the Code (as "C corporation" is defined therein) and it is anticipated that the Company will have an effective income tax rate of approximately 40.5%. 53 61 The Company has presented pro forma tax provisions and pro forma net income and per share data. These pro forma amounts represent the income tax provision and the net income of the Company had it been a C corporation and thus subject to income tax for all periods. See the consolidated financial statements included elsewhere in this Prospectus. STOCKHOLDER DISTRIBUTIONS As S corporations, the accumulated profits of Amscan Inc., Am-Source, Inc. and certain other subsidiaries of the Company were distributed to the stockholders through December 18, 1996, the effective date of the IPO. Net profits after the consummation of the IPO are added to the retained earnings of the Company and used to fund the capital requirements of the business. Additionally, prior to the IPO, Amscan Inc. and certain affiliates declared dividends representing distributions of accumulated profits and a return of capital. These amounts were reflected as subordinated debt and nearly all of the previous balances of subordinated debt were repaid from the net proceeds of the IPO. RESULTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1996 Percentage of Net Sales
NINE MONTHS ENDED SEPTEMBER 30, ----------------- 1997 1996 ----- ------ Net Sales............................................................. 100.0% 100.0% Cost of sales......................................................... 64.1 63.2 ------ ------ Gross profit........................................................ 35.9 36.8 Operating expenses: Selling expenses.................................................... 6.0 5.9 General and administrative expenses................................. 8.2 9.6 Art and development costs........................................... 2.4 2.5 Special bonuses..................................................... -- 2.2 ------ ------ Total operating expenses.............................................. 16.6 20.2 ------ ------ Income from operations.............................................. 19.3 16.6 Interest expense, net................................................. 1.6 3.1 Other income, net..................................................... (0.1) (0.2) ------ ------ Income before income taxes and minority interests................... 17.8 13.7 Income tax expense.................................................... 7.2 0.5 Minority interests.................................................... 0.1 0.9 ------ ------ Net income.......................................................... 10.5% 12.3% ====== ======
NET SALES Net sales for the nine months ended September 30, 1997 were $161.3 million, an increase of 9.7% over the nine months ended September 30, 1996. Sales to national accounts totaled $84.2 million, or 22.1% higher than in the corresponding period in 1996, principally as a result of sales to the party goods superstore channel. Sales to international customers increased $1.6 million, contributing 11% to sales growth. Also contributing to the increase in sales was the Company's marketing strategy of continually offering new products, as well as new designs and themes for existing products. During the twelve month period ended September 30, 1997, the Company added approximately 600 SKUs to its product line. 54 62 GROSS PROFIT Gross profit for the nine months ended September 30, 1997 was $57.8 million, an increase of $3.7 million over the same period in 1996. As a percent of sales, gross profit decreased for the first nine months of 1997 to 35.9% from 36.8% over the corresponding period in 1996 as a result of an increase in manufacturing capacity and the addition of a new distribution facility, which created near-term excess capacity. SELLING EXPENSES Selling expenses of $9.6 million for the nine months ended September 30, 1997 increased by $0.9 million and as a percentage of net sales to 6.0% as compared to 5.9% in the corresponding time period in 1996, primarily due to the expansion of foreign operations. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses of $13.2 million for the nine months ended September 30, 1997 decreased $0.9 million as compared to the corresponding period in 1996. As a percentage of net sales, general and administrative expenses decreased to 8.2% from 9.6%. The decrease is primarily attributable to non-recurring costs incurred in the second quarter of 1996 associated with the move to new corporate offices and additional personnel costs, including relocation and recruitment. General cost reduction efforts in 1997 were offset by increases in bad debt expense. ART AND DEVELOPMENT COSTS Art and development costs of $3.9 million for the nine months ended September 30, 1997 decreased slightly to 2.4% of net sales during the nine months ended September 30, 1997 from 2.5% for the corresponding period of 1996. In 1996, the Company significantly expanded its creative and new product development staff and internal development capabilities. The continued investment in art and development expenditures in 1997 reflects the Company's strategy to remain a leader in product quality and development. SPECIAL BONUSES The employment agreements which gave rise to special bonuses during the first months of 1996 were substantially modified at the time of the IPO in December 1996 to eliminate future special bonus payments. Such bonuses, which were based entirely upon the pre-tax income of Amscan Inc. and certain affiliates, were $3.3 million or 2.2% of net sales for the nine months ended September 30, 1996. INTEREST EXPENSE, NET Interest expense, net, decreased by $1.9 million to $2.7 million for the nine months ended September 30, 1997 over the corresponding period in 1996, as the net proceeds received from the issuance of Common Stock in December 1996 and January 1997 in connection with the IPO were used to reduce indebtedness under the Company's line of credit and to repay subordinated debt. INCOME TAXES Income tax expense was $11.6 million for the nine months ended September 30, 1997 determined based upon an estimated consolidated effective income tax rate of 40.5% for the year ending December 31, 1997. Prior to the IPO, Amscan Inc., Am-Source, Inc., and certain other subsidiaries of the Company were taxed as Subchapter S corporations for federal income tax and, where available, for state income tax purposes. Accordingly, these entities were not subject to federal and state income taxes, except in states which do no recognize Subchapter S corporation status. In connection with the IPO, these subsidiaries became subject to federal and state income 55 63 taxes. The amounts shown as income taxes for the nine months ended September 30, 1996 consisted principally of foreign taxes. MINORITY INTERESTS Minority interests of $0.1 million and $1.2 million for the nine months ended September 30, 1997 and 1996, respectively, represent the portion of income of the Company's subsidiaries attributable to equity ownership not held by the Company. In addition to the minority interests of certain foreign entities, the minority interests for the nine months ended September 30, 1996 included a 50% minority interest in Am-Source, Inc. On December 18, 1996, the Company acquired the remaining minority interest in Am-Source, Inc. YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 PERCENTAGE OF NET SALES
YEARS ENDED DECEMBER 31, --------------- 1996 1995 ----- ----- Net Sales.................................................................. 100.0% 100.0% Cost of sales.............................................................. 64.3 64.9 ------ ------ Gross profit............................................................. 35.7 35.1 Operating expenses: Selling expenses......................................................... 6.1 7.4 General and administrative expenses...................................... 10.0 9.1 Art and development costs................................................ 2.7 2.5 Non-recurring compensation in connection with the IPO.................... 8.1 Special bonuses.......................................................... 2.2 1.5 ------ ------ Total operating expenses................................................... 29.1 20.5 ------ ------ Income from operations................................................... 6.6 14.6 Interest expense, net...................................................... 3.4 3.4 Other expense (income), net................................................ 0.2 (0.2) ------ ------ Income before income taxes and minority interests........................ 3.0 11.4 Income taxes............................................................... 1.0 0.4 Minority interests......................................................... 0.9 0.6 ------ ------ Net income............................................................... 1.1% 10.4% ====== ======
NET SALES Net sales for the year ended December 31, 1996 were $192.7 million, an increase of 15.1% over the year ended December 31, 1995 in which net sales were $167.4 million. Increased sales to national accounts, principally party superstores, accounted for $21.9 million or 87% of this increase. Also contributing to this sales increase was the impact of the Company's marketing strategy of continually offering new products as well as new designs and themes for existing products. In 1996, the Company's product line included approximately 14,000 SKUs compared with approximately 13,400 SKUs in 1995. Selling price increases related to core products (paper plates, cups, cutlery, napkins and tablecovers) in response to higher paper costs accounted for approximately 6 percentage points of the 15.1% increase in net sales between the periods. Increased sales to international customers accounted for $3.3 million of the increase in net sales. 56 64 GROSS PROFIT Gross profit increased $10.0 million for the year ended December 31, 1996 compared to 1995, and improved as a percentage of sales from 35.1% to 35.7%. Higher selling prices in response to prior period increases in paper costs as well as lower product costs resulting from the Company's continued vertical integration of manufacturing operations, offset in part by the cost of added distribution facilities, were the primary reasons for this improvement in margins. SELLING EXPENSES Selling expenses were lower by $0.4 million for the year ended December 31, 1996 compared to 1995, and declined as a percentage of net sales from 7.4% to 6.1%. The primary reason for the percentage decline was the Company's ability to increase sales to its party superstore customers while not significantly increasing its sales costs associated with those accounts. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses increased $4.3 million for the year ended December 31, 1996 compared to 1995. As a percentage of net sales, general and administrative expenses increased from 9.1% to 10.0%. This increase is principally attributable to an increase in the provision for bad debts of $1.7 million or 0.9% of net sales related to a significant increase in the Company's accounts receivable and increased occupancy costs of $0.5 million or 0.3% of net sales related to the Company's new corporate offices. Also contributing to this increase are non-recurring costs related to the development of a new business management computer system of $1.2 million or 0.6% of net sales as well as one-time costs associated with the move to the new corporate offices of $0.3 million or 0.2% of net sales and additional personnel costs including relocation and recruitment costs of $0.3 million or 0.2% of net sales. ART AND DEVELOPMENT COSTS Art and development costs increased $0.9 million for the year ended December 31, 1996 compared to 1995. As a percentage of net sales, art and development costs increased from 2.5% to 2.7%. The Company significantly expanded its creative and new product development staff and internal development capabilities in the middle of 1995 which resulted in a substantial increase in art and development costs which were incurred during all of 1996. The increase in art and development expenditures reflects the Company's strategy to remain a leader in product quality and development. NON-RECURRING COMPENSATION In conjunction with the IPO, the Company recorded non-recurring compensation of $15.5 million in 1996 related to stock and cash payments of $12.5 million to certain executives in connection with the termination or modification of employment agreements and $3.0 million for the establishment of an ESOP for the benefit of the employees of Amscan Inc. and the payment of stock bonuses to certain of such employees. SPECIAL BONUSES Special bonuses, which were based entirely upon the Company's pre-tax income, increased by $1.6 million for the year ended December 31, 1996 compared to 1995. The employment agreements which gave rise to these bonuses were substantially modified to eliminate these special bonus payments in the future. 57 65 INCOME FROM OPERATIONS Due to the non-recurring compensation of $15.5 million and the other factors discussed above, income from operations decreased $11.9 million to $12.8 million in 1996 from $24.7 million in 1995. As a percentage of net sales, income from operations decreased from 14.6% in 1995 to 6.6% in 1996. INTEREST EXPENSE, NET Interest expense, net increased by $0.9 million to $6.7 million in 1996, reflecting slightly higher borrowings associated with increased working capital (primarily inventory and accounts receivable) needed to support the increased volume of sales, offset in part by a lower effective interest cost associated with the Company's revised revolving credit agreement, which was entered into in September 1995. INCOME TAXES Prior to the IPO, Amscan Inc., Am-Source, Inc. and certain other subsidiaries of the Company were taxed as S corporations for federal income tax and, where available, for state income tax purposes. Accordingly, these entities were not subject to federal and state income taxes except in states which do not recognize S corporation status. In connection with the IPO, these subsidiaries became subject to federal and state income taxes. The amounts shown as income taxes in 1996 consist principally of foreign taxes and a one-time charge of $0.8 million related to the establishment of deferred taxes in connection with the change in tax status. MINORITY INTERESTS Minority interests represent the portion of income of the Company's Subsidiaries attributable to equity ownership not held by Amscan Holdings, Inc. In addition to the minority interests of certain foreign entities, these amounts include the minority interest of Am-Source, Inc. through December 18, 1996, the date the Company acquired the 50% not owned by Mr. Svenningsen. 58 66 YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 PERCENTAGE OF NET SALES
YEARS ENDED DECEMBER 31, ---------------- 1995 1994 ----- ----- Net Sales................................................................ 100.0% 100.0% Cost of sales............................................................ 64.9 65.7 ----- ----- Gross profit........................................................... 35.1 34.3 Operating expenses: Selling expenses....................................................... 7.4 8.5 General and administrative expenses.................................... 9.1 11.0 Art and development costs.............................................. 2.5 2.1 Special bonuses........................................................ 1.5 1.7 ----- ----- Total operating expenses................................................. 20.5 23.3 ----- ----- Income from operations................................................. 14.6 11.0 Interest expense, net.................................................... 3.4 2.9 Other (income) expense, net.............................................. (0.2) 0.1 ----- ----- Income before income taxes and minority interests...................... 11.4 8.0 Income taxes............................................................. 0.4 0.4 Minority interests....................................................... 0.6 0.1 ----- ----- Net income............................................................. 10.4% 7.5% ===== =====
NET SALES Net sales for the year ended December 31, 1995 were $167.4 million, an increase of 26.8% over 1994 when net sales were $132.0 million. Increased sales to party superstores accounted for $23.3 million or 66% of this increase. The number of retail outlets represented by these accounts increased to 886 in 1995 from 720 in 1994. Also contributing to this net sales increase was the impact of the Company's marketing strategy of continually offering new products as well as new designs and themes for existing products. In 1995, the Company's product line included over 13,400 SKUs compared to approximately 11,000 SKUs in 1994. Selling price increases related to core products (paper plates, cups, napkins and tablecovers) in response to higher paper costs, accounted for approximately 5 percentage points of the 26.8% of the year-over-year increase in net sales. Increased sales to international customers accounted for $4.3 million of the increase in net sales in 1995 compared to 1994. GROSS PROFIT Gross profit increased by $13.5 million from 1994 to 1995, and improved as a percentage of net sales from 34.3% to 35.1%. The gross profit margin improvement resulted primarily from the increased vertical integration of the Company's tableware manufacturing operations. During 1995, the Company added several new pieces of equipment including two printing presses which enabled it to expand its manufacturing capacity. In addition, gross profit improved as a result of increased leveraging of existing distribution facilities and improved purchasing of nonmanufactured products. SELLING EXPENSES Selling expenses increased by $0.9 million from 1994 to 1995, but declined as a percentage of net sales from 8.5% to 7.4%. The primary reason for the percentage decline was the Company's 59 67 ability to increase sales to its party superstore customers, while not significantly increasing its sales costs associated with these accounts. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses increased by $0.5 million from 1994 to 1995, primarily as a result of modest wage increases partially offset by decreased provisions for bad debts. During 1994, the Company sustained a larger amount of write-offs due to two large accounts which filed for bankruptcy. As a percentage of net sales, general and administrative expenses declined from 11.0% in 1994 to 9.1% in 1995. The Company was able to leverage its administrative resources while supporting the increased sales. ART AND DEVELOPMENT COSTS Art and development costs increased $1.5 million from 1994 to 1995. As a percentage of net sales, art and development costs increased from 2.1% in 1994 to 2.5% in 1995. The Company significantly expanded its creative and new product development staff and internal development capabilities in 1995, which resulted in a substantial increase in art and development costs in the second half of 1995. The increase in such expenses reflects the Company's strategy of remaining a leader in product quality and development. SPECIAL BONUSES Special bonuses, which were based upon the Company's pre-tax income, increased in 1995 over 1994. The special bonus in 1994 included special one-time bonuses of approximately $0.8 million associated with the partial acquisition of Am-Source, Inc. In connection with the IPO, the employment agreements which gave rise to these bonuses were substantially modified to eliminate the special bonus payments. INCOME FROM OPERATIONS The factors discussed above contributed to the increase in income from operations of 69.9% to $24.7 million in 1995 from $14.5 million in 1994. As a percentage of net sales, income from operations increased from 11.0% in 1994 to 14.6% in 1995. INTEREST EXPENSE, NET Interest expense, net increased by $1.9 million to $5.8 million from 1994 to 1995, reflecting higher borrowings associated with increased working capital (primarily from inventory and accounts receivable) needed to support the increased volume of sales, as well as an increase in the Company's average effective rate for borrowed money from 7.5% to 8.3%. INCOME TAXES Amscan Inc., Am-Source, Inc. and certain other subsidiaries of the Company elected to be taxed as S corporations for federal income and, where available, for state income tax purposes. Accordingly, these entities were not subject to federal income taxes prior to the IPO except in states which do not recognize S corporation status. In connection with the IPO, these subsidiaries terminated their S corporation status and, accordingly, are subject to federal and state income taxes. The amounts shown as income taxes consist principally of foreign taxes. MINORITY INTERESTS Minority interests represent the portion of income attributable to equity ownership not held by Mr. Svenningsen. In addition to the minority interests of certain foreign entities, these amounts include the minority interest of Am-Source, Inc. prior to its acquisition by the Company. 60 68 LIQUIDITY AND CAPITAL RESOURCES The Company has financed its growth since 1994 principally through cash flow generated from operations, the use of operating leases, increases in its revolving line of credit borrowings and increases in long-term debt, including debt owed to Mr. Svenningsen. The net proceeds from the IPO were used to reduce indebtedness under the Company's line of credit and to repay subordinated debt. Upon consummation of the Transaction, the Company's existing loan arrangements terminated and the Company entered into the Transaction Financings. As of September 30, 1997, after giving pro forma effect to the Transaction and the Transaction Financings and the application of the net proceeds therefrom, the Company would have had (i) $237.8 million of consolidated indebtedness and (ii) $95.3 million of consolidated stockholders' deficiency. The Company's significant debt service obligations following the Transaction could, under certain circumstances, have material consequences to security holders of the Company. See "Description of Senior Debt" and "Risk Factors -- Substantial Leverage; Ability to Service Indebtedness". In order to fund the payment of the cash portion of the Transaction Consideration, to refinance certain existing outstanding indebtedness of the Company, to pay transaction costs incurred in connection with the Transaction, and for general corporate purposes, the Company issued the Notes and entered into the Bank Credit Agreement providing for borrowings in the aggregate principal amount of approximately $117 million under the Term Loan and revolving loan borrowings of up to $50 million under the Revolving Credit Facility. The Revolving Credit Facility is, subject to a borrowing base, available to fund the working capital requirements of the Company. Based upon the current level of operations and anticipated growth, the Company anticipates that its operating cash flow, together with available borrowings under the Revolving Credit Facility, will be adequate to meet its anticipated future requirements for working capital and operating expenses, to permit potential acquisitions and to service its debt requirements as they become due. However, the Company's ability to make scheduled payments of principal of, or to pay interest on, or to refinance its indebtedness (including the Exchange Notes) and to satisfy its other obligations will depend upon its future performance, which, to a certain extent, will be subject to general economic, financial, competitive, business and other factors beyond its control. Management believes that additions to plant and equipment during the past three years provide adequate capacity to support its operations for at least the next 12 months. As of September 30, 1997, the Company did not have material commitments for capital expenditures. The Transaction Financings entered into in connection with the Transaction may affect the Company's ability to make capital expenditures. See "Risk Factors -- Substantial Leverage; Ability to Service Indebtedness"; "Description of Senior Debt" and "Description of Exchange Notes". CASH FLOW DATA -- NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1996 Net cash provided by operating activities increased by $6.9 million to $8.5 million for the nine months ended September 30, 1997 as compared to the same period in 1996, primarily as a result of decreased working capital levels. Net cash used in investing activities increased by $1.2 million to $6.8 million for the nine months ended September 30, 1997 over the comparable period in 1996, and consisted primarily of capital expenditures. Net cash used in financing activities totaled $2.5 million for the nine months ended September 30, 1997 as repayments of bank and other indebtedness exceeded net proceeds of $4.5 million received from the sale of the Company's Common Stock to cover the exercise of the underwriters' over-allotment option and proceeds under the Company's existing loan arrangements. 61 69 BALANCE SHEET DATA -- SEPTEMBER 30, 1997 COMPARED TO DECEMBER 31, 1996 Accounts receivable, net, increased $18.9 million to $56.3 million at September 30, 1997 from $37.4 million at December 31, 1996. This increase is principally due to the increased sales and customary extended payment terms offered on seasonal sales during the third quarter. Third quarter sales are generally the highest of the year primarily due to the shipment of certain seasonal holiday merchandise. During September 1997, the Company entered into an agreement to convert $4.0 million of trade accounts receivable from one of its two largest customers into an equity interest. The Company subsequently transferred 50% of this interest to the Estate in full satisfaction of $2.0 million of obligations. The remaining equity interest is included in other assets at September 30, 1997. Subsequently, the Company transferred the remaining interest to the Estate for $1.0 million in cash and in full satisfaction of $1.0 million of future obligations to the Estate. Inventories increased $3.0 million to $48.7 million at September 30, 1997 from $45.7 million at December 31, 1996 due to seasonality of inventory levels. Deposits and other current assets decreased $1.7 million to $9.7 million at September 30, 1997 from December 31, 1996, principally due to a reduction in deposits for the manufacture of equipment to be leased. Property, plant and equipment, net, increased $2.5 million to $37.2 million at September 30, 1997 from $34.7 million at December 31, 1996. The increase represents the acquisition of certain domestic manufacturing and warehouse equipment, partially offset by depreciation. Loans and notes payable decreased $19.3 million to $10.0 million at September 30, 1997 from December 31, 1996, reflecting the repayment of borrowings under the Company's previous revolving credit line, which was financed by advances under the Company's then-existing loan facilities and term loans. Income taxes payable increased $5.6 million to $6.5 million at September 30, 1997 from December 31, 1996. This increase is primarily due to the change in tax status. In connection with the IPO on December 18, 1996, Amscan Inc., AmSource, Inc., and other subsidiaries of the Company terminated their S corporation status, and accordingly became subject to federal and state income taxes. Third-party long-term financings for the nine months ended September 30, 1997 consisted primarily of borrowings under the previously mentioned term loan and long-term loans secured by real property, machinery and equipment. Common Stock and additional paid-in capital increased by $4.5 million as a result of the exercise of the underwriters' over-allotment option. CASH FLOW DATA -- YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 Net cash provided by operating activities increased by $7.6 million to $12.3 million in the year ended December 31, 1996 from $4.7 million in the year ended December 31, 1995 as a result of the decreased rate of growth in inventories and other assets, partially offset by increases in deposits paid on purchased equipment and a decrease in net income before depreciation and amortization. Net cash used in investing activities of $7.6 million increased by $3.1 million from 1995 because of increased capital expenditures. Net cash used in financing activities increased by $6.1 million to $6.0 million in 1996 due to increases in stockholder distributions, repayment of bank debt and subordinated debt partially offset by net proceeds from the IPO. Third party financings for 1996 consisted primarily of borrowings under credit and long-term loans secured by machinery and equipment. The Company used net proceeds from the IPO to repay debt owed to the banks and to Mr. Svenningsen in 1996. The Company used $8.9 million of the cash in 1996 to fund its working capital needs, which consisted primarily of increases in accounts receivable and deposits on machinery and equipment. 62 70 In 1996, the Company distributed $23.4 million, compared to $11.0 million in 1995, to stockholders, of which $1.4 million in 1996 and $4.0 million in 1995 was reinvested in the Company as debt payable to stockholders. The distributions in 1996 were funded by net proceeds from the IPO and represented accumulated earnings and the return of previously provided capital. In 1996 and 1995, the Company acquired $11.0 million and $4.5 million, respectively, of machinery and equipment, which was financed by long-term debt and borrowings under the Company's revolving credit facility, and entered into operating leases for additional machinery and equipment totaling $10.8 million in 1996 and $7.4 million in 1995. BALANCE SHEET DATA -- DECEMBER 31, 1996 COMPARED TO DECEMBER 31, 1995 Accounts receivable, net increased $5.5 million to $37.4 million at December 31, 1996 from $31.9 million at December 31, 1995. This increase is due principally to increased sales. Deposits and other assets increased $8.4 million to $11.4 million at December 31, 1996 from December 31, 1995. This increase is due principally to deposits placed, offset by the related advances received, in connection with various operating leases for manufacturing and warehouse equipment as well as office equipment and computer software and to the establishment of a deferred tax asset resulting from the change in tax status. Property, plant and equipment, net increased $5.5 million to $34.7 million at December 31, 1996 from $29.2 million at December 31, 1995. This increase is primarily due to manufacturing and warehouse equipment acquired, partially offset by depreciation. Intangible assets, net increased $7.1 million on December 31, 1996 from December 31, 1995 primarily due to goodwill recorded in connection with the acquisition of the remaining 50% of Am-Source, Inc. Loans and notes payable decreased $8.5 million to $29.3 million at December 31, 1996. Subordinated and other debt due to stockholders decreased $17.1 million to $1.4 million at December 31, 1996. The decreases resulted from the repayment of bank debt and subordinated debt funded by net proceeds from the IPO. Long-term debt, including current installments, increased $3.1 million to $17.6 million at December 31, 1996 primarily because of loans used to acquire machinery and equipment. Common stock increased $1.7 million to $2.1 million at December 31, 1996 due to the exchange of shares issued in 1996. These shares include the shares issued to Mr. Svenningsen and others in connection with the Organization, the shares issued in the IPO and the shares issued in connection with the establishment of the ESOP, the payment of stock bonuses and the acquisition of the remaining 50% of Am-Source, Inc. Additional paid-in capital increased $52.4 million to $61.5 million as of December 31, 1996 primarily due to the net proceeds from the IPO, and other shares issued in connection with the IPO, partially offset by the return of previously provided capital and a reduction in additional paid-in capital resulting from the exchange of shares in the Organization. CASH FLOW DATA -- YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 Net cash provided by operating activities decreased by $0.4 million to $4.7 million in 1995 from $5.1 million in 1994. This slight decrease was primarily attributable to increases in accounts receivable and inventories, offset by increases in accounts payable and accrued expenses and net income before depreciation and amortization. Net cash used in investing activities decreased $2.8 million from $7.3 million to $4.5 million due to reduced capital expenditures. Net cash provided by financing activities decreased $2.6 million from $2.7 million to $0.1 million due to an increase in stockholder distributions partially offset by an increase in loans, notes payable and long-term indebtedness. 63 71 The Company generated $10.0 million and $3.9 million from third-party financings and $1.2 million and $6.3 million from financings with Mr. Svenningsen in 1995 and 1994, respectively. Financings in 1995 consisted primarily of long-term loans secured by machinery and equipment and borrowings under revolving credit facilities, while financings in 1994 consisted primarily of bankers acceptances and borrowings under revolving credit facilities. The Company used $18.6 million of cash in 1995 and $11.2 million of cash in 1994 to fund its working capital needs, which consisted primarily of increases in accounts receivable and inventory. In 1995, the Company distributed $11.0 million, compared to $7.5 million in 1994, to stockholders, of which $4.0 million in 1995 and $6.3 million in 1994 was reinvested in the Company as debt payable to stockholders. The remainder of these distributions was used principally for the payment of the stockholders' taxes. The increase from 1994 to 1995 was due to increased earnings of those corporations, taxable to the stockholders. In 1994, the Company acquired $8.0 million of machinery and equipment which was financed primarily by borrowings under the Company's revolving credit facilities and $4.0 million of which was refinanced through long-term loans early in 1995. RECENTLY ISSUED ACCOUNTING STANDARDS In February 1997, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128--Earnings per Share, effective for interim and annual periods ending after December 15, 1997. The Company does not believe that the impact of SFAS No. 128 will have a significant impact on its earnings per share calculation. In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income. SFAS No. 170 establishes requirements for disclosure of comprehensive income. The new standard becomes effective for the Company's fiscal year 1998 and requires reclassification of earlier financial statements for comparative purposes. In June 1997, the FASB issued SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information. SFAS No. 131 establishes standards for disclosure about operating segments in annual financial statements and requires disclosure of selected information about operating segments in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas and major customers. This statement supersedes SFAS No. 14, Financial Reporting for Segments of a Business Enterprise. The new standard becomes effective for the Company's fiscal year 1998 and requires that comparative information from earlier years be restated to conform to the requirements of this standard. The Company does not believe any substantial changes to its disclosures will be made at the time SFAS No. 131 is adopted. In November 1997, the Emerging Issues Task Force reached a consensus on Issue 97-13, Accounting for Costs Incurred in Connection with a Consulting Contract or an Internal Project That Combines Business Process Reengineering and Information Technology Transformation. The consensus generally requires third party consulting costs and internally generated costs associated with business process reengineering projects to be expensed as incurred. The consensus became effective for the Company's fiscal year ended December 31, 1997 and will not have a significant impact on its financial position or results of operations. Other pronouncements issued by the FASB or other authoritative accounting standards groups with future effective dates are either not applicable or not significant to the financial statements of the Company. QUARTERLY RESULTS As a result of the seasonal nature of certain of the Company's products, the quarterly results of operations may not be indicative of those for a full year. Third quarter sales are generally the highest 64 72 of the year due to a combination of increased sales to consumers of the Company's products during summer months as well as initial shipments of seasonal holiday merchandise as retailers build inventory. Conversely, fourth quarter sales are generally lower as retailers sell through inventories purchased during the third quarter. The overall growth rate of the Company's sales in recent years has offset, in part, this sales variability. Promotional activities, including special dating and pricing terms, particularly with respect to Halloween and Christmas products, result in generally lower margins and profitability in the fourth quarter, as well as higher accounts receivables balances and associated higher interest costs to support these balances. The following table sets forth the historical net sales and income (loss) from operations of the Company for 1997, 1996 and 1995 by quarter.
QUARTER ENDED -------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- ------- ------------ ----------- 1995 Net sales...................................... $ 39,376 $41,046 $ 47,892 $ 39,089 Income from operations......................... 6,492 6,350 9,120 2,707(a) 1996 Net sales...................................... $ 47,258 $45,714 $ 54,036 $ 45,697 Income (loss) from operations.................. 7,586 7,563 9,223 (11,614)(b) 1997 Net sales...................................... $ 53,176 $49,225 $ 58,885 Income from operations......................... 10,029 9,306 11,777
- --------------- (a) In addition to the seasonal variability described above, income from operations for the fourth quarter of 1995 was adversely affected by the impact of higher paper costs for which selling price adjustments were implemented in the first quarter of 1996. Income from operations for this quarter were also adversely affected by additional bad debt reserves (approximately $0.5 million, representing approximately one-third of the provision for doubtful accounts recognized for the full year 1995) and additional computer system expenses (approximately $0.5 million). (b) Included in fourth quarter results in 1996 are non-recurring compensation expenses of $15.5 million, including stock and cash payments of $12.5 million to certain executives in connection with the termination or modification of prior employment agreements and $3.0 million for the establishment of an ESOP for the benefit of the employees of Amscan Inc. and the payment of stock bonuses to certain of such employees. FORWARD-LOOKING STATEMENTS This Prospectus includes "forward-looking statements" within the meaning of various provisions of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, included in this Prospectus that address activities, events or developments that the Company expects or anticipates will or may occur in the future, including financial projections, future capital expenditures (including the amount and nature thereof), business strategy and measures to implement strategy, including any changes to operations, competitive strengths, goals, expansion and growth of the Company's and its Subsidiaries' business and operations, plans, references to future success and other such matters are forward-looking statements. These statements are based on certain assumptions and analyses made by the Company in light of its experience and its perception of historical trends, current conditions and expected future developments as well as other factors it believes are appropriate in the circumstances. However, whether actual results and developments will conform with the Company's expectations and predictions is subject to a number of risks and uncertainties, including, but not limited to, (1) the significant considerations discussed in this Prospectus, (2) the concentration of sales by the Company to 65 73 party goods superstores where the reduction of purchases by a small number of customers could materially reduce the Company's sales and profitability, (3) the concentration of the Company's credit risk in party goods superstores, many of which are privately held and have expanded rapidly in recent years, (4) the failure by the Company to anticipate changes in tastes and preferences of party goods retailers and consumers, (5) the introduction of new products by the Company's competitors, (6) the inability of the Company to increase prices to recover fully future increases in raw material prices, especially increases in paper prices, (7) the loss of key employees, (8) changes in general business conditions, (9) other factors which might be described from time to time in the Company's filings with the Commission, and (10) other factors which are beyond the control of the Company and its Subsidiaries. Consequently, all of the forward-looking statements made in this Prospectus are qualified by these cautionary statements, and there can be no assurance that the actual results or developments anticipated by the Company will be realized or, even if substantially realized, that they will have the expected consequences to or effects on the Company and its Subsidiaries or their business or operations. In addition, although the Company believes that it has the product offerings and resources needed for continued growth in revenues and margins, future revenue and margin trends cannot be reliably predicted. Changes in such trends may cause the Company to adjust its operations in the future. Because of the foregoing and other factors, recent trends should not be considered reliable indicators of future financial results. 66 74 BUSINESS THE COMPANY Amscan designs, manufactures and distributes decorative party goods, offering one of the broadest and deepest product lines in the industry. The Company's products include paper and plastic tableware (such as plates, napkins, tablecovers, cups and cutlery), accessories (such as invitations, thank-you cards, table and wall decorations and balloons) and novelties (such as games and party favors). The Company's products are sold to party goods superstores, independent card and gift retailers, mass merchandisers and other distributors which sell Amscan products in more than 20,000 retail outlets throughout the world, including North America, Australia, the United Kingdom, Germany and Sweden. The Company currently offers over 250 product ensembles, generally containing 30 to 150 coordinated items. These ensembles comprise a wide variety of products to accessorize a party including matching invitations, tableware, decorations, party favors and thank-you cards. The Company designs, manufactures and markets party goods for a wide variety of occasions including seasonal holidays, special events and theme celebrations. The Company's seasonal ensembles enliven holiday parties throughout the year including New Year's, Valentine's Day, St. Patrick's Day, Easter, Passover, Fourth of July, Halloween, Thanksgiving, Hanukkah and Christmas. The Company's special event ensembles include birthdays, christenings, first communions, bar mitzvahs, confirmations, graduations, baby and bridal showers and anniversaries, while its theme-oriented ensembles include Hawaiian luaus, Mardi Gras and '50s rock-and-roll parties. In addition to its long-standing relationships with independent card and gift retailers, the Company is a leading supplier to the party superstore distribution channel. Party goods superstores are growing rapidly by providing consumers with a one-stop source for all of their party needs, generally at discounted prices. The retail party goods business has historically been fragmented among independent stores and drug, discount or department store chains. However, according to industry analysts, there has been a significant shift of sales since 1990 to the party goods superstores channel. Company sales to superstores represented approximately 44% of total sales in 1996. While the number of party superstores that Amscan supplies has grown at a CAGR in excess of 20% from 1993 to 1996, the Company's sales to superstores have grown by a 47% CAGR during the same period. With Amscan products occupying an increasing share of superstore shelf space in many product categories, Amscan believes it is well positioned to take advantage of continued growth in the party superstore channel. Amscan's sales and cash flows have grown substantially over the past five years. From 1991 to 1996, sales and Adjusted EBITDA (adjusted for non-recurring items, other income or expenses, and minority interests) have grown at compound annual rates of 20% and 28%, respectively. During the same period, Adjusted EBITDA margins increased from approximately 14% to 20% due in part to the Company achieving greater economies of scale in manufacturing and distribution, and significantly reducing selling expenses as a percentage of sales. Sales and Adjusted EBITDA for the twelve months ended September 30, 1997 were approximately $207 million and $42 million, respectively, representing an Adjusted EBITDA margin of approximately 20%. 67 75 REVENUE AND ADJUSTED EBITDA GROWTH [STRONG REVENUE AND EBITDA GROWTH BAR GRAPHS] PARTY GOODS INDUSTRY OVERVIEW According to industry analyst reports, the U.S. decorative party goods industry (including tableware, accessories and novelties) generated approximately $3.5 billion in retail sales in 1996 and has grown approximately 10% annually over the past several years. The Company believes this growth is driven by several factors including favorable demographics and consumer spending patterns, the emergence of the party superstore channel and growth in the number of party events celebrated and party products available to consumers. The Company believes that demographic trends favor continued growth in decorative party goods sales. According to the United States Bureau of the Census ("The Census Bureau"), between 1997 and 2005, population in the 10-19 year old age bracket is expected to increase by approximately 10%, and population in the 20-24 year old age bracket is expected to increase by approximately 15%. This suggests an increase in celebrations revolving around teenagers and young adults including confirmations, bar mitzvahs, graduations and bridal and baby showers. In addition, the 45-54 year old age bracket is expected to increase by over 20% by 2005. According to The Census Bureau and the United States Bureau of Labor Statistics, this population segment enjoyed the highest median household income and spent the most money on entertainment in 1995. The Company believes that this population segment is a key buying group of party goods for children and grandchildren, as well as products for adult milestone events including birthdays, anniversaries and retirements. Another factor contributing to growth in the decorative party goods industry has been the emergence of party goods superstores which, according to industry analysts, are poised for expansion as national penetration continues. The Company believes that superstores are popular among consumers because of the large variety of merchandise and substantial discounts they offer. Industry analysts report that, over the past several years, the marketplace has begun to accept a move toward the party goods superstore merchandising concept, similar to earlier merchandising shifts in such product categories as toys, office supplies, home furnishings and home improvements. 68 76 The Company believes that party goods sales volumes have also increased, in part, as a result of: - the creation of new product ensembles both in response to consumer demand and as a means of stimulating customer purchases; - the broadening of product lines through the addition of new items and new accessories within ensembles; - larger retail environments allowing retailers to employ marketing techniques which result in increased average sales per customer; and - the celebration of an increased number of party themes and events, such as Hawaiian luaus, Mardi Gras and '50s rock-and-roll parties. The Company believes that by introducing products for new types of celebrations, offering multiple product ensembles for individual celebrations (such as multiple Halloween or birthday ensembles) and increasing the number of "add-on" accessories, party goods suppliers have increased the frequency and volume of consumer purchases of decorative party goods. COMPETITIVE STRENGTHS - Leading Supplier to the High Growth and High Volume Party Goods Superstore Channel. In addition to its long-standing base of business with independent card and party retailers, the Company believes that its products account for an increasing portion of the retail sales by major superstore chains, including Party City, Party Stores Holdings, Big Party Corporation, The Paper Factory, The Half-Off Card Shop, Paper Warehouse Inc. and Factory Card Outlet Corp. Approximately 44% of the Company's sales were generated from superstores last year, and based on indications from these chains that they intend to continue to expand nationwide, the Company expects that sales to this segment will continue to grow significantly. - Single Source Supplier of Decorative Party Goods. The Company provides one of the most extensive product lines of decorative party goods in the industry, serving a wide variety of occasions. Amscan produces over 250 different ensembles, generally containing 30 to 150 coordinated SKUs within each ensemble. With 14,000 SKUs, the Company is a one-stop shopping, single-source supplier to retailers of decorative party goods. The Company believes this breadth of product line provides enough variety that competing retailers can each purchase Amscan products and still differentiate themselves by the product they market to the end consumer. - Strong Customer Relationships. The Company has built strong relationships with its customer base which operates more than 20,000 retail outlets. The Company strives to provide superior service and, by involving retailers in product development and marketing, seeks to become a strategic partner to its customers. - Product Design Leadership. The Company believes one of its strengths is its leadership in creating innovative designs and party items. The Company believes its product designs have a level of color, complexity and style that are attractive to consumers and difficult to replicate. The Company offers coordinated accessories and novelties which, the Company believes, complement its tableware designs, enhancing the appeal of its tableware products and encouraging "add on" impulse purchases. - Strong and Committed Management Team. The Company's management team has built the business into an industry leader with integrated design, manufacturing, and distribution capabilities. Current management has been instrumental in building the Company's strong industry position and in the Company's achieving a 28% CAGR in Adjusted EBITDA since 69 77 1991. The management team and other key employees have committed $6.4 million (including restricted stock grants) to the Transaction. COMPANY STRATEGY The Company seeks to become the primary source for consumers' party goods requirements. The key elements of the Company's strategy are as follows: - Strengthen Position as a Leading Provider to Party Superstores. The Company offers convenient "one-stop shopping" for large superstore buyers and seeks to increase its proportionate share of sales volume and shelf space in the superstores. - Offer the Broadest and Deepest Product Line in the Industry. The Company strives to offer the broadest and deepest product line in the industry. The Company helps retailers boost average purchase volume per consumer through coordinated ensembles that promote "add on" purchases. - Diversify Distribution Channels, Product Offering and Geographic Presence. The Company will seek, through internal growth and acquisitions, to expand its distribution capabilities internationally, increase its presence in additional retail channels and further broaden and deepen its product line. - Provide Superior Customer Service. The Company strives to achieve high average fill rates in excess of 95% and ensure short turnaround times. - Maintain Product Design Leadership. The Company will continue investing in art and design to support a steady supply of fresh ideas and create complex, unique ensembles that appeal to consumers and are difficult to replicate. - Maintain State-of-the-Art Manufacturing and Distribution Technology. The Company intends to maintain technologically advanced production and distribution systems in order to enhance product quality, manufacturing efficiency, cost control and customer satisfaction. - Pursue Attractive Acquisitions. The Company believes that opportunities exist to make acquisitions of complementary businesses to leverage the Company's existing marketing, distribution and production capabilities, expand its presence in the various retail channels, further broaden and deepen its product line and penetrate international markets. The Company receives inquiries from time to time with respect to the possible acquisition by the Company of other entities and the Company intends to pursue acquisition opportunities aggressively. BUSINESS OPERATIONS PRODUCT DESIGN The Company's 70-person in-house design staff produces and manages the Company's party goods. From the designs and concepts developed by the Company's artists, the Company selects those it believes best to replace approximately one-third of its designed product ensembles each year. For 1997, the Company introduced approximately 50 new ensembles. 70 78 PRODUCT LINE The categories of products which the Company offers are tableware, accessories and novelties. The percentages of sales for each product category for 1994, 1995 and 1996 are set forth in the following table:
1994 1995 1996 ---- ---- ---- Tableware........................................................... 58% 60% 59% Accessories......................................................... 26 24 25 Novelties........................................................... 16 16 16 ---- ---- ---- 100% 100% 100% ==== ==== ====
Products. The following table sets forth the principal products in each of the three categories:
TABLEWARE ACCESSORIES NOVELTIES - ----------------------------- ----------------------------- ----------------------------- Decorated Balloons Buttons Paper Plates Cascades Cocktail Picks Paper Napkins Confetti Games Paper Tablecovers Banners Candles Paper Cups Crepe Mugs Solid Color Cutouts Noise Makers Paper and Plastic Plates Decorative Tissues Party Favors Paper Napkins Flags Party Hats Paper and Plastic Tablecovers Gift Bags Pom Poms Paper and Plastic Cups Gift Wrap T-shirts Plastic Cutlery Guest Towels Honeycomb Centerpieces Invitations and Notes Ribbons and Bows Signs
Occasions. The Company supplies party goods for the following types of occasions:
SEASONAL EVERYDAY THEMES - ----------------------------- ----------------------------- ----------------------------- New Year's Anniversaries Fall Valentine's Day Birthdays Fiesta St. Patrick's Day Graduations Fifties Rock-and-Roll Easter Retirements Hawaiian Luau Passover Showers Mardi Gras Fourth of July Weddings Patriotic Halloween Bar Mitzvahs Religious Thanksgiving Christenings Sports Hanukkah First Communions Summer Fun Christmas Confirmations
Tableware. The Company believes that tableware products are the initial focus of consumers in planning a party, since these items are necessary in connection with the consumption of food and beverages. To distinguish its tableware from that of its competitors, the Company seeks to create a broad range of unique designs for its products. In addition, the Company's tableware products are priced competitively and affordably, having suggested retail prices (based upon quantity and product) ranging between $1.70 and $10.00. Accessories and Novelty Items. The Company believes that consumers are attracted to Amscan tableware due to the breadth and array of accessory and novelty items. Unified displays of complete ensembles in retail stores are designed to enhance the appeal of the Company's 71 79 tableware and encourage the impulse buying of accessories and novelties. The Company believes that by offering a broad product line, it increases the number of products sold per customer transaction. MANUFACTURED PRODUCTS Items manufactured by the Company accounted for approximately 50% of the Company's sales in 1996. State-of-the-art printing, forming, folding and packaging equipment support the Company's manufacturing operations. Company facilities in Kentucky, New York, Rhode Island and California produce paper and plastic plates, napkins, cups and other party and novelty items. This vertically integrated manufacturing capability for many of its key products allows the Company the opportunity to better control costs and monitor product quality, manage inventory investment and provide efficiency in order fulfillment. Given its size and sales volume, the Company is generally able to operate its manufacturing equipment on the basis of at least two shifts per day thus lowering its production costs. In addition, the Company manufactures products for third parties allowing the Company to maintain a satisfactory level of equipment utilization. PURCHASED PRODUCTS The Company sources the remainder of its products from independently-owned manufacturers, many of whom are located in the Far East and with whom the Company has long-standing relationships. The two largest such suppliers operate as exclusive suppliers to the Company and represent relationships which have been in place for more than ten years. The Company believes that the quality and price of the products manufactured by these suppliers provide a significant competitive advantage. The Company's business, however, is not dependent upon any single source of supply for products manufactured for the Company by third parties. RAW MATERIALS The principal raw material used by the Company in its products is paper. The Company has historically been able to change its product prices in response to changes in raw material costs. While the Company currently purchases such raw material from a relatively small number of sources, paper is available from a number of sources. The Company believes its current suppliers could be replaced by the Company without adversely affecting its operations in any material respect. SALES AND MARKETING The Company's principal sales and marketing efforts are conducted through a domestic direct employee sales force of approximately 60 professionals servicing over 5,000 retail accounts. These professionals have, on average, been affiliated with the Company for approximately five years. In addition to this seasoned sales team, the Company utilizes a select group of manufacturers' representatives to handle specific account situations. International customers are generally serviced by employees of the Company's foreign subsidiaries. To support its marketing effort, the Company produces three separate product catalogues annually, two for seasonal products and one for everyday products. From 1991 to 1996, the Company significantly reduced selling, general and administrative expenses as a percentage of sales, largely because of a proportionate decrease in selling expenses. 72 80 SG&A AND ADJUSTED EBITDA AS % OF REVENUES The Company's practice of including party goods retailers in all facets of the Company's product development is a key element of the Company's sales and marketing efforts. The Company targets important consumer preferences by integrating its own market research with the input of party goods retailers in the creation of its designs and products. In addition, the sales organization assists customers in the actual set-up and layout of displays of the Company's products, and, from time to time, the Company also provides customers with promotional displays. DISTRIBUTION AND SYSTEMS The Company ships its products from distribution warehouses which employ computer assisted systems. Nonseasonal products are shipped either from California or New York to provide fast delivery of goods to party goods retailers at economical freight costs. In order to better control inventory investment, seasonal products are shipped out of a central warehouse located in New York. Products for foreign markets are shipped from the Company's distribution warehouses in Canada, Mexico, England and Australia. Many of the Company's sales orders are generated electronically through hand-held units with which the sales force and many customers are equipped. Specifically, orders are entered into the hand-held units and then transmitted over telephone lines to the Company's mainframe computer, where they are processed for shipment. This electronic order entry expedites the order processing which in turn improves the Company's ability to fill customer merchandise needs accurately and quickly. CUSTOMERS The Company's customers are principally party goods superstores, independent card and party retailers, mass merchandisers and other distributors. In the aggregate, Amscan supplies more than 20,000 retail outlets both domestically and internationally. The Company is a leading supplier to the party superstore channel, which has been experiencing significant growth. 73 81 REVENUE BREAKDOWN BY RETAIL CHANNEL 1996 REVENUE OF $192.7 MILLION [REVENUE BREAKDOWN PIE CHARTS] The Company has a diverse customer base. Only one customer, Party City, accounted for more than 10% of the Company's sales in 1996. Sales to Party City accounted for 11% and 15% of the Company's sales in 1995 and 1996, respectively. Although the Company believes its relationship with Party City is good, if it were to significantly reduce its volume of purchases from the Company, the Company's financial condition and results of operations could be adversely affected. FUTURE ACQUISITIONS The Company believes that opportunities exist to make acquisitions of complementary businesses to leverage the Company's existing marketing, distribution and production capabilities, expand its presence in various retail channels, further broaden and deepen its product line and penetrate international markets. The Company receives inquiries from time to time with respect to the possible acquisition by the Company of other entities. As of the date of this Prospectus, the Company has not entered into any agreements to acquire other companies or businesses; however, the Company intends to pursue acquisition opportunities aggressively. COMPETITION The Company competes on the basis of diversity and quality of its product designs, breadth of product line, product availability, price, reputation and customer service. The Company has many competitors with respect to one or more of its products but believes that there are few competitors which manufacture and distribute products with the complexity of design and breadth of product offerings that the Company does. Furthermore, the Company believes that its design and manufacturing processes create an efficiency in manufacturing that few of its competitors achieve in the production of numerous coordinated products in multiple design types. Competitors include smaller independent specialty manufacturers, as well as divisions or subsidiaries of large companies with greater financial and other resources than those of the Company. Certain of these competitors control licenses for widely recognized images, such as cartoon or motion picture characters, which could provide them with a competitive advantage. The Company has pursued a strategy of developing its own designs and generally has not pursued licensing opportunities. EMPLOYEES As of September 30, 1997, the Company had approximately 1,100 employees, none of whom is represented by a labor union. The Company considers its relationship with its employees to be good. 74 82 FACILITIES The Company maintains its corporate headquarters in Elmsford, New York and conducts its principal design, manufacturing and distribution operations at the following facilities:
OWNED OR LEASED LOCATION PRINCIPAL ACTIVITY SQUARE FEET (WITH EXPIRATION DATE) - ------------------------- ----------------------------- --------------------- ----------------------------- Elmsford, New York(1) Executive Offices; design and 50,000 square feet Leased (expiration date: art production of paper party December 16, 2007) products and decorations Harriman, New York Manufacture of paper napkins 75,000 square feet Leased (expiration date: and cups March 31, 1999) Providence, Rhode Island Manufacture and distribution 51,000 square feet Leased (expiration date: June of plastic plates, cups and 30, 2008) bowls Louisville, Kentucky Manufacture and distribution 183,000 square feet Leased (expiration date: of paper plates March 31, 1999) Anaheim, California Manufacture of novelty items 25,000 square feet Leased (expiration date: February 28, 1999) Newburgh, New York Manufacture and distribution 167,000 square feet Leased (expiration date: of party products November 30, 1999) Temecula, California(2) Distribution of party 212,000 square feet Leased (expiration date: products and decorations February 28, 2000) Goshen, New York Distribution of party 130,000 square feet Leased (expiration date: products and decorations December 31, 1998) Chester, New York(3) Distribution of party 287,000 square feet Owned products and decorations Montreal, Canada(4) Distribution of party 124,000 square feet Owned products and decorations Milton Keynes, England Distribution of party 110,000 square feet Leased (expiration date: June products and decorations 30, 2017) throughout United Kingdom and Europe Melbourne, Australia Distribution of party 10,000 square feet Owned products and decorations in Australia and Asia
- ------------------ (1) Prior to December 16, 1997, this property was leased by the Company from a limited liability company which is 79%-owned by a trust established for benefit of Mr. Svenningsen's children, 20%-owned by a trust established for the benefit of Mr. Svenningsen's sister's children and 1%-owned by a corporation owned by the Estate. In July 1997, such limited liability company entered into a purchase and sale agreement pursuant to which the Elmsford property was sold on December 16, 1997. See "Management -- Certain Relationships and Related Transactions". (2) Property leased by the Company from the Estate. See "Management -- Certain Relationships and Related Transactions". (3) Property subject to a ten-year mortgage securing a loan in the original principal amount of $5,925,000 bearing interest at a rate of 8.51%. Such loan matures in September 2004. The principal amount outstanding as of September 30, 1997 was approximately $4,147,500. (4) Property subject to a mortgage securing a loan in the original principal amount of $2,088,000 bearing interest at a rate of the lower of Hong Kong Bank of Canada's Cost of Funds plus 1.6% or Canadian Prime plus 0.5%. The principal amount outstanding as of September 30, 1997 was approximately $1,924,000. The Company believes that its properties have been adequately maintained, are in generally good condition and are suitable for the Company's business as presently conducted. The Company believes its existing facilities provide sufficient production capacity for its present needs and for its anticipated needs in the foreseeable future. To the extent such capacity is not needed for the manufacture of the Company's products, the Company generally uses such capacity for the manufacture of products for others pursuant to terminable contracts. All properties generally are used on a basis of two shifts per day. The Company also believes that upon the expiration of its 75 83 current leases, it either will be able to secure renewal terms or enter into leases for alternative locations at market terms. COMPANY ORGANIZATION The business of Amscan Inc. was founded by John Svenningsen and his family in 1947, and in December 1996, the Company completed its initial public offering. Amscan Holdings, Inc. was organized on October 3, 1996 to become the holding company for the businesses previously conducted by the Company's principal subsidiary, Amscan Inc. and certain affiliated companies. These affiliated companies include Trisar, Inc., which manufactures and distributes certain of the Company's products, Amscan Distributors (Canada) Ltd. and Amscan Svenska AB, each of which distributes the Company's products, JCS Realty Corp. and SSY Realty Corp., each of which owns certain real estate leased to the Company, Am-Source, Inc., the Company's supplier of plastic plates, cups and bowls, and certain companies located in Great Britain, Australia, Germany and Mexico which distribute the Company's products. The Company operates in a single industry segment. The principal executive offices of the Company are located at 80 Grasslands Road, Elmsford, New York 10523 and the telephone number at such address is (914) 345-2020. INTELLECTUAL PROPERTY AND LICENSES The Company owns copyrights on the designs created by the Company and used on its products. The Company owns trademarks in the words and designs used on or in connection with its products. It is the practice of the Company to register its copyrights with the United States Copyright Office to the extent it deems reasonable. The Company does not believe that the loss of copyrights or trademarks with respect to any particular product or products would have a material adverse effect on the business of the Company. The Company does not depend on licenses to any material degree in its business and, therefore, does not incur any material licensing expenses. LEGAL PROCEEDINGS Neither the Company nor any of its Subsidiaries is a party to any material pending legal proceedings. A lawsuit relating to the Transaction filed against the Company, MergerCo, GSCP II and certain of the Company's then-directors was voluntarily withdrawn on December 15, 1997. 76 84 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS Set forth below are the names, ages and positions with the Company of the persons who are currently serving as directors and executive officers of the Company.
NAME AGE POSITION - --------------------- ---- ----------------------------------------------------- Terence M. O'Toole 39 Director, Chairman of the Board Sanjeev K. Mehra 38 Director Joseph P. DiSabato 31 Director Gerald C. Rittenberg 45 Chief Executive Officer James M. Harrison 46 President, Chief Financial Officer and Treasurer William S. Wilkey 41 Senior Vice President -- Sales and Marketing
Terence M. O'Toole is a Managing Director of Goldman, Sachs & Co. in the Principal Investment Area. He joined Goldman Sachs in 1983. He is a member of Goldman Sachs' Investment Committee. Mr. O'Toole serves on the Board of Directors of AMF Bowling, Inc., Insilco Corporation, 21st Century Newspapers, Inc., Western Wireless Corporation and several other privately held companies on behalf of Goldman Sachs. He holds a B.S. degree from Villanova University and an M.B.A. from the Stanford Graduate School of Business. Sanjeev K. Mehra is a Managing Director of Goldman, Sachs & Co. in the Principal Investment Area. He joined Goldman Sachs in 1986. He is a Director of the Stone Street and Bridge Street Funds, private equity funds affiliated with Goldman Sachs for the benefit of its employees. Mr. Mehra serves on the Board of Directors of Great Plains Software, Inc. and several other privately held companies on behalf of Goldman Sachs. He holds an A.B. from Harvard University and an M.B.A. from the Harvard Graduate School of Business Administration. Joseph P. DiSabato is an Associate of Goldman, Sachs & Co. in the Principal Investment Area. He joined Goldman Sachs in 1988, worked as a Financial Analyst until 1991, and returned in 1994 as an Associate. He holds a B.S. from the Massachusetts Institute of Technology and an M.B.A. from the Anderson Graduate School of Management. Gerald C. Rittenberg became Chief Executive Officer upon consummation of the Transaction. Prior to that time, Mr. Rittenberg served as the President of the predecessor to the Company, Amscan Inc., since April 1996, and served as President of the Company from the time of its formation in October 1996. From May 1997 until December 1997, Mr. Rittenberg served as Acting Chairman of the Board. From 1991 to April 1996, he was Executive Vice President -- Product Development of Amscan Inc. and from 1990 to 1991 he was Vice President -- Product Development of Amscan Inc. Prior to joining Amscan Inc., Mr. Rittenberg was Senior Vice President of Different Looks, a division of Berwick Industries, Incorporated which manufactures and distributes gift wrap and related products. Previously, Mr. Rittenberg was Director of Operations for the packaging division of Philip Morris Companies Inc. James M. Harrison became President, Chief Financial Officer and Treasurer upon consummation of the Transaction. Prior to that time, Mr. Harrison served as the Chief Financial Officer of the predecessor to the Company, Amscan Inc., since August 1996 and served as Chief Financial Officer and Secretary of the Company since February 1997. From 1993 to 1995, Mr. Harrison was the Executive Vice President, Chief Operating Officer, Secretary, Treasurer and a member of the Board of Directors of The C.R. Gibson Company, a manufacturer and distributor of paper gift products. From 1988 to 1993, Mr. Harrison was the Chief Financial Officer of The C.R. Gibson Company. William S. Wilkey has served as the Senior Vice President -- Sales and Marketing of Amscan Inc. since 1992 and as Vice President -- Marketing and Field Sales from 1990 to 1992. From 1988 to 77 85 1990, Mr. Wilkey was employed by Paper Art, a manufacturer and distributor of party goods (currently called Creative Expressions Group, Inc.), where he served as National Sales Manager. EXECUTIVE COMPENSATION AND RELATED INFORMATION SUMMARY COMPENSATION TABLE The following table sets forth information concerning the compensation earned for the past two years for the Company's former and current Chief Executive Officer and each other executive officer of the Company as of December 31, 1996 whose aggregate salary and bonus for 1996 exceeded $100,000. The amounts shown include compensation for services in all capacities that were provided to the Company or its Subsidiaries. Unless otherwise indicated, amounts shown were paid by the Company's principal Subsidiary, Amscan Inc. Information with respect to Company Common Stock relates to the Company Common Stock prior to the consummation of the Transaction.
LONG TERM COMPENSATION ------------ ANNUAL COMPENSATION SECURITIES ------------------------ UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(A) OPTIONS(B) COMPENSATION(C) - ----------------------------- ---- -------- ---------- ------------ --------------- John A. Svenningsen 1996 $315,609 $ 0(d) $ 5,939 Former CEO and Chairman 1995 289,399 0(d) 10,614 Gerald C. Rittenberg 1996 211,000 2,800,000(e) 1,895 Chief Executive Officer 1995 200,269 1,682,000(e) 4,317 William S. Wilkey 1996 181,000 1,036,000(f) 100,000 21,679 Senior Vice President -- 1995 172,500 757,000(f) 4,317 Sales and Marketing James M. Harrison 1996(g) 62,500 50,000 50,000 0 President, Chief Financial Officer and Treasurer
- --------------- (a) Represents amounts earned with respect to the years indicated, whether paid or accrued. (b) Reflects stock options on shares of Company Common Stock ("Company Stock Options") granted pursuant to the 1996 Stock Option Plan for Key Employees (the "Prior Stock Plan") at an exercise price equal to the fair market value on the date of grant. (c) Represents contributions by the Company under the Profit Sharing & Savings Plan maintained by the Company's principal Subsidiary, Amscan Inc., and under the ESOP, as well as insurance premiums paid by the Company with respect to term life insurance for the benefit of the named executive officer. (d) Prior to the IPO, which was consummated in December 1996, certain entities which are now Subsidiaries of the Company elected to be taxed as S corporations under the Code. Mr. Svenningsen received $11,009,000 and $15,841,000 from such entities in 1995 and 1996, respectively. Such amounts represented distributions to him as an S corporation shareholder and, with respect to 1996, additional distributions of accumulated capital and previously-taxed earnings in conjunction with the IPO. (e) Represents bonuses earned by Mr. Rittenberg pursuant to his prior employment agreement with Amscan Inc. which terminated in December 1996 in connection with the IPO. (f) Represents bonuses earned by Mr. Wilkey pursuant to an employment agreement with Amscan Inc. which expired on December 31, 1996. 78 86 (g) Mr. Harrison became an employee and Chief Financial Officer of Amscan Inc. on August 1, 1996. OPTION GRANTS TABLE The following table sets forth information concerning stock options which were granted during 1996 to the executive officers named in the Summary Compensation Table. The options were granted pursuant to the Prior Stock Plan. Information with respect to options relates to options on the Company Common Stock prior to the consummation of the Transaction. OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE % OF VALUE AT ASSUMED TOTAL OPTIONS ANNUAL RATES OF GRANTED TO STOCK PRICE EMPLOYEES APPRECIATION IN EXPIRATION FOR OPTION TERM OPTIONS FISCAL EXERCISE DATE ---------------------- NAME GRANTED(1) YEAR PRICE OF OPTIONS 5% 10% - ---------------- ---------- ------------- -------- ----------------- -------- ---------- William S. Wilkey........ 100,000 23.5% $ 12 December 19, 2006 $754,673 $1,912,491 James W. Harrison...... 50,000 11.8 12 December 19, 2006 377,337 956,245
(1) All Company Stock Options listed in this column were exercisable ratably over four years beginning one year from the date of grant, and were scheduled to expire ten years after the date of grant. To the extent permitted under the Code, such options were incentive stock options. FISCAL 1996 YEAR END OPTION VALUES
NUMBER OF UNEXERCISED OPTIONS AT FISCAL 1996 YEAR END (EXERCISABLE/ NON-EXERCISABLE) ---------------- William S. Wilkey........................................................ 100,000 James M. Harrison........................................................ 50,000
At December 31, 1996, the market price of the Company Common Stock was $12 per share, an amount equal to the exercise price of each of the Company Stock Options granted to Mr. Wilkey and Mr. Harrison. As a result, none of such Company Stock Options was "in the money" at December 31, 1996. No Company Stock Options were exercised in the most recent fiscal year. At the Effective Time, the Company Stock Options listed in the foregoing table were converted pursuant to the New Employment Arrangements into options on the common stock of the Company following the Transaction and a cash bonus payment. For a description of such conversion and a description of additional options granted to certain employees of the Company in connection with the Transaction, see "-- New Employment Arrangements". NEW EMPLOYMENT ARRANGEMENTS Concurrent with the execution of the Transaction Agreement, MergerCo entered into the New Employment Arrangements with certain employees of the Company relating, for certain of such employees, to their employment with the Company following the Effective Time and relating to their ownership of Company Common Stock and options to purchase shares of Company Common Stock following the Transaction, as more fully described below. At the Effective Time, certain of the 79 87 New Employment Arrangements replaced and superseded former employment agreements for such employees and became obligations of the Company, as the surviving company in the Transaction. Employment Agreement with Gerald C. Rittenberg. Under the Employment Agreement between the Company and Gerald C. Rittenberg, dated as of August 10, 1997 (the "Rittenberg Employment Agreement"), Mr. Rittenberg serves as Chief Executive Officer of the Company for a three-year period commencing at the Effective Time (an "Initial Term"), which term will be extended automatically for successive additional one-year periods (each an "Additional Term"), unless either the Company gives Mr. Rittenberg, or Mr. Rittenberg gives the Company, written notice of the intention not to extend the term no less than twelve months prior to the end of the Initial Term or Additional Term, whichever is then in effect. Mr. Rittenberg will receive during the Initial Term an annual base salary of $295,000 which will be increased by 5% at the beginning of each Additional Term. During Mr. Rittenberg's Initial Term and any Additional Term, Mr. Rittenberg will be eligible for an annual bonus for each calendar year comprised of (i) a non-discretionary bonus equal to 50% of his annual base salary if certain operational and financial targets determined by the Board of Directors in consultation with Mr. Rittenberg are attained, and (ii) a discretionary bonus awarded in the sole discretion of the Board of Directors. The Rittenberg Employment Agreement also provides for other customary benefits including incentive, savings and retirement plans, paid vacation, health care and life insurance plans, and expense reimbursement. Under the Rittenberg Employment Agreement, if Mr. Rittenberg's employment were to be terminated by the Company other than for Cause (as defined below), death or Disability (as defined below), the Company would be obligated to pay Mr. Rittenberg a lump sum cash payment in an amount equal to the sum of (1) accrued unpaid salary, earned but unpaid bonus for any prior year, any deferred compensation and accrued but unpaid vacation pay (collectively, "Accrued Obligations") plus (2) severance pay equal to his annual base salary, provided, however, that in connection with a termination by the Company other than for Cause following a Sale Event (as defined below), such severance pay will be equal to Mr. Rittenberg's annual base salary multiplied by the number of years the Company elects as the Restriction Period (as defined below) in connection with the non-competition provisions. Upon termination of Mr. Rittenberg's employment by the Company for Cause, death, Disability or if he terminates his employment, Mr. Rittenberg will be entitled to his unpaid Accrued Obligations. Additionally, upon termination of Mr. Rittenberg's employment during his Initial Term or any Additional Term (1) by the Company other than for Cause or (2) by reason of his death or Disability, or if the Initial Term or any Additional Term is not renewed at its expiration (other than for Cause), the Rittenberg Employment Agreement provides for payment of a prorated portion of the bonus to which Mr. Rittenberg would otherwise have been entitled. As used in the Rittenberg Employment Agreement: (a) "Cause" means (1) conviction of a felony (excluding felonies under the Motor Vehicle Code referred to therein); (2) any act of intentional fraud against the Company; (3) any act of gross negligence or willful misconduct with respect to Mr. Rittenberg's duties under the Rittenberg Employment Agreement; and (4) any act of willful disobedience in violation of specific reasonable directions of the Board of Directors consistent with Mr. Rittenberg's duties, and (b) "Disability" means that Mr. Rittenberg has been unable, for a period of (i) 180 consecutive days or (ii) an aggregate of 210 days in a period of 365 consecutive days, to perform his duties under the Rittenberg Employment Agreement, as a result of physical or mental illness or injury. The Rittenberg Employment Agreement also provides that during his Initial Term, any Additional Term and during the three-year period following any termination of his employment (the "Restriction Period"), Mr. Rittenberg shall not participate in or permit his name to be used or become associated with any person or entity that is or intends to be engaged in any business which is in competition with the business of the Company, or any of its Subsidiaries or controlled affiliates, in any country in which the Company or any of its Subsidiaries or controlled affiliates operate, compete or are engaged in such business or at such time intend to so operate, compete or become engaged 80 88 in such business (a "Competitor"), provided, however, that if Mr. Rittenberg's employment is terminated by the Company other than for Cause following a Sale Event, the Restriction Period will be instead a one, two or three-year period at the election of the Company. For purposes of the Rittenberg Employment Agreement, "Sale Event" means either (1) the acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) that is a Competitor (as defined in the Rittenberg Employment Agreement), other than GSCP and its affiliates, of a majority of the outstanding voting stock of the Company or (2) the sale or other disposition (other than by way of merger or consolidation) of all or substantially all of the assets of the Company and its Subsidiaries taken as a whole to any person or group of persons that is a Competitor, provided, however, that an underwritten initial public offering of shares of Company Common Stock pursuant to a registration statement under the Securities Act will not constitute a Sale Event. The Rittenberg Employment Agreement also provides for certain other restrictions during the Restriction Period in connection with (a) the solicitation of persons or entities with business relationships with the Company and (b) inducing any employee of the Company to terminate their employment or offering employment to such persons, in each case subject to certain conditions. Pursuant to the Rittenberg Employment Agreement, Mr. Rittenberg contributed to MergerCo immediately prior to the Effective Time, 272,728 shares of Company Common Stock in exchange for 60.0 shares of MergerCo Common Stock, having an aggregate value equal to 272,728 times the Cash Consideration of $16.50 per share, or approximately $4.5 million, which shares of MergerCo Common Stock were valued at the purchase price for which GSCP purchased common shares of MergerCo immediately prior to the Effective Time (the "New Purchase Price"). At the Effective Time, such shares of MergerCo Common Stock were converted into 60.0 shares of Company Common Stock as the surviving company in the Transaction (as converted, the "Rollover Stock"). Also pursuant to the Rittenberg Employment Agreement, following the Effective Time, Mr. Rittenberg was granted options ("New Options") to purchase 16.648 shares of Company Common Stock. The New Options were granted pursuant to a new stock incentive plan and related option agreement (together, the "Option Documents"), which were adopted by the Company following the Effective Time and are more fully described below. Such New Options vest in equal annual installments over a five-year period and are subject to forfeiture upon termination of Mr. Rittenberg's employment if not vested and exercised within certain time periods specified in the Option Documents. Unless sooner exercised or forfeited as provided in the Option Documents, the New Options will expire on the tenth anniversary of the Effective Time. Mr. Rittenberg is not permitted to sell, assign, transfer, pledge or otherwise encumber any New Options, shares of Rollover Stock or shares of Company Common Stock acquired upon exercise of the New Options, except as provided in the Stockholders' Agreement and the Option Documents, and the shares of Rollover Stock and shares of Company Common Stock acquired upon exercise of the New Options are subject to the terms of the Stockholders' Agreement. At the Effective Time, the Rittenberg Employment Agreement replaced and superseded Mr. Rittenberg's former employment agreement with the Company. Employment Agreement with James M. Harrison. Under the Employment Agreement, dated August 10, 1997, by and between the Company and James M. Harrison (the "Harrison Employment Agreement"), Mr. Harrison serves as President of the Company for a three-year Initial Term at an annual base salary of $275,000. The Harrison Employment Agreement contains provisions for Additional Terms, salary increases during any Additional Term, non-discretionary and discretionary bonus payments, severance, other benefits, definitions of Cause and Disability, and provisions for non-competition and non-solicitation similar to those in the Rittenberg Employment Agreement, with the exception of the provision for an election by the Company of a one, two or three-year Restriction Period following a Sale Event; under the Harrison Employment Agreement, the Restriction Period is fixed at three years and severance pay is fixed at one year's annual base salary. In addition, the 81 89 Harrison Employment Agreement provides that Mr. Harrison's bonus for the 1997 calendar year will be equal to the bonus that would have been payable to him in accordance with the relevant terms of his current employment agreement with the Company, without taking into account any incremental financing or transaction costs attributable to the Transaction as determined in good faith by the Board. The Harrison Employment Agreement also provides that Mr. Harrison will receive a bonus payment of $105,000 on March 15, 1998, in addition to any other bonus payable. Pursuant to the Harrison Employment Agreement, following the Effective Time, Mr. Harrison was granted New Options to purchase 13.874 shares of Company Common Stock. Such New Options were granted on terms similar to those granted pursuant to the Rittenberg Employment Agreement. Additionally, under the Harrison Employment Agreement, Mr. Harrison converted, as of the Effective Time, his Company Stock Options to purchase 50,000 shares of Company Common Stock into options ("Rollover Options") to purchase 2.394 shares of Company Common Stock. The Rollover Options have an exercise price per share (the "Rollover Exercise Price") equal to $54,545. Mr. Harrison also received at the Effective Time a cash bonus equal to $176,041 in connection therewith. The Rollover Options were granted pursuant to the Option Documents and on the same terms as the New Options. Pursuant to the Harrison Employment Agreement, Mr. Harrison was granted immediately prior to the Effective Time, 15.0 shares of MergerCo Common Stock (the "Restricted Stock"), having an aggregate value of $1,125,000, based on the New Purchase Price, which shares were converted in the Transaction into 15.0 shares of Company Common Stock. During the Stock Restricted Period (as defined below), the Restricted Stock will be forfeitable and may not be sold, assigned, transferred, pledged or otherwise encumbered by Mr. Harrison. For purposes of the Harrison Employment Agreement, the "Stock Restricted Period" means the period beginning on the date of grant of the Restricted Stock and ending on the earliest of (i) the occurrence of an IPO (as such term is defined in the Stockholders' Agreement); (ii) immediately prior to the consummation of a transaction or series of transactions, approved by the Board of Directors, pursuant to which a person, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act, other than Goldman Sachs or any of its affiliates, acquires a majority of the outstanding voting stock of the Company; and (iii) the termination of Mr. Harrison's employment with the Company, (1) because of his death, (2) by the Company without Cause, (3) by Mr. Harrison because of the Company's material breach of its obligations under the Harrison Employment Agreement, (4) by Mr. Harrison if the Company imposes on him duties or work conditions materially burdensome to him which are inconsistent with his prior duties and work conditions or (5) because of Mr. Harrison's Disability; provided, however, that the Stock Restricted Period ended with respect to 25% of the shares of Restricted Stock on January 1, 1998 and with respect to the remaining 75%, in equal installments on January 1 of each of the years 1999 through 2007. Pursuant to the Harrison Employment Agreement, upon the voluntary or involuntary termination of Mr. Harrison's employment during the Stock Restricted Period for any reason other than a reason listed in clause (iii) of the preceding sentence, all shares of Restricted Stock (with respect to which the Stock Restricted Period has not then ended) will be forfeited and returned to the Company without payment. Mr. Harrison is not permitted to sell, assign, transfer, pledge or otherwise encumber any New Options, Rollover Options, shares of Restricted Stock or shares of Company Common Stock acquired upon exercise of the New Options or Rollover Options (in either case, "Option Shares"), except as provided in the Stockholders' Agreement and the Option Documents, and the shares of Restricted Stock and Option Shares will be subject to the terms of the Stockholders' Agreement. At the Effective Time, the Harrison Employment Agreement replaced and superseded Mr. Harrison's former employment agreement with the Company, dated as of February 1, 1997 (the "Prior Harrison Employment Agreement"). At that time, in consideration and in full satisfaction, and in lieu of the payment of any Bonus (other than as set forth above) or Sale Bonus (as such terms 82 90 are defined in the Prior Harrison Employment Agreement), the Company paid to Mr. Harrison, immediately after the Effective Time, $270,000 in cash. The Harrison Employment Agreement also provides that none of the Transaction or other transactions and arrangements contemplated by the Transaction Agreement, the Stockholders' Agreement, the Voting Agreement and the Harrison Employment Agreement would be or result in or give rise to any change of control or potential change of control under or constitute good reason for Mr. Harrison terminating the Prior Harrison Employment Agreement. Stock and Option Agreement with William S. Wilkey. Pursuant to a Stock and Option Agreement, dated as of August 10, 1997, by and between the Company and William S. Wilkey (the "Wilkey Agreement"), Mr. Wilkey contributed to the Company immediately after the Effective Time $500,000 in cash in exchange for 6.6666667 shares of Company Common Stock ("New Stock") valued at the New Cost Per Share. Mr. Wilkey made payment to the Company for the New Stock immediately after the Effective Time and borrowed the funds for such payment from the Company. Such borrowing is evidenced by a personal full recourse note maturing on March 15, 2001, accruing interest at 6.65%, compounded annually, and payable in annual payments of principal and interest equal to one-quarter of any bonus Mr. Wilkey receives from the Company (provided, that the first such payment will be made from any bonus corresponding to the 1998 calendar year), with any portion of the note remaining at maturity payable at maturity. Mr. Wilkey also entered into a related stock pledge agreement with the Company. Also pursuant to the Wilkey Agreement, following the Effective Time, Mr. Wilkey was granted New Options to purchase 11.654 shares of Company Common Stock. Such New Options were granted on terms similar to those granted pursuant to the Rittenberg Employment Agreement. Additionally, Mr. Wilkey converted, as of the Effective Time, his Company Stock Options to purchase 100,000 shares of Company Common Stock into Rollover Options to purchase 4.787 shares of Company Common Stock. The Rollover Options have a Rollover Exercise Price equal to $54,545. Mr. Wilkey also received at the Effective Time a cash bonus equal to $352,082 in connection therewith. The Rollover Options were granted pursuant to the Option Documents and on the same terms as the New Options. Mr. Wilkey is not be permitted to sell, assign, transfer, pledge or otherwise encumber any New Options, Rollover Options, shares of New Stock or Option Shares, except as provided in the Stockholders' Agreement and the Option Documents, and the shares of New Stock and Option Shares are subject to the terms of the Stockholders' Agreement. The Wilkey Agreement is not intended to, and does not, supersede, amend, modify or replace Mr. Wilkey's employment agreement with the Company, dated as of October 4, 1996 (the "Wilkey Employment Agreement"), which, except for certain provisions thereof relating to option grants under the Prior Stock Plan, which plan was terminated at the Effective Time (and which provisions therefore are no longer operative), will remain in full force and effect. Under the terms of the Wilkey Employment Agreement, which commenced on January 1, 1997, Mr. Wilkey is employed as Senior Vice President -- Sales and Marketing of the Company for a period of five years. Mr. Wilkey received an initial base salary of $200,000 for 1997, which will be increased by 5% each successive year during the term of the agreement. In addition, Mr. Wilkey is entitled to receive an annual bonus which will be determined by a formula which takes into account the amount by which sales and profits are increased on a year to year basis. Mr. Wilkey's agreement also provides that upon termination of employment he may not for a period of three years be employed by, or associated in any manner with, any business which is competitive with the Company. The Wilkey Employment Agreement may be terminated by the Company upon the death or permanent disability of Mr. Wilkey or for "cause". Employment Agreement with Diane D. Spaar. Under the Employment Agreement, dated August 10, 1997, by and between the Company and Diane D. Spaar (the "Spaar Employment 83 91 Agreement"), Ms. Spaar serves as Senior Vice President of Creative Development of the Company for a three-year Initial Term at an annual base salary of $200,000. The Spaar Employment Agreement contains provisions for Additional Terms, salary increases during any Additional Term, non-discretionary and discretionary bonus payments, severance, other benefits, definitions of Cause and Disability, and provisions for non-competition and non-solicitation similar to those in the Harrison Employment Agreement. In addition, the Spaar Employment Agreement provides that Ms. Spaar's bonus for the 1997 calendar year will be equal to the bonus that would have been payable to her in accordance with the relevant terms of her current employment agreement with the Company, without taking into account any incremental financing or transaction costs attributable to the Transaction as determined in good faith by the Board. Pursuant to the Spaar Employment Agreement, Ms. Spaar contributed to the Company immediately after the Effective Time $100,000 in cash in exchange for 1.3333333 shares of New Stock valued at the New Cost Per Share. Ms. Spaar made payment to the Company for the New Stock immediately after the Effective Time and borrowed the funds for such payment from the Company. Such borrowing is evidenced by a personal full recourse note maturing in three years, accruing interest at 6.07%, compounded annually, and payable in 36 equal monthly installments of principal and interest. Ms. Spaar also entered into a related stock pledge agreement with the Company. Pursuant to the Spaar Employment Agreement, following the Effective Time, Ms. Spaar was granted New Options to purchase 9.434 shares of Company Common Stock. Such New Options were granted on terms similar to those granted pursuant to the Rittenberg Employment Agreement. Additionally, Ms. Spaar converted, as of the Effective Time, her Company Stock Options to purchase 50,000 shares of Company Common Stock into Rollover Options to purchase 2.393 shares of Company Common Stock. The Rollover Options have a Rollover Exercise Price equal to $59,659. Ms. Spaar also received at the Effective Time a cash bonus equal to $137,664 in connection therewith. The Rollover Options were granted pursuant to the Option Documents and on the same terms as the New Options. Ms. Spaar is not permitted to sell, assign, transfer, pledge or otherwise encumber any New Options, Rollover Options, shares of New Stock or Option Shares, except as provided in the Stockholders' Agreement and the Option Documents, and the shares of New Stock and Option Shares are subject to the terms of the Stockholders' Agreement. At the Effective Time, the Spaar Employment Agreement replaced and superseded Ms. Spaar's former employment agreement with the Company. The Spaar Employment Agreement also provides that none of the Transaction or other transactions and arrangements contemplated by the Transaction Agreement, the Stockholders' Agreement, the Voting Agreement or the Spaar Employment Agreement would be or result in or give rise to any change of control under or good reason for Ms. Spaar terminating her current employment agreement. Employment Agreement with Katherine A. Kusnierz. Under the Employment Agreement, dated August 10, 1997, by and between the Company and Katherine A. Kusnierz (the "Kusnierz Employment Agreement"), Ms. Kusnierz serves as Vice President of Product Design of the Company for a three-year Initial Term at an annual base salary of $200,000. The Kusnierz Employment Agreement contains provisions for Additional Terms, salary increases during any Additional Term, non-discretionary and discretionary bonus payments, severance, other benefits, definitions of Cause and Disability, and provisions for non-competition and non-solicitation similar to those in the Harrison Employment Agreement. Pursuant to the Kusnierz Employment Agreement, Ms. Kusnierz contributed to the Company immediately after the Effective Time $150,000 in cash in exchange for 2.0 shares of New Stock valued at the New Cost Per Share. Ms. Kusnierz made payment to the Company for the New Stock immediately after the Effective Time and borrowed the funds for such payment from the Company. 84 92 Such borrowing is evidenced by a personal full recourse note maturing in three years, accruing interest at 6.07%, compounded annually, and payable in 36 equal monthly installments of principal and interest. Ms. Kusnierz also entered into a related stock pledge agreement with the Company. Pursuant to the Kusnierz Employment Agreement, following the Effective Time, Ms. Kusnierz was granted New Options to purchase 11.099 shares of Company Common Stock. Such New Options were granted on terms similar to those granted pursuant to the Rittenberg Employment Agreement. Additionally, Ms. Kusnierz converted, as of the Effective Time, her Company Stock Options to purchase 10,000 shares of Company Common Stock into Rollover Options to purchase 0.478 shares of Company Common Stock. The Rollover Options have a Rollover Exercise Price equal to $59,659. Ms. Kusnierz also received at the Effective Time a cash bonus equal to $32,042 in connection therewith. The Rollover Options were granted pursuant to the Option Documents and on the same terms as the New Options. Ms. Kusnierz is not permitted to sell, assign, transfer, pledge or otherwise encumber any New Options, Rollover Options, shares of New Stock or Option Shares, except as provided in the Stockholders' Agreement and the Option Documents, and the shares of New Stock and Option Shares are subject to the terms of the Stockholders' Agreement. Other Employment Matters. The Company has agreed in the Transaction Agreement that, for a period of at least two years from the Effective Time, subject to applicable law, the Company and its Subsidiaries will provide benefits to their employees as a group (and not necessarily on an individual-by-individual or group-by-group basis) that will, in the aggregate, be similar to those currently provided by the Company and its Subsidiaries to their employees. AMSCAN HOLDINGS, INC. 1997 STOCK INCENTIVE PLAN Following consummation of the Transaction, the Company adopted the Amscan Holdings, Inc. 1997 Stock Incentive Plan (the "Stock Incentive Plan") under which the Company may grant incentive awards in the form of shares of Company Common Stock ("Restricted Stock Awards"), options to purchase shares of Company Common Stock ("Company Stock Options") and stock appreciation rights ("Stock Appreciation Rights") to certain directors, officers, employees and consultants ("Participants") of the Company and its affiliates. The total number of shares of Company Common Stock initially reserved and available for grant under the Stock Incentive Plan is 120 shares. A committee of the Company's board of directors (the "Committee"), or the board itself in the absence of a Committee, is authorized to make grants and various other decisions under the Stock Incentive Plan. Unless otherwise determined by the Committee, any Participant granted an award under the Stock Incentive Plan must become a party to, and agree to be bound by, the Stockholders' Agreement. Company Stock Option awards under the Stock Incentive Plan may include incentive stock options, nonqualified stock options, or both types of Company Stock Options, in each case with or without Stock Appreciation Rights. Company Stock Options are nontransferable (except under certain limited circumstances) and, unless otherwise determined by the Committee, have a term of ten years. Upon a Participant's death or when the Participant's employment with the Company or the applicable affiliate of the Company, is terminated for any reason, such Participant's previously unvested Company Stock Options are forfeited and the Participant or his or her legal representative may, within three months (if termination of employment is for any reason other than death) or one year (in the case of the Participant's death), exercise any previously vested Company Stock Options. Stock Appreciation Rights may be granted in conjunction with all or part of any Company Stock Option award, and are exercisable, subject to certain limitations, only in connection with the exercise of the related Company Stock Option. Upon termination or exercise of the related Company Stock Option, Stock Appreciation Rights terminate and are no longer exercisable. Stock Appreciation Rights are transferable only with the related Company Stock Options. 85 93 Unless otherwise provided in the related award agreement or, if applicable, the Stockholders' Agreement, immediately prior to certain change of control transactions described in the Stock Incentive Plan, all outstanding Company Stock Options and Stock Appreciation Rights will, subject to certain limitations, become fully exercisable and vested and any restrictions and deferral limitations applicable to any Restricted Stock Awards will lapse. The Stock Incentive Plan will terminate ten years after its effective date; however, awards outstanding as of such date will not be affected or impaired by such termination. The Company's board of directors and the Committee have authority to amend the Stock Incentive Plan and awards granted thereunder, subject to the terms of the Stock Incentive Plan. COMPENSATION OF DIRECTORS The Company currently does not compensate its directors other than for expense reimbursement. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During 1996, the Company had no compensation committee. During 1996, Mr. Svenningsen, then Chairman of the Board and Chief Executive Officer of the Company, participated in deliberations concerning executive compensation. During 1997, prior to consummation of the Transaction, the members of the Compensation Committee were Messrs. Rosenberry and Tugwell. See "-- Certain Relationships and Related Transactions". Following the consummation of the Transaction, the Company has no compensation committee. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Prior to the Organization and the IPO, Amscan was privately held and its business was conducted through corporations owned principally by Mr. Svenningsen. These corporations entered into a variety of transactions and other arrangements with Mr. Svenningsen and entities under his control, a number of which have already been terminated. The remaining transactions and arrangements are described below. During 1996, the Company leased certain of its facilities from Mr. Svenningsen or from entities that Mr. Svenningsen either owned directly or in which he had a direct or indirect beneficial interest. The Company has paid rent and expenses for those facilities on terms which it believes are at least as favorable to the Company as the terms which would have been available for leases negotiated with unaffiliated persons at the inception of each lease. In March 1996, the Company began leasing approximately 45,000 square feet for the Company's administrative headquarters in an office building of approximately 90,000 square feet in Elmsford, New York. Prior to December 16, 1997, the building was owned by a limited liability company which is 79%-owned by a trust established for the benefit of Mr. Svenningsen's children, 20%-owned by a trust established for the benefit of Mr. Svenningsen's sister's children and 1%-owned by a corporation owned by the Estate. Rent expense relating to this lease was $752,000 for the year ended December 31, 1996. This lease, as amended, provided for annual rent of $1,003,000 and a term which was scheduled to expire on February 28, 2001. In July 1997, the limited liability company that owns the building entered into a purchase and sale agreement pursuant to which the Elmsford property was sold on December 16, 1997. Prior to March 1996, the Company's headquarters had been in a facility owned by Mr. Svenningsen. Rent expense related to that facility was $196,000 for the year ended December 31, 1996. During 1996, the Company leased a 212,000 square foot warehouse in Temecula, California from Mr. Svenningsen. Rent expense related to this warehouse was $1,186,000 for the year ended December 31, 1996. The expiration date of this lease, as amended, is February 28, 2000; however, the Company has options to renew at market rental for two additional five-year periods. 86 94 During 1996, the aggregate rent paid to Mr. Svenningsen or the entities owned directly or indirectly by him was $2,134,000. Future minimum lease payments for 1997, 1998, 1999, 2000 and 2001 are $2,246,000, $2,309,000, $2,374,000, $1,239,000 and $167,000, respectively. The Company and Mr. Svenningsen entered into an agreement pursuant to which the Company agreed to provide Mr. Svenningsen with the right to seek reimbursement from the Company for any income tax obligation attributable to any period prior to the organization of the Company in December 1996 (including any gross-up for additional taxes), but only to the extent that such tax is attributable to income that was not distributed to Mr. Svenningsen. Alternatively, in the event that the status of Amscan Inc. and certain other Subsidiaries of the Company, including Am-Source, Inc., JCS Realty Corp. or SSY Realty Corp. as a S corporation is not respected, the Company was provided the right to seek reimbursement from Mr. Svenningsen, but only to the extent that Mr. Svenningsen is entitled to a tax refund attributable to amounts he previously included in income in his capacity as a stockholder of such corporations. In connection with the Transaction, the Company and the Svenningsen Stockholders have entered into the Tax Indemnification Agreement, pursuant to which the parties have agreed to indemnify one another with respect to certain tax liabilities that may arise in connection with the election by certain Subsidiaries of the Company to have been treated and operated as S corporations under the Code. See "The Transaction -- Tax Indemnification Agreement". During September 1997, the Company entered into an agreement to convert $4.0 million of trade accounts receivable from a customer into an equity interest. The Company subsequently transferred this interest to the Estate for (i) a cash payment of $1.0 million, (ii) satisfaction of approximately $2.0 million of certain debts and future lease obligations owed to the Estate, and (iii) substantially all of the assets of Ya Otta Pinata ("Ya Otta"), a California corporation 100% owned by the Estate, at a valuation of approximately $1.0 million. Ya Otta manufactures pinatas which historically had been sold by the Company's sales force with no commissions charged to Ya Otta. After the Organization, the Company's sales force continued to sell pinatas manufactured by Ya Otta and on any sales after the Organization, the Company receives a 5% sales commission. For the year ended December 31, 1996, sales by Ya Otta were approximately $3,650,000. Nupaq-Group, Inc., a California corporation which is 100% owned by the Estate ("Nupaq"), provides packaging services for the Company's novelty item manufacturing operations. For the year ended December 31, 1996, the Company paid Nupaq approximately $260,000 for such services. During 1996, the Company amended its revolving credit agreement with several banks, including Fleet Bank N.A. ("Fleet"). At the time such credit agreement was entered into, Mr. Tugwell was President and Chief Executive Officer of Fleet. Such revolving credit agreement has since been replaced by a new credit facility. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources". Under the Transaction Agreement, the Company has agreed to indemnify for six years after the Effective Time all former directors, officers, employees and agents of the Company, to the fullest extent currently provided in the Company's Certificate of Incorporation and By-laws consistent with applicable law, for acts or omissions occurring prior to the Effective Time to the extent such acts or omissions are uninsured and will, subject to certain limitations, maintain for six years its prior directors' and officers' liability insurance. Goldman Sachs and its affiliates have certain interests in the Transaction and in the Company in addition to being the Initial Purchaser of the Notes. Messrs. O'Toole and Mehra are Managing Directors of Goldman Sachs, Mr. DiSabato is an Associate of Goldman Sachs and each of them is a director of the Company. GSCP currently owns approximately 81.7% of the outstanding shares of Company Common Stock. Accordingly, the general and managing partners of each of the GSCP Fund Partners (as defined herein), which are affiliates of Goldman Sachs and The Goldman Sachs Group, will each be deemed to be an "affiliate" of GSCP and the Company. See "Ownership of 87 95 Capital Stock". Goldman Sachs received an underwriting discount of approximately $3.3 million in connection with its purchase and resale of the Notes. Goldman Sachs also served as financial advisor to MergerCo in connection with the Transaction and received a fee equal to 1% of the aggregate consideration paid in the Transaction plus reimbursement of certain expenses from MergerCo upon consummation of the Transaction. Goldman Sachs may from time to time receive customary fees for services rendered to the Company. In connection with the Bank Credit Facilities, GS Credit Partners acted as Syndication Agent, Documentation Agent and Arranger, and Fleet is acting as Administrative Agent. Goldman Sachs received a fee of approximately $2.7 million plus reimbursement of certain expenses in connection with such services. 88 96 OWNERSHIP OF CAPITAL STOCK The following table sets forth certain information concerning ownership of shares of Company Common Stock by: (i) persons who are known by the Company to own beneficially more than 5% of the outstanding shares of Company Common Stock; (ii) each director of the Company; (iii) each executive officer of the Company; and (iv) all directors and executive officers of the Company as a group.
SHARES OF COMPANY COMMON STOCK PERCENTAGE BENEFICIALLY OF CLASS NAME OF BENEFICIAL OWNER OWNED OUTSTANDING(A) - -------------------------------------------------------- ----------------- -------------- Gerald C. Rittenberg.................................... 60.0 5.9% James M. Harrison....................................... 15.0 1.5 William S. Wilkey....................................... 6.7 * Katherine A. Kusnierz................................... 2.0 * Diane D. Spaar.......................................... 1.3 * Terence M. O'Toole(b)................................... -- -- Sanjeev K. Mehra(c)..................................... -- -- Joseph P. DiSabato(d)................................... -- -- Estate of John A. Svenningsen........................... 100.0 9.9 c/o Kurzman & Eisenberg LLP One North Broadway, Suite 1004 White Plains, New York 10601 GS Capital Partners II, L.P(e).......................... 825.0 81.7 and other GSCP funds 85 Broad Street New York, New York 10004 All directors and executive officers as group (8 85.0 8.4 persons)..............................................
- --------------- (a) The amounts and percentage of Company Common Stock beneficially owned are reported on the basis of regulations of the Commission governing the determination of beneficial ownership of securities. Under the rules of the Commission, a person is deemed to be a "beneficial owner" of a security if that person has or shares "voting power", which includes the power to vote or to direct the voting of such security, or "investment power", which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days. Under these rules, more than one person may be deemed a beneficial owner of the same securities and a person may be deemed to be a beneficial owner of securities as to which he has no economic interest. The percentage of Company Common Stock outstanding is based on the 1,010 shares of Company Common Stock outstanding as of the date of this Prospectus. (b) Mr. O'Toole, who is a Managing Director of Goldman Sachs, disclaims beneficial ownership of the shares of Company Common Stock that will be owned by GSCP and its affiliates after the Effective Time. (c) Mr. Mehra, who is a Managing Director of Goldman Sachs, disclaims beneficial ownership of the shares of Company Common Stock that will be owned by GSCP and its affiliates after the Effective Time. (d) Mr. DiSabato, who is an Associate of Goldman Sachs, disclaims beneficial ownership of the shares of Company Common Stock that will be owned by GSCP and its affiliates after the Effective Time. 89 97 (e) Of the 825.0 shares of Company Common Stock beneficially owned by GSCP and its affiliates, approximately 517.6 shares are owned by GSCP II, approximately 205.8 shares will be owned by GS Capital Partners II Offshore, L.P., approximately 19.1 shares are owned by Goldman, Sachs & Co. Verwaltungs GmbH as nominee for GS Capital Partners II (Germany) C.L.P., approximately 55.5 shares are owned by Stone Street Fund 1997, L.P. and approximately 27.0 shares are owned by Bridge Street Fund 1997, L.P. Each of the GSCP funds are investment partnerships that are managed by Goldman Sachs or its affiliates, which has full dispositive power with respect to the holdings of such partnerships. * Less than 1% STOCKHOLDERS' AGREEMENT As of the Effective Time, the Company entered into the Stockholders' Agreement with GSCP and the Estate and certain employees of the Company listed as parties thereto (including the Estate, the "Non-GSCP Investors"). The following discussion summarizes the terms of the Stockholders' Agreement which the Company believes are material to an investor in the Notes or the Exchange Notes. This summary is qualified in its entirety by reference to the full text of the Stockholders' Agreement, a copy of which is filed as an exhibit to the Registration Statement of which this Propsectus is a part, and is incorporated by reference herein. The Stockholders' Agreement provides, among other things, for (i) the right of the Non-GSCP Investors to participate in, and the right of GSCP to require the Non-GSCP Investors to participate in, certain sales of Company Common Stock by GSCP, (ii) prior to an initial public offering of the stock of the Company (as defined in the Stockholders' Agreement), certain rights of the Company to purchase, and certain rights of the Non-GSCP Investors (other than the Estate) to require the Company to purchase (except in the case of termination of employment by such Non-GSCP Investors) all, but not less than all, of the shares of Company Common Stock owned by a Non-GSCP Investor (other than the Estate) upon the termination of employment or death of such Non-GSCP Investor, at prices determined in accordance with the Stockholders' Agreement and (iii) certain additional restrictions on the rights of the Non-GSCP Investors to transfer shares of Company Common Stock. The Stockholders' Agreement also contains certain provisions granting GSCP and the Non-GSCP Investors certain rights in connection with registrations of Company Common Stock in certain offerings and provides for indemnification and certain other rights, restrictions and obligations in connection with such registrations. The Stockholders' Agreement will terminate (i) with respect to the rights and obligations of and restrictions on GSCP and the Non-GSCP Investors in connection with certain restrictions on the transfer of shares of Company Common Stock, when GSCP and its affiliates no longer hold at least 40% of the outstanding shares of Company Common Stock, on a fully diluted basis; provided that the Stockholders' Agreement will terminate in such respect in any event if the Company enters into certain transactions resulting in GSCP, its affiliates, the Non-GSCP Investors, and each of their respective permitted transferees, owning less than a majority of the outstanding voting power of the entity surviving such transaction; and (ii) with respect to the registration of Company Common Stock in certain offerings, with certain exceptions, on the earlier of (1) the date on which there are no longer any registrable securities outstanding (as determined under the Stockholders' Agreement) and (2) the twentieth anniversary of the Stockholders' Agreement. 90 98 DESCRIPTION OF SENIOR DEBT In order to fund a portion of the payment of the cash portion of the Transaction Consideration, to refinance certain existing outstanding indebtedness of the Company, to pay transaction costs incurred in connection with the Transaction, and for general corporate purposes the Company issued the Notes and entered into the Revolving Credit Agreement and the AXEL Credit Agreement providing for the Revolving Credit Facility and the Term Loan, respectively, (together, the "Bank Credit Facilities"). The execution of the Bank Credit Facilities, the borrowings necessary to complete the Transaction and the delivery of required documentation thereunder, occurred at the time of closing of the Transaction. The following summary of the material provisions of the Revolving Credit Agreement and the AXEL Credit Agreement does not purport to be complete, and is qualified by reference to the full text of such agreements, which have been filed as exhibits to the Registration Statement of which this Prospectus is a part. The Term Loan will mature seven years after funding and will provide for amortization (in quarterly installments) of one percent of the principal amount thereof per year for the first five years and 32.3% and 62.7% of the principal amount thereof in the sixth and seventh years, respectively. The Term Loan will bear interest, at the option of the Company, at the lenders' customary base rate plus 1.375% per annum or at the lenders' customary reserve adjusted Eurodollar rate plus 2.375% per annum. The Company will be required to make scheduled amortization payments on the Term Loan as follows:
FOR THE YEAR ENDING: AMORTIZATION % AMORTIZED --------------------------------------------------------- ------------ ----------- December 31, 1998........................................ $ 1,170,000 1.0% December 31, 1999........................................ 1,170,000 1.0 December 31, 2000........................................ 1,170,000 1.0 December 31, 2001........................................ 1,170,000 1.0 December 31, 2002........................................ 1,170,000 1.0 December 31, 2003........................................ 37,787,500 32.3 December 31, 2004........................................ 73,362,500 62.7 ------------ ------ Total............................................. $117,000,000 100.0% ============ ======
The Company is obligated to obtain interest rate protection, pursuant to interest rate swaps, caps or other similar arrangements satisfactory to GS Credit Partners, with respect to a notional amount of not less than half of the aggregate amount outstanding under the Term Loan as of the Effective Time, which protection must remain in effect for not less than three years after the Effective Time. In addition, the Company will be required to make prepayments on the Bank Credit Facilities under certain circumstances, including upon certain asset sales and issuance of debt or equity securities, subject to certain exceptions. The Company will also be required to make prepayments on the Bank Credit Facilities in an amount equal to 75% (to be reduced to 50% for any fiscal year in which the Company's Consolidated Leverage Ratio (as defined in the Bank Credit Agreements) is less than 3.75 to 1.0) of the Company's Excess Cash Flow (as defined in the Bank Credit Agreements) for each fiscal year, commencing with the fiscal year ending December 31, 1998. Such mandatory prepayments will be applied to prepay the Term Loan first (on a pro rata basis) and thereafter to prepay the Revolving Credit Facility and to reduce the commitments thereunder. Subject to certain call protection provisions applicable for 18 months from the Effective Time, the Company may prepay, in whole or in part, borrowings under the Term Loan. Call protection provisions also apply to mandatory prepayments of borrowings under the Term Loan except for 91 99 \mandatory prepayments from Excess Cash Flow. The Company may prepay borrowings under or reduce commitments for the Revolving Credit Facility, in whole or in part, without penalty. The Revolving Credit Facility has a term of five years and will bear interest, at the option of the Company, at the lenders' customary base rate plus 1.25% per annum or at the lenders' customary reserve adjusted Eurodollar rate plus 2.25% per annum. Interest on balances out standing under the Revolving Credit Facility are subject to adjustment in the future based on the Company's performance. Amounts drawn on the Revolving Credit Facility for working capital purposes are also subject to an agreed upon borrowing base and periodic reduction of outstanding balances. All borrowings under the Revolving Credit Facility are subject to mandatory prepayments upon the occurrence of certain events as described above. The Bank Credit Facilities are guaranteed by the Guarantors. Subject to certain exceptions, all extensions of credit to the Company and all guarantees are secured by all existing and after-acquired personal property of the Company and the Guarantors, including, subject to certain exceptions, a pledge of all of the stock of all Subsidiaries owned by the Company or any of the Guarantors and first priority liens on after-acquired real property fee and leasehold interests of the Company and the Guarantors. The Bank Credit Facilities contain certain financial covenants, as well as additional affirmative and negative covenants, constraining the Company. The Company must maintain a minimum Consolidated Adjusted EBITDA (as defined in the Bank Credit Agreements) of not less than an amount ranging from $35 million for the four Fiscal Quarter (as defined in the Bank Credit Agreements) period ending March 31, 1998 to $48.5 million for the four Fiscal Quarter period ending December 31, 2002. The Company is required to maintain a Fixed Charge Coverage Ratio (defined in the Bank Credit Agreements as the ratio of (a) Consolidated Adjusted EBITDA to (b) Consolidated Fixed Charges (as defined in the Bank Credit Agreements)) of not less than a ratio of 1.00 to 1.00 for the four-Fiscal Quarter period ending March 31, 1998 to a ratio of 1.20 to 1.00 for the four-Fiscal Quarter period ending December 31, 2002. The Company must not permit the ratio of Consolidated Total Debt (as defined in the Bank Credit Agreements) to Consolidated Adjusted EBITDA on the last day of any four Fiscal Quarter period to exceed a ratio ranging from 6.60 to 1.00 for such period ending March 31, 1998 to 3.70 to 1.00 for such period ending December 31, 2002. Borrowings under the Revolving Credit Facilities are subject to customary affirmative and negative covenants, including but not limited to limitations on other indebtedness, liens, investments, guarantees, restricted junior payments (dividends, redemptions and payments on subordinated debt), mergers and acquisitions, sales of assets, capital expenditures, leases, transactions with affiliates, conduct of business and other provisions customary for financings of this type, including exceptions and baskets. The Revolving Credit Agreement permits business acquisitions in the same line of business as the Company and its Subsidiaries subject to certain restrictions, and permits borrowings thereunder to finance such acquisitions of up to $25 million in the aggregate. As a condition to any such acquisitions in excess of $10 million in the aggregate, the pro forma ratio of total indebtedness to EBITDA at the time of any such acquisition must not exceed a ratio of 5.5:1.0 through the last fiscal quarter of 1999 and lower ratios thereafter decreasing to 3.7:1.0 for the four Fiscal Quarter period ending December 31, 2002. Any such acquisitions in excess of $25 million in the aggregate must be funded from either equity or a combination of equity and subordinated debt or equity and additional term loans in accordance with certain specified ratios. Borrowings under the Revolving Credit Facility are subject to customary events of default (with customary grace periods), including without limitation failure to make payments when due, defaults under other indebtedness, noncompliance with covenants, breach of representations and warranties, bankruptcy, judgments in excess of specified amounts, invalidity of guarantees, impairment of security interests in collateral and "changes of control". 92 100 Borrowings under the Term Loan are subject to affirmative covenants identical to those set forth above with respect to borrowings under the Revolving Credit Facility and negative covenants substantially as set forth in the Notes, including limitations on the incurrence of indebtedness, investments, guarantees, restricted payments (dividends, redemptions and payments on subordinated debt), mergers, sales of assets, transactions with affiliates and other provisions customary for financings of this type. The Term Loan also contains a negative covenant restricting liens similar to the lien covenant in the Revolving Credit Facility. Borrowings under the Term Loan are subject to events of default substantially as set forth in the Notes and the Exchange Notes; provided that there is (i) an immediate default for principal payment defaults, (ii) a three-day grace period for interest payment defaults, (iii) a cross default to the Revolving Credit Facility and other debt with an aggregate principal amount of $5 million or more in the event such default is not cured within twenty business days and (iv) an immediate default if (1) prior to a Qualified Public Offering (as defined in the Bank Credit Agreements), GSCP II and its affiliates cease to own and control 51% or more of the voting power of the Company's securities, (2) after a Qualified Public Offering, a person or group acquires beneficial ownership of the Company's securities representing greater voting power than GSCP II and its affiliates or (3) a Change of Control as defined in the Indenture occurs. The Indenture permits the Bank Credit Agreement to be amended, modified, renewed, refunded, refinanced or replaced (in whole or in part) from time to time. OTHER SENIOR DEBT As of the Effective Time, the Company had approximately $10.8 million in outstanding indebtedness and capital leases outstanding, relating primarily to mortgages of real property. The Company's distribution center in Chester, New York, is subject to a ten-year mortgage securing a loan in the original principal amount of $5,925,000 bearing interest at a rate of 8.51%. Such mortgage loan matures in September 2004. The principal amount outstanding as of September 30, 1997 was approximately $4,147,500. The Company's distribution center in Montreal, Canada is subject to a mortgage securing a loan in the original principal amount of $2,088,000. Such mortgage loan bears interest at a rate of the lower of Hong Kong Bank of Canada's Cost of Funds plus 1.6% or Canadian Prime plus 0.5%. The principal amount outstanding as of September 30, 1997 was approximately $1,924,000. The remaining amounts of indebtedness outstanding relate to capital leases for the Company's machinery and equipment and will be due and payable at scheduled maturities through 2003. The mortgages and capital leases described above are Senior Debt. 93 101 DESCRIPTION OF EXCHANGE NOTES GENERAL The Exchange Notes will be issued by the Company pursuant to the same Indenture (the "Indenture") among the Company, the Guarantors and IBJ Schroder Bank & Trust Company, as trustee (the "Trustee"), under which the Notes were issued. The terms of the Exchange Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (the "Trust Indenture Act"). The Exchange Notes are subject to all such terms, and Holders of Exchange Notes are referred to the Indenture and the Trust Indenture Act for a statement thereof. The discussion below summarizes the terms of the Exchange Notes that the Company believes are material to an investor in the Exchange Notes. This summary does not purport to be complete and is qualified in its entirety by reference to the full text of the agreements underlying this discussion, copies of which are filed as exhibits to the Registration Statement of which this Prospectus is a part, and are incorporated by reference herein. The definitions of certain terms used in the following summary are set forth below under the caption " -- Certain Definitions". On December 19, 1997, the Company issued $110.0 million aggregate principal amount of Notes under the Indenture. The terms of the Exchange Notes are identical in all material respects to the Notes, except for certain transfer restrictions and registration and other rights relating to the exchange of the Notes for Exchange Notes. The Trustee will authenticate and deliver Exchange Notes for original issue only in exchange for a like principal amount of Notes. Any Notes that remain outstanding after the consummation of the Exchange Offer, together with the Exchange Notes, will be treated as a single class of securities under the Indenture. Accordingly, all references herein to specified percentages in aggregate principal amount of the outstanding Exchange Notes shall be deemed to mean, at any time after the Exchange Offer is consummated, such percentage in aggregate principal amount of the Notes and Exchange Notes then outstanding. As of December 19, 1997, all of the Company's Subsidiaries were Restricted Subsidiaries. However, under certain circumstances, the Company will be able to designate current or future Subsidiaries as Unrestricted Subsidiaries. Unrestricted Subsidiaries will not be subject to many of the restrictive covenants set forth in the Indenture. PRINCIPAL, MATURITY AND INTEREST The Exchange Notes are general unsecured obligations of the Company, limited in aggregate principal amount, together with any outstanding Notes, to $200 million, of which $110 million was issued in the Note Offering and, assuming all Holders of Notes exchange their Notes, will be issued in the Exchange Offer. Notes or Exchange Notes issued thereafter ("Additional Notes") may be issued in one or more series from time to time, subject to compliance with the covenants contained in the Indenture, provided, that no Additional Note may be issued at a price that would cause such Additional Note to have "original issue discount" within the meaning of Section 1273 of the Code. Any Additional Notes will have the same terms, including interest rate, maturity and redemption provisions, as the Exchange Notes initially being issued hereunder. The Exchange Notes will mature on December 15, 2007. Interest on the Exchange Notes will accrue at the rate of 9 7/8% per annum and will be payable in cash semi-annually in arrears on June 15 and December 15, commencing on June 15, 1998, to Holders of record on the immediately preceding June 1 and December 1. Interest on the Exchange Notes will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from December 19, 1997, the date of original issuance of the Notes. Interest will be computed on the basis of a 360-day year consisting of twelve 30-day months. Principal, premium, if any, and interest on the Exchange Notes will be payable at the office or agency of the Company maintained for such purpose within the City and State of New York or, at the 94 102 option of the Company, payment of interest may be made by check mailed to the Holders of the Exchange Notes at their respective addresses set forth in the register of Holders of Exchange Notes; provided, however, that all payments with respect to Global Exchange Notes and definitive Exchange Notes the Holders of which have given wire transfer instructions to the Company at least 10 Business Days prior to the applicable payment date will be required to be made by wire transfer of immediately available funds to the accounts specified by the Holders thereof. Until otherwise designated by the Company, the Company's office or agency in New York will be the office of the Trustee maintained for such purpose. The Exchange Notes will be issued in minimum denominations of $1,000 and integral multiples thereof. SETTLEMENT AND PAYMENT Payments by the Company in respect of the Exchange Notes (including principal, premium, if any, and interest) will be made in immediately available funds as provided above. The Exchange Notes are expected to trade in the Depository's settlement system, and any secondary market trading activity will, therefore, be required by the Depository to be settled in immediately available funds. No assurance can be given as to the effect, if any, of such settlement arrangements on trading activity in the Exchange Notes. Because of time-zone differences, the securities account of Euroclear or Cedel Bank participants (each, a "Member Organization") purchasing an interest in a Global Exchange Note from a Participant (as defined herein) that is not a Member Organization will be credited during the securities settlement processing day (which must be a business day for Euroclear or Cedel Bank, as the case may be) immediately following the Depository Trust Company ("DTC") settlement date. Transactions in interests in a Global Exchange Note settled during any securities settlement processing day will be reported to the relevant Member Organization on the same day. Cash received in Euroclear or Cedel Bank as a result of sales of interests in a Global Exchange Note by or through a Member Organization to a Participant that is not a Member Organization will be received with value on the DTC settlement date, but will not be available in the relevant Euroclear or Cedel Bank cash account until the business day following settlement in DTC. SUBORDINATION The Exchange Notes will be unsecured senior subordinated indebtedness of the Company ranking pari passu with all other existing and future senior subordinated indebtedness of the Company. The payment of all Obligations in respect of the Exchange Notes will be subordinated, as set forth in the Indenture, in right of payment to the prior payment in full in cash or Cash Equivalents of all Senior Debt, whether outstanding on the date of the Indenture or thereafter incurred. The Indenture provides that, upon any distribution to creditors of the Company in a liquidation or dissolution of the Company or in a bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to the Company or its property, an assignment for the benefit of creditors or any marshaling of the Company's assets and liabilities, the holders of Senior Debt will be entitled to receive payment in full of all Obligations due in respect of such Senior Debt (including interest after the commencement of any such proceeding at the rate specified in the documents relating to the applicable Senior Debt, whether or not the claim for such interest is allowed as a claim in such proceeding), or provision will be made for payment in cash or Cash Equivalents or otherwise in a manner satisfactory to the holders of such Senior Debt, before the Holders of Exchange Notes will be entitled to receive any Securities Payment (other than payments in Permitted Junior Securities) and until all Obligations with respect to Senior Debt are paid in full, or provision is made for payment in cash or Cash Equivalents or otherwise in a manner satisfactory to the holders of such Senior Debt, any Securities Payment (other than any payments in Permitted Junior Securities) to which the Holders of Exchange Notes would be entitled will be made to the holders of Senior Debt (except that Holders of Exchange Notes may receive payments made from the trust described under " -- Legal Defeasance and Covenant Defeasance"). 95 103 The Indenture also provides that the Company may not make any Securities Payment (other than payments in Permitted Junior Securities) upon or in respect of the Exchange Notes (except from the trust described under " -- Legal Defeasance and Covenant Defeasance") if (i) a default in the payment of the principal of, premium, if any, or interest on Designated Senior Debt occurs and is continuing, or any judicial proceeding is pending to determine whether any such default has occurred, or (ii) any other default occurs and is continuing with respect to Designated Senior Debt that permits, or would permit, with the passage of time or the giving of notice or both, holders of the Designated Senior Debt to which such default relates to accelerate its maturity and the Trustee receives a notice of such default (a "Payment Blockage Notice") from the Company or the holders of any Designated Senior Debt. Securities Payments on the Exchange Notes may and shall be resumed (a) in the case of a payment default on Designated Senior Debt, upon the date on which such default is cured or waived or shall have ceased to exist, unless another default, event of default or other event that would prohibit such payment shall have occurred and be continuing, or all Obligations in respect of such Designated Senior Debt shall have been discharged or paid in full and (b) in case of a nonpayment default, the earlier of the date on which such nonpayment default is cured or waived or 179 days after the date on which the applicable Payment Blockage Notice is received by the Trustee. No new period of payment blockage may be commenced unless and until 360 days have elapsed since the first day of effectiveness of the immediately prior Payment Blockage Notice. No nonpayment default that existed or was continuing on the date of delivery of any Payment Blockage Notice to the Trustee shall be, or be made, the basis for a subsequent Payment Blockage Notice unless such default shall have been subsequently cured or waived for a period of not less than 180 days. In the event that, notwithstanding the foregoing, the Company makes any Securities Payment (other than payments in Permitted Junior Securities) to the Trustee or any Holder of an Exchange Note prohibited by the subordination provisions, then and in such event such Securities Payment will be required to be paid over and delivered forthwith to the holders of Senior Debt. The Indenture further requires that the Company promptly notify holders of Senior Debt if payment of the Exchange Notes is accelerated because of an Event of Default. As a result of the subordination provisions described above, in the event of a liquidation or insolvency of the Company, Holders of Exchange Notes may recover less ratably than creditors of the Company who are holders of Senior Debt. See "Risk Factors". On a pro forma basis, after giving effect to the Transaction and the Transaction Financings and the application of the proceeds therefrom, the principal amount of Senior Debt outstanding at September 30, 1997 would have been approximately $128 million. The Indenture limits, subject to certain financial tests, the amount of additional Indebtedness, including Senior Debt, that the Company and its Restricted Subsidiaries can incur. See "-- Certain Covenants -- Incurrence of Indebtedness and Issuance of Disqualified Stock". "Bank Debt" means all Obligations in respect of the Indebtedness outstanding under the Bank Credit Agreement together with any amendment, modification, renewal, refunding, refinancing or replacement (in whole or part) from time to time of such Indebtedness. "Bank Hedging Obligations" means all present and future Hedging Obligations of the Company, whether existing now or in the future, that are secured by the Bank Credit Agreement (or other agreement evidencing Bank Debt or other Senior Debt) or any of the collateral documents executed from time to time in connection therewith. "Designated Senior Debt" means (i) so long as the Bank Debt is outstanding, the Bank Debt, (ii) the Bank Hedging Obligations and (iii) any Senior Debt permitted under the Indenture the principal amount of which is $15 million or more and that has been designated by the Company as "Designated Senior Debt" and as to which the Trustee has been given written notice of such designation. 96 104 "Permitted Junior Securities" means, with respect to any payment or distribution of any kind, equity securities or subordinated securities of the Company or any successor obligor provided for by a plan of reorganization or readjustment that, in the case of any such subordinated securities, are subordinated in right of payment to all Senior Debt that may at the time be outstanding to at least the same extent as the Exchange Notes are so subordinated as provided in the Indenture. "Securities Payment" means any payment or distribution of any kind, whether in cash, property or securities (including any payment or distribution deliverable by reason of the payment of any other Indebtedness subordinated to the Exchange Notes) on account of the principal of (and premium, if any) or interest on the Exchange Notes or on account of the purchase or redemption or other acquisition of or satisfaction of obligations with respect to Exchange Notes by the Company or any Subsidiary of the Company. "Senior Debt" means (i) the Bank Debt, (ii) the Bank Hedging Obligations and (iii) any other Indebtedness permitted to be incurred by the Company under the terms of the Indenture, unless the instrument under which such Indebtedness is incurred expressly provides that it is on a parity with or subordinated in right of payment to the Exchange Notes. Notwithstanding anything to the contrary in the foregoing, Senior Debt does not include (1) any liability for federal, state, local or other taxes owed or owing by the Company, (2) any Indebtedness of the Company to any of its Restricted Subsidiaries or other Affiliates (other than Goldman, Sachs & Co. and its Affiliates, including Goldman Sachs Credit Partners L.P.), (3) any trade payables, (4) that portion of any Indebtedness that is incurred in violation of the Indenture, (5) Indebtedness which, when incurred and without respect to any election under Section 1111(b) of Title 11, United States Code, is without recourse to the Company, (6) any Indebtedness, Guarantee or obligation of the Company which is contractually subordinate in right of payment to any other Indebtedness, Guarantee or obligation of the Company; provided, however, that this clause (6) does not apply to the subordination of liens or security interests covering particular properties or types of assets securing Senior Debt, (7) Indebtedness evidenced by the Notes or the Exchange Notes and (8) Capital Stock. SENIOR SUBORDINATED GUARANTEES The Company's payment obligations under the Exchange Notes will be jointly and severally guaranteed on a senior subordinated basis (the "Senior Subordinated Guarantees") by each Restricted Subsidiary of the Company (other than a Restricted Subsidiary organized under the laws of a country other than the United States) and each other Subsidiary of the Company that becomes a guarantor under the Bank Credit Agreement. The obligations of each Guarantor under its Senior Subordinated Guarantee will be subordinated to its Guarantee of all Obligations under the Bank Credit Agreement (the "Senior Guarantees") and will be limited so as not to constitute a fraudulent conveyance under applicable law. See, however, "Risk Factors -- Fraudulent Conveyance". The Indenture provides that no Guarantor may consolidate with or merge with or into (whether or not such Guarantor is the surviving Person) another Person whether or not affiliated with such Guarantor unless (i) subject to the provisions of the following paragraph, the Person formed by or surviving any such consolidation or merger (if other than such Guarantor) assumes all the obligations of such Guarantor, pursuant to a supplemental indenture in form and substance reasonably satisfactory to the Trustee, under the Exchange Notes and the Indenture; (ii) immediately after giving effect to such transaction, no Default or Event of Default exists; and (iii) the Company would be permitted by virtue of the Company's pro forma Fixed Charge Coverage Ratio to incur, immediately after giving effect to such transaction, at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the covenant described below under the caption "-- Incurrence of Indebtedness and Issuance of Disqualified Stock". The Indenture provides that the foregoing will not prevent the merger, consolidation or sale of assets between Guarantors or between the Company and any Guarantor. 97 105 The Indenture provides that in the event of a sale or other disposition of all or substantially all of the assets of any Guarantor, by way of merger, consolidation or otherwise, or a sale or other disposition (including, without limitation, by foreclosure) of all of the Capital Stock of any Guarantor, then such Guarantor (in the event of a sale or other disposition, by way of such a merger, consolidation or otherwise (including, without limitation, by foreclosure), of all of the capital stock of such Guarantor) or the Person acquiring the property (in the event of a sale or other disposition of all or substantially all of the assets of such Guarantor) will be automatically released and relieved of any obligations under its Senior Subordinated Guarantee; provided that the Net Proceeds of such sale or other disposition are applied, as and if required, in accordance with the applicable provisions of the Indenture. In addition, if any Guarantor is released and relieved of all obligations it may have as a guarantor under the Bank Credit Agreement, then such Guarantor will also be automatically released and relieved of any obligations under its Senior Subordinated Guarantee. See "-- Repurchase at the Option of Holders -- Asset Sales". Certain of the operations of the Company, including a substantial portion of its operations outside the United States, are conducted through Subsidiaries that are not Guarantors. The Company is dependent upon the cash flow of those Subsidiaries to meet its obligations, including its obligations under the Exchange Notes. The Exchange Notes will be effectively subordinated to all indebtedness and other liabilities (including trade payables and capital lease obligations) of the Company's Subsidiaries that are not Guarantors, which were approximately $3 million (excluding inter-company payables to the Company) at September 30, 1997. Any right of the Company to receive assets of any of such Subsidiaries upon the latter's liquidation or reorganization (and the consequent right of the Holders of the Exchange Notes to participate in those assets) will be effectively subordinated to the claims of such Subsidiary's creditors, except to the extent that the Company or a Guarantor is itself recognized as a creditor of such Subsidiary, in which case the claims of the Company would still be subordinate to any security in the assets of such Subsidiary and any indebtedness of such Subsidiary senior to that held by the Company or a Guarantor. See "Risk Factors -- Holding Company Structure". OPTIONAL REDEMPTION Except as described below, the Exchange Notes are not redeemable at the Company's option prior to December 15, 2002. From and after December 15, 2002, the Exchange Notes will be subject to redemption at the option of the Company, in whole or in part, upon not less than 30 nor more than 60 days' written notice, at the Redemption Prices (expressed as percentages of principal amount) set forth below, plus accrued and unpaid interest thereon to the applicable redemption date, if redeemed during the twelve-month period beginning on December 15 of each of the years indicated below:
PERCENTAGE OF PRINCIPAL YEAR AMOUNT ------------------------------------------------------ ------------- 2002.................................................. 104.937% 2003.................................................. 103.292 2004.................................................. 101.646 2005 and thereafter................................... 100.000
Prior to December 15, 2000, the Company may, at its option, on any one or more occasions, redeem up to 35% of the principal amount of Exchange Notes at a redemption price equal to 109.875% of the principal amount thereof, plus accrued and unpaid interest thereon to the redemption date, with the net proceeds of public or private sales of common stock of, or contributions to the common equity capital of, the Company; provided that at least $65 million in aggregate principal amount of Notes and Exchange Notes (or if Additional Notes have been issued, a correspondingly higher amount) remains outstanding immediately after the occurrence of each 98 106 such redemption; and provided, further, that such redemption shall occur within 120 days of the date of the closing of the related sale of common stock of, or capital contribution to, the Company. In addition, at any time on or prior to December 15, 2002, upon the occurrence of a Change of Control, the Company may redeem the Exchange Notes, in whole but not in part, at a redemption price equal to the principal amount thereof plus the Applicable Premium plus accrued and unpaid interest, if any, to the date of redemption. Notice of redemption of the Exchange Notes pursuant to this paragraph shall be mailed to holders of the Exchange Notes not more than 30 days following the occurrence of a Change of Control. "Applicable Premium" means, with respect to an Exchange Note, the greater of (i) 1.0% of the then outstanding principal amount of such Exchange Note and (ii)(a) the present value of all remaining required interest and principal payments due on such Exchange Note and all premium payments relating thereto assuming a redemption date of December 15, 2002, computed using a discount rate equal to the Treasury Rate plus 50 basis points minus (b) the then outstanding principal amount of such Exchange Note minus (c) accrued interest thereon paid on the redemption date. "Treasury Rate" means the yield to maturity at the time of computation of United States Treasury securities with a constant maturity (as compiled and published in the most recent Federal Reserve Statistical Release H.15(519) which has become publicly available at least two business days prior to the date fixed for redemption (or, if such Statistical Release is no longer published, any publicly available source of similar market data)) most nearly equal to the then remaining term to December 15, 2002; provided, however, that if the then remaining term to December 15, 2002 is not equal to the constant maturity of a United States Treasury security for which a weekly average yield is given, the Treasury Rate shall be obtained by linear interpolation (calculated to the nearest one-twelfth of a year) from the weekly average yields of United States Treasury securities for which such yields are given, except that if the then remaining term to December 15, 2002 is less than one year, the weekly average yield on actually traded United States Treasury securities adjusted to a constant maturity of one year shall be used. SELECTION AND NOTICE If less than all of the Exchange Notes are to be redeemed at any time, selection of such Exchange Notes for redemption will be made by the Trustee in compliance with the requirements of the principal national securities exchange, if any, on which the Exchange Notes are listed, or, if the Exchange Notes are not so listed, on a pro rata basis, by lot or by such method as the Trustee shall deem fair and appropriate; provided that the unredeemed portion of any Exchange Note redeemed in part shall equal $1,000 or an integral multiple thereof. Notices of redemption shall be mailed by first class mail at least 30 but not more than 60 days before the redemption date to each Holder of Exchange Notes to be redeemed at such Holder's registered address. If any Exchange Note is to be redeemed in part only, the notice of redemption that relates to such Exchange Note shall state the portion of the principal amount thereof to be redeemed. A new Exchange Note in principal amount equal to the unredeemed portion thereof will be issued in the name of the Holder thereof upon cancellation of the original Exchange Note. On and after the redemption date, unless the Company defaults in payment of the redemption price, interest ceases to accrue on Exchange Notes or portions of them called for redemption. MANDATORY REDEMPTION; SINKING FUND PAYMENTS Except as set below under "-- Repurchase at the Option of Holders", the Company is not required to make mandatory redemption or sinking fund payments with respect to the Exchange Notes. 99 107 REPURCHASE AT THE OPTION OF HOLDERS CHANGE OF CONTROL Upon the occurrence of a Change of Control, each Holder of Exchange Notes will have the right to require the Company to repurchase all or any part (equal to $1,000 or an integral multiple thereof) of such Holder's Exchange Notes pursuant to the offer described below (the "Change of Control Offer") at an offer price in cash (the "Change of Control Payment") equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest, including Liquidated Damages, if any, thereon to the date of repurchase. Within 30 days following any Change of Control, the Company will mail a notice to each Holder describing the transaction or transactions that constitute the Change of Control and offering to repurchase Exchange Notes pursuant to the procedures required by the Indenture and described in such notice. The Company will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of the Exchange Notes as a result of a Change of Control. On a date that is no earlier than 30 days nor later than 60 days from the date that the Company mails notice of the Change of Control to the Holders (the "Change of Control Payment Date"), the Company will, to the extent lawful, (1) accept for payment all Exchange Notes or portions thereof properly tendered pursuant to the Change of Control Offer, (2) deposit with the Paying Agent an amount equal to the Change of Control Payment in respect of all Exchange Notes or portions thereof so tendered and (3) deliver or cause to be delivered to the Trustee for cancellation the Exchange Notes so accepted together with an Officers' Certificate stating the aggregate principal amount of Exchange Notes or portions there of being purchased by the Company. The Paying Agent will promptly mail to each Holder of Exchange Notes so tendered the Change of Control Payment for such Exchange Notes, and the Trustee will promptly authenticate and mail (or cause to be transferred by book entry) to each Holder a new Exchange Note equal in principal amount to any unpurchased portion of the Exchange Notes surrendered, if any. The Company will publicly announce the results of the Change of Control Offer on or as soon as practicable after the Change of Control Payment Date. The Change of Control provisions described above will be applicable whether or not any other provisions of the Indenture are applicable. Except as described above with respect to a Change of Control, the Indenture does not contain provisions that permit the Holders of the Exchange Notes to require that the Company repurchase or redeem the Exchange Notes in the event of a takeover, recapitalization or similar transaction. Such a transaction could occur, and could have an effect on the Exchange Notes, without constituting a Change of Control. The Company will not be required to make a Change of Control Offer upon a Change of Control if a third party makes the Change of Control Offer in the manner, at the times and otherwise in compliance with the requirements set forth in the Indenture applicable to a Change of Control Offer made by the Company and purchases all Exchange Notes validly tendered and not withdrawn under such Change of Control Offer. The existence of a Holder's right to require the Company to repurchase such Holder's Exchange Notes upon the occurrence of a Change of Control may deter a third party from seeking to acquire the Company in a transaction that would constitute a Change of Control. ASSET SALES The Indenture provides that the Company will not, and will not permit any of its Restricted Subsidiaries to, cause, make or suffer to exist an Asset Sale unless (i) the Company (or the Restricted Subsidiary, as the case may be) receives consideration at the time of such Asset Sale at least equal to the fair market value (evidenced by a resolution of the Board of Directors set forth in an Officers' Certificate delivered to the Trustee) of the assets or Equity Interests issued or sold or 100 108 otherwise disposed of and (ii) at least 80% of the consideration therefor received by the Company or such Restricted Subsidiary is in the form of cash or Cash Equivalents; provided that the amount of (x) any liabilities (as shown on the Company's or such Restricted Subsidiary's most recent balance sheet) of the Company or any Restricted Subsidiary (other than contingent liabilities and liabilities that are by their terms subordinated to the Exchange Notes or any guarantee thereof) that are assumed by the transferee of any such assets pursuant to a customary novation agreement that releases the Company or such Restricted Subsidiary from further liability, (y) any Excludable Current Liabilities, and (z) any notes or other obligations received by the Company or any such Restricted Subsidiary from such transferee that are immediately converted by the Company or such Restricted Subsidiary into cash (to the extent of the cash received), shall be deemed to be cash for purposes of this provision. Within 365 days after the Company's or any Restricted Subsidiary's receipt of the Net Proceeds of any Asset Sale (or in the case of an Asset Sale involving the Specified Real Estate, by the later of (i) June 30, 1999 and (ii) the date 365 days after receipt of such Net Proceeds) the Company or such Restricted Subsidiary may apply the Net Proceeds from such Asset Sale, at its option, (i) to permanently repay or reduce Obligations under the Bank Credit Agreement (and to correspondingly reduce commitments with respect thereto) or other Senior Debt, (ii) to secure Letter of Credit Obligations to the extent related letters of credit have not been drawn or been returned undrawn, and/or (iii) to an investment in any one or more businesses, capital expenditures or acquisitions of other assets, in each case, used or useful in a Principal Business; provided, that such Net Proceeds may, at the Company's option, be deemed to have been applied pursuant to this clause (iii) to the extent of any expenditures by the Company made to invest in, acquire or construct businesses, properties or assets used in a Principal Business within one year preceding the date of such Asset Sale. Pending the final application of any such Net Proceeds, the Company or such Restricted Subsidiary may temporarily reduce Indebtedness under a revolving credit facility, if any, or otherwise invest such Net Proceeds in Cash Equivalents. The Indenture provides that any Net Proceeds from the Asset Sale that are not used as provided and within the time period set forth in the first sentence of this paragraph will be deemed to constitute "Excess Proceeds". When the aggregate amount of Excess Proceeds exceeds $15 million, the Company will be required to make offers to all Holders of Exchange Notes and to the holders of any other Senior Subordinated Indebtedness the terms of which so require (each an "Asset Sale Offer") to purchase the maximum principal amount of Exchange Notes and such other Senior Subordinated Indebtedness, that is an integral multiple of $1,000, that may be purchased out of the Excess Proceeds at an offer price in cash in an amount equal to 100% of the aggregate principal amount thereof (or 100% of the accreted value thereof, in case of Senior Subordinated Indebtedness issued at a discount), plus accrued and unpaid interest thereon to the date fixed for the closing of such offer, in accordance with the procedures set forth in the Indenture. The Excess Proceeds shall be allocated to the respective Asset Sale Offers for the Exchange Notes and such other Senior Subordinated Indebtedness in proportion to their relative principal amounts (or accreted value, as applicable). The Indenture provides that the Company may, in lieu of making an Asset Sale Offer for other Senior Subordinated Indebtedness, satisfy its obligation under the governing agreement with respect thereto by applying the Excess Proceeds allocated thereto to the prepayment, redemption or public or private repurchase of such Senior Subordinated Indebtedness. The Company will commence any required Asset Sale Offer with respect to Excess Proceeds within ten Business Days after the date that the aggregate amount of Excess Proceeds exceeds $15 million by mailing the notice required pursuant to the terms of the Indenture, with a copy to the Trustee. To the extent that the aggregate amount of Exchange Notes (and such other Senior Subordinated Indebtedness) tendered pursuant to any required Asset Sale Offer is less than the Excess Proceeds allocated thereto, the Company may use any remaining Excess Proceeds (x) to offer to redeem or purchase other Senior Subordinated Indebtedness or Subordinated Indebtedness (a "Subordinated Asset Sale Offer") in accordance with the provisions of the indenture or other 101 109 agreement governing such other Senior Subordinated Indebtedness or Subordinated Indebtedness or (y) for any other purpose not prohibited by the Indenture. If the aggregate principal amount of Exchange Notes tendered pursuant to any Asset Sale Offer exceeds the amount of Excess Proceeds allocated thereto, the Exchange Notes so tendered shall be purchased on a pro rata basis, based upon the principal amount tendered. Upon completion of any such Asset Sale Offer, the amount of Excess Proceeds shall be reset at zero. The Company will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of the Notes and Exchange Notes as a result of an Asset Sale. The Bank Credit Agreement prohibits the Company from purchasing any Exchange Notes, and also provides that certain change of control events with respect to the Company will constitute a default thereunder. Any future credit agreements or other agreements relating to Senior Debt to which the Company becomes a party may contain similar restrictions and provisions. In the event a Change of Control occurs or an Asset Sale Offer is required to be made at a time when the Company is prohibited from purchasing Exchange Notes, the Company could seek the consent of its lenders to the purchase of Exchange Notes or could attempt to refinance the borrowings that contain such prohibition. If the Company does not obtain such a consent or repay such borrowings, the Company will remain prohibited from purchasing Exchange Notes. In such case, while the Company's failure to purchase tendered Exchange Notes would constitute an Event of Default under the Indenture, the subordination provisions of the Indenture would likely have the practical effect of restricting payments to the Holders of the Exchange Notes. CERTAIN COVENANTS RESTRICTED PAYMENTS The Indenture provides that the Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay any dividend or make any other payment or distribution on account of the Company's or any of its Restricted Subsidiaries' Equity Interests (other than dividends or distributions payable in Equity Interests (other than Disqualified Stock) of the Company or dividends or distributions payable to the Company or any Restricted Subsidiary of the Company); (ii) purchase, redeem, defease or otherwise acquire or retire for value any Equity Interests of the Company; (iii) make any payment on or with respect to, or purchase, redeem, defease or otherwise acquire or retire for value any Subordinated Indebtedness, except for a payment of principal or interest at Stated Maturity; or (iv) make any Restricted Investment (all such payments and other actions set forth in clauses (i) through (iv) above being collectively referred to as "Restricted Payments"), unless, at the time of and after giving effect to such Restricted Payment: (a) no Default or Event of Default shall have occurred and be continuing or would occur as a consequence thereof; (b) the Company would, at the time of such Restricted Payment and immediately after giving pro forma effect thereto as if such Restricted Payment had been made at the beginning of the applicable four-quarter period, have been permitted to incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of the covenant described below under the caption "-- Incurrence of Indebtedness and Issuance of Disqualified Stock"; and (c) such Restricted Payment, together with the aggregate of all other Restricted Payments made by the Company and its Restricted Subsidiaries after the date of the Indenture (including Restricted Payments permitted by clause (i) of the next succeeding paragraph, but excluding all other Restricted Payments permitted by the next succeeding paragraph), is less than the 102 110 sum of (i) 50% of the Consolidated Net Income of the Company for the period (taken as one accounting period) from the beginning of the first fiscal quarter commencing after the date of the Indenture to the end of the Company's most recently ended fiscal quarter for which internal financial statements are available at the time of such Restricted Payment (or, if such Consolidated Net Income for such period is a deficit, less 100% of such deficit), plus (ii) 100% of the aggregate net cash proceeds and the fair market value, as determined in good faith by the Board of Directors, of marketable securities received by the Company from the issue or sale since the date of the Indenture of Equity Interests (including Retired Capital Stock (as defined below)) of the Company or of debt securities of the Company that have been converted into such Equity Interests (other than Refunding Capital Stock (as defined below) or Equity Interests or convertible debt securities of the Company sold to a Restricted Subsidiary of the Company and other than Disqualified Stock or debt securities that have been converted into Disqualified Stock), plus (iii) 100% of the aggregate amounts contributed to the common equity capital of the Company since the date of the Indenture, plus (iv) 100% of the aggregate amounts received in cash and the fair market value of marketable securities (other than Restricted Investments) received from (x) the sale or other disposition of Restricted Investments made by the Company and its Restricted Subsidiaries since the date of the Indenture or (y) the sale of the stock of an Unrestricted Subsidiary or the sale of all or substantially all of the assets of an Unrestricted Subsidiary to the extent that a liquidating dividend is paid to the Company or any Subsidiary from the proceeds of such sale, plus (v) 100% of any dividends received by the Company or a Wholly Owned Restricted Subsidiary of the Company after the date of the Indenture from an Unrestricted Subsidiary of the Company, plus (vi) $10 million. The foregoing provisions will not prohibit: (i) the payment of any dividend within 60 days after the date of declaration thereof, if at the date of declaration such payment would have complied with the provisions of the Indenture; (ii) the redemption, repurchase, retirement or other acquisition of any Equity Interests of the Company or any Restricted Subsidiary (the "Retired Capital Stock") or any Subordinated Indebtedness, in each case, in exchange for, or out of the proceeds of, the substantially concurrent sale (other than to a Restricted Subsidiary of the Company) of Equity Interests of the Company (other than any Disqualified Stock) (the "Refunding Capital Stock"); (iii) the defeasance, redemption or repurchase of Subordinated Indebtedness with the net cash proceeds from an incurrence of Permitted Refinancing Indebtedness; (iv) the redemption, repurchase or other acquisition or retirement for value of any Equity Interests of the Company or any Restricted Subsidiary of the Company held by any member of the Company's (or any of its Subsidiaries') management pursuant to any management equity subscription agreement or stock option or similar agreement; provided that the aggregate price paid for all such repurchased, redeemed, acquired or retired Equity Interests shall not exceed the sum of $5 million in any twelve-month period plus the aggregate cash proceeds received by the Company during such twelve-month period from any issuance of Equity Interests by the Company to members of management of the Company and its Subsidiaries; provided that the amount of any such net cash proceeds that are utilized for any such redemption, repurchase, retirement or other acquisition shall be excluded from clause (c)(ii) of the immediately preceding paragraph; (v) Investments in Unrestricted Subsidiaries or in Joint Ventures having an aggregate fair market value, taken together with all other Investments made pursuant to this clause (v) that are at that time outstanding, not to exceed $15 million plus 5% of the increase in Total Assets since the Closing Date (as defined herein) at the time of such Investment (with the fair market value of each Investment being measured at the time made and without giving effect to subsequent changes in value); 103 111 (vi) repurchases of Equity Interests deemed to occur upon exercise or conversion of stock options, warrants, convertible securities or other similar Equity Interests if such Equity Interests represent a portion of the exercise or conversion price of such options, warrants, convertible securities or other similar Equity Interests; (vii) the making and consummation of a Subordinated Asset Sale Offer in accordance with the provisions described under the caption entitled "-- Repurchase at the Option of Holders -- Asset Sales"; and (viii) any dividend or distribution payable on or in respect of any class of Equity Interests issued by a Restricted Subsidiary of the Company; provided that such dividend or distribution is paid on a pro rata basis to all of the holders of such Equity Interests in accordance with their respective holdings of such Equity Interests; provided, further, that at the time of, and after giving effect to, any Restricted Payment permitted under clauses (iv), (v) or (vii) above, no Default or Event of Default shall have occurred and be continuing or would occur as a consequence thereof. As of December 19, 1997, all of the Company's Subsidiaries were Restricted Subsidiaries. The Company will not permit any Unrestricted Subsidiary to become a Restricted Subsidiary except pursuant to the last sentence of the definition of "Unrestricted Subsidiary". For purposes of designating any Restricted Subsidiary as an Unrestricted Subsidiary, all outstanding Investments by the Company and its Restricted Subsidiaries (except to the extent repaid) in the Subsidiary so designated will be deemed to be Restricted Payments in an amount equal to the book value of such Investment at the time of such designation. Such designation will only be permitted if a Restricted Payment in such amount would be permitted at such time and if such Subsidiary otherwise meets the definition of an Unrestricted Subsidiary. Unrestricted Subsidiaries will not be subject to any of the restrictive covenants set forth in the Indenture. The amount of all Restricted Payments (other than cash) shall be the fair market value (evidenced by a resolution of the Board of Directors set forth in an Officers' Certificate delivered to the Trustee) on the date of the Restricted Payment of the asset(s) proposed to be transferred by the Company or such Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment. Not later than the date of making any Restricted Payment, the Company shall deliver to the Trustee an Officers' Certificate stating that such Restricted Payment is permitted and setting forth the basis upon which the calculations required by the covenant "Restricted Payments" were computed, which calculations may be based upon the Company's latest available financial statements. INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF DISQUALIFIED STOCK The Indenture provides that the Company will not, and will not permit any of its Subsidiaries to, directly or indirectly, create, incur, issue, assume, guaranty or otherwise become directly or indirectly liable, contingently or otherwise, with respect to (collectively, "incur" and correlatively, an "incurrence" of) any Indebtedness (including Acquired Debt) and that the Company will not issue any Disqualified Stock; provided, however, that the Company may incur Indebtedness (including Acquired Debt) or issue shares of Disqualified Stock if the Fixed Charge Coverage Ratio for the Company for the most recent four full fiscal quarters for which internal financial statements are available at the time of such incurrence would have been at least 2.00 to 1.0, determined on a pro forma basis (including a pro forma application of the net proceeds therefrom), as if the additional Indebtedness had been incurred or the Disqualified Stock had been issued, as the case may be, and the application of the proceeds therefrom had occurred at the beginning of such four-quarter period. 104 112 The foregoing provisions will not apply to: (a) the incurrence by the Company (and the Guarantee thereof by the Guarantors) of Indebtedness under the Bank Credit Agreement and the issuance of letters of credit thereunder (with letters of credit being deemed to have a principal amount equal to the aggregate maximum amount then available to be drawn thereunder, assuming compliance with all conditions for drawing) up to an aggregate principal amount of $167 million outstanding at any one time, less principal repayments of term loans and permanent commitment reductions with respect to revolving loans and letters of credit under the Bank Credit Agreement (in each case, other than in connection with an amendment, refinancing, refunding, replacement, renewal or modification) made after the date of the Indenture; (b) the incurrence by the Company or any of its Restricted Subsidiaries of any Existing Indebtedness; (c) the incurrence by the Company or any of its Restricted Subsidiaries of Indebtedness represented by the Notes and the Exchange Notes (other than any Additional Notes); (d) Indebtedness (including Acquired Debt) incurred by the Company or any of its Restricted Subsidiaries to finance the purchase, lease or improvement of property (real or personal), assets or equipment (whether through the direct purchase of assets or the Capital Stock of any Person owning such assets), in an aggregate principal amount not to exceed $15 million plus 5% of the increase in Total Assets since the Closing Date; (e) Indebtedness incurred by the Company or any of its Restricted Subsidiaries constituting reimbursement obligations with respect to letters of credit issued in the ordinary course of business, including, without limitation, letters of credit in respect of workers' compensation claims or self-insurance, or other Indebtedness with respect to reimbursement type obligations regarding workers' compensation claims; (f) intercompany Indebtedness between or among the Company and any of its Restricted Subsidiaries and Guarantees by the Company of Indebtedness of any Restricted Subsidiary of the Company or by a Restricted Subsidiary of the Company of Indebtedness of any other Restricted Subsidiary of the Company or the Company; (g) Hedging Obligations that are incurred (1) for the purpose of fixing or hedging interest rate or currency exchange rate risk with respect to any Indebtedness that is permitted by the terms of the Indenture to be outstanding or (2) for the purpose of fixing or hedging currency exchange rate risk with respect to any purchases or sales of goods or other transactions or expenditures made or to be made in the ordinary course of business and consistent with past practices as to which the payment therefor or proceeds therefrom, as the case may be, are denominated in a currency other than U.S. dollars; (h) obligations in respect of performance and surety bonds and completion guarantees provided by the Company or any Restricted Subsidiary in the ordinary course of business; (i) the incurrence by the Company or any of its Restricted Subsidiaries of Permitted Refinancing Indebtedness in exchange for, or the net proceeds of which are used to extend, refinance, renew, replace, defease or refund, Indebtedness that was permitted by the Indenture to be incurred; (j) the incurrence by the Company's Unrestricted Subsidiaries of Non-Recourse Debt, provided, however, that if any such Indebtedness ceases to be Non-Recourse Debt of an Unrestricted Subsidiary, such event shall be deemed to constitute an incurrence of Indebtedness by a Restricted Subsidiary of the Company; and (k) the incurrence by the Company of additional Indebtedness (including pursuant to the Bank Credit Agreement) not otherwise permitted hereunder in an amount under this clause (k) 105 113 not to exceed $25 million in aggregate principal amount (or accreted value, as applicable) outstanding at any one time. For purposes of calculating the Fixed Charge Coverage Ratio, the Indenture permits, among other things, the Company to give pro forma effect to acquisitions, and the cost savings expected to be realized in connection with such acquisitions, that have occurred or are occurring since the beginning of the applicable four-quarter reference period (or during the immediately preceding four quarters). These adjustments and the other adjustments permitted under the definition of Fixed Charge Coverage Ratio will be in addition to the pro forma adjustments permitted to be included in pro forma financial statements prepared in accordance with GAAP or Article 11 of Regulation S-X under the Exchange Act. ANTI-LAYERING PROVISION The Indenture provides that (i) the Company will not directly or indirectly incur, create, issue, assume, guarantee or otherwise become liable for any Indebtedness that is subordinate or junior in right of payment to any Senior Debt and senior in any respect in right of payment to the Exchange Notes and (ii) no Guarantor will directly or indirectly incur, create, issue, assume, guarantee or otherwise become liable for any Indebtedness that is subordinate or junior in right of payment to the Senior Guarantees and senior in any respect in right of payment to the Senior Subordinated Guarantees. Except for the limitations on the incurrence of debt described above under the caption "-- Incurrence of Indebtedness and Issuance of Disqualified Stock," the Indenture does not limit the amount of debt that is pari passu with the Exchange Notes. LIENS The Indenture provides that the Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create, incur, assume or suffer to exist any Lien that secures obligations under any Senior Subordinated Indebtedness or Subordinated Indebtedness on any asset or property now owned or hereafter acquired by the Company or any of its Restricted Subsidiaries, or on any income or profits therefrom, or assign or convey any right to receive income therefrom to secure any Senior Subordinated Indebtedness or Subordinated Indebtedness, unless the Exchange Notes are equally and ratably secured with the obligations so secured or until such time as such obligations are no longer secured by a Lien; provided, that in any case involving a Lien securing Subordinated Indebtedness, such Lien is subordinated to the Lien securing the Exchange Notes to the same extent that such Subordinated Indebtedness is subordinated to the Exchange Notes. DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES The Indenture provides that the Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any encumbrance or restriction on the ability of any Restricted Subsidiary to (i) (a) pay dividends or make any other distributions to the Company or any of its Restricted Subsidiaries (1) on its Capital Stock or (2) with respect to any other interest or participation in, or measured by, its profits, or (b) pay any indebtedness owed to the Company or any of its Restricted Subsidiaries, (ii) make loans or advances to the Company or any of its Restricted Subsidiaries or (iii) sell, lease or transfer any of its properties or assets to the Company or any of its Restricted Subsidiaries, except for such encumbrances or restrictions existing under or by reason of (a) Existing Indebtedness as in effect on the date of the Indenture, (b) the Bank Credit Agreement and any amendments, modifications, restatements, renewals, increases, supplements, refundings, replacements or refinancings thereof, provided that the Bank Credit Agreement and any amendments, modifications, restatements, renewals, increases, supplements, refundings, replacements or refinancings thereof are no more 106 114 restrictive taken as a whole with respect to such dividend and other payment restrictions than those terms included in the Bank Credit Agreement on the date of the Indenture, (c) the Indenture and the Exchange Notes, (d) applicable law, (e) any instrument governing Indebtedness or Capital Stock of a Person acquired by the Company or any of its Restricted Subsidiaries as in effect at the time of such acquisition (except to the extent such Indebtedness was incurred in connection with or in contemplation of such acquisition), which encumbrance or restriction is not applicable to any Person, or the properties or assets of any Person, other than the Person, or the property or assets of the Person, so acquired, provided that, in the case of Indebtedness, such Indebtedness was permitted by the terms of the Indenture to be incurred, (f) customary non-assignment or net worth provisions in leases and other agreements entered into in the ordinary course of business and consistent with past practices, (g) purchase money obligations for property acquired in the ordinary course of business that impose restrictions of the nature described in clause (iii) above on the property so acquired, (h) Permitted Refinancing Indebtedness, provided that the restrictions contained in the agreements governing such Permitted Refinancing Indebtedness are no more restrictive than those contained in the agreements governing the Indebtedness being refinanced, (i) any Mortgage Financing or Mortgage Refinancing that imposes restrictions on the real property securing such Indebtedness, (j) any Permitted Investment, (k) contracts for the sale of assets, including, without limitation customary restrictions with respect to a Restricted Subsidiary of the Company pursuant to an agreement that has been entered into for the sale or disposition of all or substantially all of the Capital Stock or assets of such Restricted Subsidiary or (l) customary provisions in joint venture agreements and other similar agreements. MERGER, CONSOLIDATION, OR SALE OF ALL OR SUBSTANTIALLY ALL ASSETS The Indenture provides that the Company may not consolidate or merge with or into (whether or not the Company is the surviving corporation), or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its properties or assets in one or more related transactions to, another Person unless (i) the Company is the surviving corporation or the Person formed by or surviving any such consolidation or merger (if other than the Company) or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made is a corporation organized or existing under the laws of the United States, any state thereof or the District of Columbia; (ii) the Person formed by or surviving any such consolidation or merger (if other than the Company) or Person to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made assumes all the obligations of the Company under the Exchange Notes and the Indenture pursuant to a supplemental Indenture in form reasonably satisfactory to the Trustee; (iii) immediately after such transaction no Default or Event of Default exists; and (iv) except in the case of a merger of the Company with or into a Wholly Owned Restricted Subsidiary of the Company, the Company or the Person formed by or surviving any such consolidation or merger (if other than the Company), or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made will, at the time of such transaction and after giving pro forma effect thereto as if such transaction had occurred at the beginning of the applicable four-quarter period, be permitted to incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of the covenant described above under the caption "-- Incurrence of Indebtedness and Issuance of Disqualified Stock". Notwithstanding the foregoing clauses (iii) and (iv), (a) any Restricted Subsidiary may consolidate with, merge into or transfer all or part of its properties and assets to the Company and (b) the Company may merge with an Affiliate incorporated solely for the purpose of reincorporating the Company in another jurisdiction. TRANSACTIONS WITH AFFILIATES The Indenture provides that the Company will not, and will not permit any of its Restricted Subsidiaries to, make any payment to, or sell, lease, transfer or otherwise dispose of any of its properties or assets to, or purchase any property or assets from, or enter into or make or amend 107 115 any contract, agreement, understanding, loan, advance or guarantee with, or for the benefit of, any Affiliate (each of the foregoing, an "Affiliate Transaction"), unless (i) such Affiliate Transaction is on terms that are no less favorable to the Company or the relevant Restricted Subsidiary than those that would have been obtained in a comparable transaction by the Company or such Restricted Subsidiary with an unrelated Person and (ii) the Company delivers to the Trustee (a) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $5 million, a resolution of the Board of Directors set forth in an Officers' Certificate certifying that such Affiliate Transaction complies with clause (i) above and (if there are any disinterested members of the Board of Directors) that such Affiliate Transaction has been approved by a majority of the disinterested members of the Board of Directors and (b) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $10 million, or with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $5 million as to which there are no disinterested members of the Board of Directors, an opinion as to the fairness to the Holders of such Affiliate Transaction from a financial point of view issued by an accounting, appraisal or investment banking firm of national standing. The foregoing provisions will not apply to the following: (i) transactions between or among the Company and/or any of its Restricted Subsidiaries; (ii) Restricted Payments or Permitted Investments permitted by the provisions of the Indenture described above under "-- Restricted Payments"; (iii) the payment of all fees, expenses and other amounts relating to the Transaction; (iv) the payment of reasonable and customary regular fees to, and indemnity provided on behalf of, officers, directors, employees or consultants of the Company or any Restricted Subsidiary of the Company; (v) the transfer or provision of inventory, goods or services by the Company or any Restricted Subsidiary of the Company in the ordinary course of business to any Affiliate of the Company on terms that are customary in the industry or consistent with past practices, including with respect to price and volume discounts; (vi) the execution of, or the performance by the Company or any of its Restricted Subsidiaries of its obligations under the terms of, any financial advisory, financing, underwriting or placement agreement or any other agreement relating to investment banking or financing activities with Goldman, Sachs & Co. or any of its Affiliates including, without limitation, in connection with acquisitions or divestitures, in each case to the extent that such agreement was approved by a majority of the disinterested members of the Board of Directors in good faith; (vii) payments, advances or loans to employees that are approved by a majority of the disinterested members of the Board of Directors of the Company in good faith; (viii) the performance of any agreement as in effect as of the date of the Indenture or any transaction contemplated thereby (including pursuant to any amendment thereto so long as any such amendment is not disadvantageous to the Holders of the Exchange Notes in any material respect); (ix) the existence of, or the performance by the Company or any of its Restricted Subsidiaries of its obligations under the terms of, any stockholders agreement (including any registration rights agreement or purchase agreement related thereto) to which it is a party as of the date of the Indenture and any similar agreements which it may enter into thereafter, provided, however, that the existence of, or the performance by the Company or any of its Restricted Subsidiaries of obligations under, any future amendment to any such existing agreement or under any similar agreement entered into after the date of the Indenture shall only be permitted by this clause (ix) to the extent that the terms of any such amendment or new agreement are not otherwise disadvantageous to the Holders of the Exchange Notes in any material respect; (x) transactions permitted by, and complying with, the provisions of the covenant described under "-- Merger, Consolidation, or Sale of All or Substantially All Assets"; and (xi) transactions with suppliers or other purchases or sales of goods or services, in each case in the ordinary course of business (including, without limitation, pursuant to joint venture agreements) and otherwise in compliance with the terms of the Indenture which are fair to the Company or its Restricted Subsidiaries, in the reasonable determination of a majority of the disinterested members of the Board of Directors of the 108 116 Company or an executive officer thereof, or are on terms at least as favorable as might reasonably have been obtained at such time from an unaffiliated party. ISSUANCES OF GUARANTEES OF INDEBTEDNESS The Indenture provides that the Company will not permit any Restricted Subsidiary, directly or indirectly, to Guarantee or pledge any assets to secure the payment of any other Indebtedness unless such Restricted Subsidiary either (i) is a Guarantor, or (ii) simultaneously executes and delivers a supplemental indenture to the Indenture providing for the Guarantee of the payment of all Obligations with respect to the Exchange Notes by such Restricted Subsidiary, which Guarantee shall be senior to such Restricted Subsidiary's Guarantee of or pledge to secure any other Indebtedness that constitutes Subordinated Indebtedness and subordinated to such Restricted Subsidiary's Guarantee of or pledge to secure any other Indebtedness that constitutes Senior Debt to the same extent as the Exchange Notes are subordinated to Senior Debt. In addition, the Indenture provides that (x) if the Company shall, after the date of the Indenture, create or acquire any new Restricted Subsidiary (other than a Restricted Subsidiary organized under the laws of a country other than the United States), then such newly created or acquired Restricted Subsidiary shall execute a Senior Subordinated Guarantee and deliver an opinion of counsel in accordance with the terms of the Indenture, and (y) if the Company shall (whether before or after the date of the Indenture) create or acquire any other new Subsidiary that becomes a guarantor under the Bank Credit Agreement, then such newly created or acquired Subsidiary shall execute a Senior Subordinated Guarantee and deliver an opinion of counsel in accordance with the terms of the Indenture. Notwithstanding the foregoing, any such Senior Subordinated Guarantee shall provide by its terms that it shall be automatically and unconditionally released and discharged upon certain mergers, consolidations, sales and other dispositions (including, without limitation, by foreclosure) pursuant to the terms of the Indenture. In addition, if any Guarantor is released and relieved of all obligations it may have as a guarantor under the Bank Credit Agreement, then such Guarantor will also be automatically released and relieved of any obligations under its Senior Subordinated Guarantee. See "-- Senior Subordinated Guarantees". The form of such Senior Subordinated Guarantee is attached as an exhibit to the Indenture. REPORTS The Indenture provides that, whether or not required by the rules and regulations of the Commission, so long as any Exchange Notes are outstanding, the Company will, commencing after consummation of the Transaction, furnish to the Holders of Exchange Notes (i) all quarterly and annual financial information that would be required to be contained in a filing with the Commission on Forms 10-Q and 10-K if the Company were required to file such Forms, including a "Management's Discussion and Analysis of Financial Condition and Results of Operations" and, with respect to the annual information only, a report thereon by the Company's certified independent accountants and (ii) all current reports that would be required to be filed with the Commission on Form 8-K if the Company were required to file such reports. In addition, whether or not required by the rules and regulations of the Commission, following the consummation of the Transaction, the Company will file a copy of all such information and reports with the Commission for public availability (unless the Commission will not accept such a filing) and make such information available to securities analysts and prospective investors upon request. In addition, the Company and the Guarantors have agreed that, for so long as any Notes or Exchange Notes remain outstanding, they will furnish to the Holders of the Notes and/or Exchange Notes and to securities analysts and prospective investors, upon their request, the information required to be delivered pursuant to Rule 144A (d)(4) under the Securities Act. 109 117 EVENTS OF DEFAULT AND REMEDIES The Indenture provides that each of the following constitutes an Event of Default with respect to the Exchange Notes: (i) default for 30 days in the payment when due of interest, including Liquidated Damages, if any, on the Exchange Notes (whether or not prohibited by the subordination provisions of the Indenture); (ii) default in payment when due of the principal of or premium, if any, on the Exchange Notes (whether or not prohibited by the subordination provisions of the Indenture); (iii) failure by the Company for 30 days after notice from the Trustee or the Holders of at least 25% in principal amount of the then outstanding Exchange Notes to comply with the provisions described under "-- Change of Control", "-- Restricted Payments", "-- Incurrence of Indebtedness and Issuance of Disqualified Stock" or "-- Merger, Consolidation, or Sale of All or Substantially All Assets"; (iv) failure by the Company for 60 days after notice from the Trustee or the Holders of at least 25% in principal amount of the then outstanding Exchange Notes to comply with any of its other agreements in the Indenture or the Exchange Notes; (v) default under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by the Company or any of its Restricted Subsidiaries (or the payment of which is guaranteed by the Company or any of its Restricted Subsidiaries) whether such Indebtedness or guarantee now exists, or is created after the date of the Indenture, which default results in the acceleration of such Indebtedness prior to its express maturity and, in each case, the principal amount of any such Indebtedness, together with the principal amount of any other such Indebtedness the maturity of which has been so accelerated, aggregates $15 million or more; (vi) failure by the Company or any of its Restricted Subsidiaries to pay final judgments aggregating in excess of $15 million, which judgments are not paid, discharged or stayed for a period of 60 days; (vii) certain events of bankruptcy or insolvency with respect to the Company or any of its Restricted Subsidiaries; (viii) except as permitted by the Indenture, any Senior Subordinated Guarantee shall be held in any judicial proceeding to be unenforceable or invalid or shall cease for any reason to be in full force and effect (except by its terms) or any Guarantor, or any Person acting on behalf of any Guarantor, shall deny or disaffirm its obligations under its Senior Subordinated Guarantee. If any Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the then outstanding Exchange Notes may declare all the Exchange Notes to be due and payable immediately. Upon such declaration the principal, interest, premium, if any, and Liquidated Damages, if any, shall be due and payable immediately; provided, however, that so long as Senior Debt or any commitment therefor is outstanding under the Bank Credit Agreement, any such notice or declaration shall not be effective until the earlier of (a) five Business Days after such notice is delivered to the Representative for the Bank Debt or (b) the acceleration of any Indebtedness under the Bank Credit Agreement. Notwithstanding the foregoing, in the case of an Event of Default arising from certain events of bankruptcy or insolvency, with respect to the Company, any Significant Restricted Subsidiary or any group of Restricted Subsidiaries that, taken together, would constitute a Significant Restricted Subsidiary, all outstanding Exchange Notes will become due and payable without further action or notice. Holders of the Exchange Notes may not enforce the Indenture or the Exchange Notes except as provided in the Indenture. Subject to certain limitations, Holders of a majority in principal amount of the then outstanding Exchange Notes may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Holders of the Exchange Notes notice of any continuing Default or Event of Default (except a Default or Event of Default relating to the payment of principal, premium, if any, or interest) if it determines that withholding notice is in their interest. In the case of any Event of Default occurring by reason of any willful action (or inaction) taken (or not taken) by or on behalf of the Company with the intention of avoiding payment of the premium that the Company would have had to pay if the Company then had elected to redeem the Exchange Notes pursuant to the optional redemption provisions of the Indenture, an equivalent premium shall also become and be immediately due and payable to the extent permitted by law upon 110 118 the acceleration of the Exchange Notes. If an Event of Default occurs prior to December 15, 2002 by reason of any willful action (or inaction) taken (or not taken) by or on behalf of the Company with the intention of avoiding the prohibition on redemption of the Exchange Notes prior to December 15, 2002, then the premium specified in the Indenture shall also become immediately due and payable to the extent permitted by law upon the acceleration of the Exchange Notes. The Holders of a majority in aggregate principal amount of the Exchange Notes then outstanding by notice to the Trustee may on behalf of the Holders of all of the Exchange Notes waive any existing Default or Event of Default and its consequences under the Indenture except a continuing Default or Event of Default in the payment of interest on, or the principal of and premium, if any, on, the Exchange Notes. The Company is required to deliver to the Trustee annually a statement regarding compliance with the Indenture, and the Company is required upon becoming aware of any Default or Event of Default, to deliver to the Trustee a statement specifying such Default or Event of Default. NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS No past, present or future director, officer, employee, incorporator or stockholder of the Company or any Guarantor, as such, shall have any liability for any obligations of the Company or the Guarantors under the Exchange Notes, the Senior Subordinated Guarantees or the Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder of Exchange Notes by accepting an Exchange Note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Exchange Notes. LEGAL DEFEASANCE AND COVENANT DEFEASANCE The Company may, at its option and at any time, elect to have all obligations of the Company and the Guarantors discharged with respect to the outstanding Exchange Notes and the Senior Subordinated Guarantees ("Legal Defeasance") except for (i) the rights of Holders of outstanding Exchange Notes to receive payments in respect of the principal of and premium, if any, and interest on such Exchange Notes when such payments are due from the trust referred to below, (ii) the Company's obligations with respect to the Exchange Notes concerning issuing temporary Exchange Notes, registration of Exchange Notes, mutilated, destroyed, lost or stolen Exchange Notes and the maintenance of an office or agency for payment and money for security payments held in trust, (iii) the rights, powers, trusts, duties and immunities of the Trustee, and the Company's obligations in connection therewith and (iv) the Legal Defeasance provisions of the Indenture. In addition, the Company may, at its option and at any time, elect to have the obligations of the Company and the Guarantors released with respect to certain covenants that are described in the Indenture and the Senior Subordinated Guarantees ("Covenant Defeasance") and thereafter any omission to comply with such obligations shall not constitute a Default or Event of Default with respect to the Exchange Notes and the Senior Subordinated Guarantees. In the event Covenant Defeasance occurs, certain events (not including non-payment, bankruptcy, receivership, rehabilitation and insolvency events) described under "-- Events of Default and Remedies" will no longer constitute an Event of Default with respect to the Exchange Notes and the Senior Subordinated Guarantees. In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the Company or the Guarantors must irrevocably deposit with the Trustee, in trust, for the benefit of the Holders of the Exchange Notes, cash in U.S. dollars, non-callable Government Securities, or a combination thereof, in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay the principal of and premium, if any, and interest on the outstanding Exchange Notes on the stated maturity or on the applicable redemption date, as the case may be, and the Company or the Guarantors must specify whether the Exchange Notes are being defeased to maturity or to a particular redemption date; (ii) in the case of Legal Defeasance, the Company or the Guarantors shall have delivered to the Trustee an opinion of counsel in the 111 119 United States reasonably acceptable to the Trustee confirming that (A) the Company or the Guarantors have received from, or there has been published by, the Internal Revenue Service a ruling or (B) since the date of the Indenture, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such opinion of counsel shall confirm that, the Holders of the outstanding Exchange Notes will not recognize income, gain or loss for federal income tax purposes as a result of such Legal Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance had not occurred; (iii) in the case of Covenant Defeasance, the Company or the Guarantors shall have delivered to the Trustee an opinion of counsel in the United States reasonably acceptable to the Trustee confirming that the Holders of the outstanding Exchange Notes will not recognize income, gain or loss for federal income tax purposes as a result of such Covenant Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Covenant Defeasance had not occurred; (iv) no Default or Event of Default shall have occurred and be continuing on the date of such deposit (other than a Default or Event of Default resulting from the borrowing of funds to be applied to such deposit) or insofar as Events of Default from bankruptcy or insolvency events are concerned, at any time in the period ending on the 91st day after the date of deposit; (v) such Legal Defeasance or Covenant Defeasance will not result in a breach or violation of, or constitute a default under, any material agreement or instrument (other than the Indenture) to which the Company or any of its Restricted Subsidiaries is a party or by which the Company or any of its Restricted Subsidiaries is bound; (vi) the Company or the Guarantors must have delivered to the Trustee an opinion of counsel to the effect that after the 91st day following the deposit, the trust funds will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally; (vii) the Company or the Guarantors must deliver to the appropriate Trustee an Officers' Certificate stating that the deposit was not made by the Company or the Guarantors, as applicable, with the intent of preferring the Holders of Exchange Notes over the other creditors of the Company or the Guarantors, as applicable, with the intent of defeating, hindering, delaying or defrauding creditors of the Company or the Guarantors, as applicable, or others; and (viii) the Company or the Guarantors must deliver to the Trustee an Officers' Certificate and an opinion of counsel, each stating that all conditions precedent provided for or relating to the Legal Defeasance or the Covenant Defeasance have been complied with. TRANSFER AND EXCHANGE A holder may transfer or exchange Exchange Notes in accordance with the Indenture. The Registrar and the Trustee may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and the Company may require a Holder to pay any taxes and fees required by law or permitted by the Indenture. The Company is not required to transfer or exchange any Exchange Note selected for redemption. Also, the Company is not required to transfer or exchange any Exchange Note for a period of 15 days before a selection of Exchange Notes to be redeemed. The registered Holder of an Exchange Note will be treated as the owner of it for all purposes. BOOK-ENTRY, DELIVERY AND FORM The Exchange Notes initially issued in exchange for the Notes generally will be represented by one or more fully-registered global notes (collectively, the "Global Exchange Note"). Notwithstanding the foregoing, Notes held in certificated form will be exchanged solely for Exchange Notes in certificated form, as discussed below. The Global Exchange Note will be deposited upon issuance with the Depository and registered in the name of the Depository or a nominee of the Depository (the "Global Exchange Note Registered Owner"). Except as set forth below, the Global Exchange Note may be transferred, in whole and not in part, only to another nominee of the Depository or to a successor of the Depository or its nominee. 112 120 The Depository is a limited-purpose trust company that was created to hold securities for its participating organizations (collectively, the "Participants" or the "Depository's Participants") and to facilitate the clearance and settlement of transactions in such securities between Participants through electronic book-entry changes in accounts of its Participants. The Depository's Participants include securities brokers and dealers (including the initial Purchaser), banks and trust companies, clearing corporations and certain other organizations. Access to the Depository's system is also available to other entities such as banks, brokers, dealers and trust companies (collectively, the "Indirect Participants" or the "Depository's Indirect Participants") that clear through or maintain a custodial relationship with a Participant, either directly or indirectly. Persons who are not Participants may beneficially own securities held by or on behalf of the Depository only through the Depository's Participants or the Depository's Indirect Participants. The Company expects that pursuant to procedures established by the Depository, (i) upon deposit of the Global Exchange Note, the Depository will credit the accounts of Participants designated by the Exchange Agent with portions of the principal amount of the Global Exchange Note and (ii) ownership of such interests in the Global Exchange Note will be shown on, and the transfer of ownership thereof will be effected only through, records maintained by the Depository (with respect to the interests of the Depository's Participants), the Depository's Participants and the Depository's Indirect Participants. The laws of some states require that certain persons take physical delivery in definitive form of securities that they own. Consequently, the ability to transfer Exchange Notes is limited to that extent. For certain other restrictions on the transferability of the Exchange Notes, see "Risk Factors -- Restrictions on Transfer". Except as described below, owners of interests in the Global Exchange Note will not have Exchange Notes registered in their names, will not receive physical delivery of Exchange Notes in definitive form and will not be considered the registered owners or holders thereof under the Indenture for any purpose. Payments in respect of the principal of and premium, if any, and interest on any Exchange Notes registered in the name of the Global Exchange Note Registered Owner will be payable by the Trustee to the Global Exchange Note Registered Owner in its capacity as the registered Holder under the Indenture. Under the terms of the Indenture, the Company and the Trustee will treat the persons in whose names the Exchange Notes, including the Global Exchange Note, are registered as the owners thereof for the purpose of receiving such payments and for any and all other purposes whatsoever. Consequently, neither the Company, the Trustee nor any agent of the Company or the Trustee has or will have any responsibility or liability for (i) any aspect of the Depository's records or any Participant's records relating to or payments made on account of beneficial ownership interests in the Global Exchange Note, or for maintaining, supervising or reviewing any of the Depository's records or any Participant's records relating to the beneficial ownership interests in the Global Exchange Note or (ii) any other matter relating to the actions and practices of the Depository or any of its Participants. The Company believes, however, that it is the current practice of the Depository, upon receipt of any payment in respect of securities such as the Exchange Notes (including principal and interest), to credit the accounts of the relevant Participants with the payment on the payment date, in the amounts proportionate to their respective holdings in principal amount of beneficial interests in the relevant security as shown on the records of the Depository unless the Depository has reason to believe it will not receive payment on such payment date. Payments by the Participants and the Indirect Participants to the beneficial owners of the Exchange Notes will be governed by standing instructions and customary practices and will be the responsibility of the Participants or the Indirect Participants and will not be the responsibility of the Depository, the Trustee or the Company. Neither the Company nor the Trustee will be liable for any delay by the Depository or any of its Participants in identifying the beneficial owners of the Exchange Notes, and the Company and the Trustee may conclusively rely on and will be protected in relying on instruction from the Global Exchange Note Registered Owner for all purposes. 113 121 The Global Exchange Note is exchangeable for definitive Exchange Notes if (i) the Depository notifies the Company that it is unwilling or unable to continue as Depository of the Global Exchange Note and the Company thereupon fails to appoint a successor Depository, (ii) the Company, at its option, notifies the Trustee in writing that it elects to cause the issuance of the Exchange Notes in definitive registered form, (iii) there shall have occurred and be continuing an Event of Default or any event which after notice or lapse of time or both would be an Event of Default with respect to the Exchange Notes or (iv) as provided in the following paragraph. Such definitive Exchange Notes shall be registered in the names of the owners of the beneficial interests in the Global Exchange Note as provided by the Participants. Exchange Notes issued in definitive form will be in fully registered form, without coupons, in minimum denominations of $1,000 and integral multiples thereof. Upon issuance of Exchange Notes in definitive form, the Trustee is required to register the Exchange Notes in the name of, and cause the Exchange Notes to be delivered to, the person or persons (or the nominee thereof) identified as the beneficial owners as the Depository shall direct. Subject to the restrictions on the transferability of the Exchange Notes described in "Risk Factors -- Restrictions on Transfer," an Exchange Note in definitive form will be issued (i) in the Exchange Offer solely in exchange for certificated Notes or (ii) following the Exchange Offer, upon the resale, pledge or other transfer of any Exchange Note or interest therein to any person or entity that does not participate in the Depository. The exchange of certificated notes in the Exchange Offer may be made only by presentation of the Notes, duly endorsed, together with a duly completed Letter of Transmittal and other required documentation as described under "The Exchange Offer -- Procedures for Tendering" and "-- Guaranteed Delivery Procedures". Transfers of certificated Exchange Notes may be made only by presentation of Exchange Notes, duly endorsed, to the Trustee for registration of transfer on the Note Register maintained by the Trustee for such purposes. The information in this section concerning the Depository and the Depository's book-entry system has been obtained from sources that the Company believes to be reliable, but the Company takes no responsibility for the accuracy thereof. CERTIFICATED SECURITIES If (i) the Company notifies the Trustee in writing that the Depository is no longer willing or able to act as a depository and the Company is unable to locate a qualified successor within 90 days or (ii) the Company, at its option, notifies the Trustee in writing that it elects to cause the issuance of Exchange Notes evidenced by registered, definitive certificates ("Certificated Securities") under the Indenture, then, upon surrender by the Global Exchange Note Holder of its Global Exchange Notes, Exchange Notes in such form will be issued to each person that the Global Exchange Note Holder and the Depository identify as being the beneficial owner of the related Exchange Note. Neither the Company nor the Trustee will be liable for any delay by the Global Exchange Note Holder or the Depository in identifying the beneficial owners of Exchange Notes and the Company and the Trustee may conclusively rely on, and will be protected in relying on, instructions from the Global Exchange Note Holder or the Depository for all purposes. REGISTRATION RIGHTS; LIQUIDATED DAMAGES The Company, the Guarantors and the Initial Purchaser entered into the Registration Rights Agreement on December 19, 1997 (the "Closing Date"). Pursuant to the Registration Rights Agreement, the Company and the Guarantors agreed to file with the Commission on or prior to 45 days after the Closing Date the Exchange Offer Registration Statement on the appropriate form under the Securities Act with respect to the Exchange Notes. Upon the effectiveness of the Exchange Offer Registration Statement, the Company will offer to the Holders of Transfer Restricted Securities pursuant to the Exchange Offer who are able to make certain representations the opportunity to exchange their Transfer Restricted Securities for Exchange Notes. If (i) the 114 122 Company and the Guarantors are not required to file the Exchange Offer Registration Statement or permitted to consummate the Exchange Offer because the Exchange Offer is not permitted by applicable law or Commission policy or (ii) any Holder of Transfer Restricted Securities notifies the Company on or prior to the 20th Business Day following consummation of the Exchange Offer that it alone or together with Holders who hold in the aggregate at least $1.0 million in principal amount of Notes (A) is prohibited by law or Commission policy from participating in the Exchange Offer or (B) may not resell the Exchange Notes acquired by it in the Exchange Offer to the public without delivering a prospectus and the prospectus contained in the Exchange Offer Registration Statement is not appropriate or available for such resales or (C) is a broker-dealer and owns Notes acquired directly from the Company or an affiliate of the Company, the Company and the Guarantors will use their best efforts to file with the Commission a Shelf Registration Statement to cover resales of the Notes by the Holders thereof who satisfy certain conditions relating to the provision of information in connection with the Shelf Registration Statement. The Company and the Guarantors will use their best efforts to cause the applicable registration statement to be declared effective by the Commission as described below. For purposes of the foregoing, "Transfer Restricted Securities" means each Note until the earliest to occur of (i) the date on which such Note has been exchanged by a person other than a broker-dealer for an Exchange Note in the Exchange Offer and entitled to be resold to the public by the Holder thereof without complying with the prospectus delivery requirements of the Securities Act, (ii) following the exchange by a broker-dealer in the Exchange Offer of a Note for an Exchange Note, the date on which such Exchange Note is sold to a purchaser who receives from such broker-dealer on or prior to the date of such sale a copy of the prospectus contained in the Exchange Offer Registration Statement, (iii) the date on which such Note has been effectively registered under the Securities Act and disposed of in accordance with a Shelf Registration Statement and (iv) the date on which such Note is distributed to the public pursuant to Rule 144 under the Securities Act. Notwithstanding the foregoing, at any time after Consummation (as defined in the Registration Rights Agreement) of the Exchange Offer, the Company and the Guarantors may allow the Shelf Registration Statement to cease to be effective and usable if (i) the Board of Directors of the Company determines in good faith that such action is in the best interests of the Company, and the Company notifies the Holders within a certain period of time after the Board of Directors makes such determination or (ii) the prospectus contained in the Shelf Registration Statement or the Shelf Registration Statement contains an untrue statement of a material fact required to be stated therein or omits to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; provided that the period referred to in the Registration Rights Agreement during which the Shelf Registration Statement is required to be effective and usable will be extended by the number of days during which such registration statement was not effective or usable pursuant to the foregoing provisions. The Registration Rights Agreement provides that (i) the Company and the Guarantors will file an Exchange Offer Registration Statement with the Commission on or prior to 45 days after the Closing Date, (ii) the Company and the Guarantors will use their best efforts to have the Exchange Offer Registration Statement declared effective by the Commission on or prior to 105 days after the date on which such Exchange Offer Registration Statement is filed with the Commission, (iii) unless the Exchange Offer would not be permitted by applicable law or Commission policy, the Company and the Guarantors will commence the Exchange Offer and use their best efforts to issue on or prior to 45 days after the date on which the Exchange Offer Registration Statement was declared effective by the Commission, Exchange Notes in exchange for all Notes tendered prior thereto in the Exchange Offer and (iv) if obligated to file the Shelf Registration Statement, the Company and the Guarantors will use their best efforts to file the Shelf Registration Statement with the Commission on or prior to 45 days after such filing obligation arises and to cause the Shelf Registration Statement to be declared effective by the Commission on or prior to 105 days after the date such filing is required. If (a) the Company and the Guarantors fail to file either of the Registration Statements required by the Registration Rights Agreement on or before the date specified for such filing, (b) either of such 115 123 Registration Statements is not declared effective by the Commission on or prior to the date specified for such effectiveness (the "Effectiveness Target Date"), (c) the Company and the Guarantors fail to consummate the Exchange Offer within 45 days of the Effectiveness Target Date with respect to the Exchange Offer Registration Statement, or (d) the Shelf Registration Statement or the Exchange Offer Registration Statement is declared effective but thereafter ceases to be effective or usable in connection with resales of Transfer Restricted Securities during the periods specified in the Registration Rights Agreement (each such event referred to in clauses (a) through (d) above a "Registration Default"), then, subject to the last sentence of the preceding paragraph, the Company will pay Liquidated Damages to each Holder of Transfer Restricted Securities, with respect to the first 90-day period immediately following the occurrence of such Registration Default in an amount equal to $0.05 per week per $1,000 in principal amount of Notes constituting Transfer Restricted Securities held by such Holder. The amount of the Liquidated Damages will increase by an additional $0.05 per week per $1,000 in principal amount of Notes constituting Transfer Restricted Securities with respect to each subsequent 90-day period until all Registration Defaults have been cured, up to a maximum amount of Liquidated Damages of $0.50 per week per $1,000 in principal amount of Notes constituting Transfer Restricted Securities. All accrued Liquidated Damages will be paid by the Company in cash on each Damages Payment Date (as defined in the Registration Rights Agreement) to the Global Note Holder (and any Holder of Certificated Securities who has given wire transfer instructions to the Company at least 10 Business Days prior to the Damages Payment Date) by wire transfer of immediately available funds and to all other Holders of Certificated Securities by mailing checks to their registered addresses. Following the cure of all Registration Defaults, the accrual of Liquidated Damages will cease. Holders of Notes will be required to make certain representations to the Company (as described in the Registration Rights Agreement) in order to participate in the Exchange Offer and will be required to deliver information to be used in connection with the Shelf Registration Statement and will be provided an opportunity to provide comments on the Shelf Registration Statement within the time periods set forth in the Registration Rights Agreement in order to have their Notes included in the Shelf Registration Statement and benefit from the provisions regarding Liquidated Damages set forth above. The summary herein of certain provisions of the Registration Rights Agreement does not purport to be complete and is subject to, and is qualified in its entirety by reference to, the full text of the Registration Rights Agreement, which has been filed as an exhibit to the Registration Statement of which this Prospectus is a part and is incorporated by reference herein. CONSENT OF HOLDERS; SINGLE CLASS Except as described below under "-- Amendment, Supplement and Waiver", and as otherwise described herein or in the Indenture, the Notes and the Exchange Notes will be considered collectively to be a single class for all purposes under the Indenture, including, without limitation, waivers, amendments, redemptions and Repurchase Offers, and for purposes of this "Description of Exchange Notes" (except under the caption, "-- Registration Rights; Liquidated Damages") all reference herein to "Exchange Notes" shall be deemed to refer collectively to the Notes and any Exchange Notes, unless the context otherwise requires. AMENDMENT, SUPPLEMENT AND WAIVER Except as provided in the next two succeeding paragraphs, the Indenture and the Exchange Notes may be amended or supplemented with the consent of the Holders of at least a majority in principal amount of the Exchange Notes then outstanding (including, without limitation, consents obtained in connection with a purchase of, or tender offer or exchange offer for, such Exchange Notes), and any existing default or compliance with any provision of the Indenture or the Exchange Notes may be waived with the consent of the Holders of a majority in principal amount of the then 116 124 outstanding Exchange Notes (including consents obtained in connection with a purchase of, or tender offer or exchange offer for, such Exchange Notes). Without the consent of each Holder affected, an amendment or waiver may not (with respect to any Exchange Notes held by a nonconsenting Holder): (i) reduce the principal amount of Exchange Notes whose Holders must consent to an amendment, supplement or waiver, (ii) reduce the principal of or change the fixed maturity of any Exchange Note or alter the provisions with respect to the redemption of the Exchange Notes (other than provisions relating to the covenants described above under "-- Repurchase at the Option of Holders"), (iii) reduce the rate of or change the time for payment of interest, including Liquidated Damages, if any, on any Exchange Note, (iv) waive a Default or Event of Default in the payment of principal of or premium, if any, or interest, including Liquidated Damages, if any, on the Exchange Notes (except a rescission of acceleration of the Exchange Notes by the Holders of at least a majority in aggregate principal amount thereof and a waiver of the payment default that resulted from such acceleration), (v) make any Exchange Note payable in money other than that stated in the Exchange Notes, (vi) make any change in the provisions of the Indenture relating to waivers of past Defaults or the rights of Holders of Exchange Notes to receive payments of principal of or premium, if any, or interest, including Liquidated Damages, if any, on the Exchange Notes, (vii) waive a redemption payment with respect to any Exchange Note (other than a payment required by one of the covenants described above under "-- Repurchase at the Option of Holders") or (viii) make any change in the foregoing amendment and waiver provisions. Notwithstanding the foregoing, without the consent of any Holder of Exchange Notes, the Company and the Trustee may amend or supplement the Indenture or the Exchange Notes to cure any ambiguity, defect or inconsistency, to provide for uncertificated Exchange Notes in addition to or in place of certificated Exchange Notes, to provide for the assumption of the Company's obligations to Holders of Exchange Notes in the case of a merger or consolidation, to make any change that would provide any additional rights or benefits to the Holders of Exchange Notes or that does not adversely affect the legal rights under the Indenture of any such Holder, or to comply with requirements of the Commission in order to effect or maintain the qualification of the Indenture under the Trust Indenture Act. CONCERNING THE TRUSTEE The Indenture contains certain limitations on the rights of the Trustee, should the Trustee become a creditor of the Company, to obtain payment of claims in certain cases, or to realize on certain property received in respect of any such claim as security or otherwise. The Trustee will be permitted to engage in other transactions; however, if the Trustee acquires any conflicting interest it must eliminate such conflict within 90 days, apply to the Commission for permission to continue or resign. The Holders of a majority in principal amount of the then outstanding Exchange Notes will have the right to direct the time, method and place of conducting any proceeding for exercising any remedy available to the Trustee, subject to certain exceptions. The Indenture provides that in case an Event of Default shall occur (which shall not be cured), the Trustee will be required, in the exercise of its power, to use the degree of care of a prudent man in the conduct of his own affairs. Subject to such provisions, the Trustee will be under no obligation to exercise any of its rights or powers under the Indenture at the request of any Holder, unless such Holder shall have offered to the Trustee security and indemnity satisfactory to it against any loss, liability or expense. CERTAIN DEFINITIONS Set forth below are certain defined terms used in the Indenture. Reference is made to the Indenture for a full disclosure of all such terms, as well as any other capitalized terms used herein for which no definition is provided. 117 125 "Acquired Debt" means, with respect to any specified Person, (i) Indebtedness of any other Person existing at the time such other Person is merged with or into or became a Restricted Subsidiary of such specified Person, including, without limitation, Indebtedness incurred in connection with, or in contemplation of, such other Person merging with or into or becoming a Restricted Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien encumbering any asset acquired by such specified Person. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlling", "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise; provided that beneficial ownership of 10% or more of the voting securities of a Person shall be deemed to be control. "Asset Sale" means: (i) the sale, conveyance, transfer or other disposition (whether in a single transaction or a series of related transactions) of property or assets (including by way of a sale and leaseback) of the Company or any Restricted Subsidiary (each referred to in this definition as a "disposition") or (ii) the issuance or sale of Equity Interests of any Restricted Subsidiary (whether in a single transaction or a series of related transactions), in each case, other than: (a) a disposition of Cash Equivalents or goods held for sale in the ordinary course of business or obsolete equipment or other obsolete assets in the ordinary course of business consistent with past practices of the Company; (b) the disposition of all or substantially all of the assets of the Company in a manner permitted pursuant to the provisions described above under the covenant entitled "-- Merger, Consolidation, or Sale of All or Substantially All Assets" or any disposition that constitutes a Change of Control pursuant to the Indenture; (c) any disposition that is a Restricted Payment or Permitted Investment that is permitted under the covenant described above under "-- Restricted Payments"; (d) any individual disposition, or series of related dispositions, of assets with an aggregate fair market value of less than $2.5 million; (e) any sale of an Equity Interest in, or Indebtedness or other securities of, an Unrestricted Subsidiary; and (f) foreclosures on assets. "Asset Sale Offer" has the meaning set forth under the caption "-- Repurchase at the Option of Holders -- Asset Sales". "Bank Credit Agreement" means one or more credit agreements to be entered into by and among the Company and the financial institutions party thereto providing a portion of the financing for the Transaction, as well as financing for the Company's ongoing requirements, including any related notes, guarantees, collateral documents, instruments and agreements executed in connection therewith, and in each case as amended, modified, renewed, refunded, refinanced or replaced (in whole or in part) from time to time. 118 126 "Capital Lease Obligation" means, at the time any determination thereof is to be made, the amount of the liability in respect of a capital lease that would at such time be required to be capitalized on a balance sheet in accordance with GAAP. "Capital Stock" means (i) in the case of a corporation, corporate stock, (ii) in the case of an association or business entity, any and all shares, interests, participations, rights or other equivalents (however designated) of corporate stock, (iii) in the case of a partnership, partnership interests (whether general or limited) and (iv) any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing Person (but excluding customary employee incentive or bonus arrangements, and customary earn-out provisions granted in connection with acquisition transactions and providing for aggregate payouts not in excess of $5 million per year). "Cash Equivalents" means (i) United States dollars, (ii) securities issued or directly and fully guaranteed or insured by the United States government or any agency or instrumentality thereof, (iii) certificates of deposit and eurodollar time deposits with maturities of one year or less from the date of acquisition, bankers' acceptances with maturities not exceeding one year and overnight bank deposits, in each case with any domestic bank having capital and surplus in excess of $500 million and a Keefe Bank Watch Rating of "B" (or the equivalent rating under a substantially similar ratings system if Keefe Bank Watch Ratings are no longer published) or better, (iv) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clauses (ii) and (iii) above entered into with any financial institution meeting the qualifications specified in clause (iii) above and (v) commercial paper having the highest rating obtainable from Moody's Investors Service, Inc. or Standard & Poor's Corporation (or in their absence, an equivalent rating from another nationally recognized securities rating agency) and in each case maturing within one year after the date of acquisition. "Change of Control" means the occurrence of any of the following: (i) the sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of transactions, of all or substantially all of the assets of the Company and its Restricted Subsidiaries, taken as a whole, to any "person" (as such term is used in Section 13(d)(3) of the Exchange Act) other than the Permitted Holders and their Related Parties; (ii) the Company becomes aware (by way of a report or any other filing pursuant to Section 13(d) of the Exchange Act, proxy, vote, written notice or otherwise) of the acquisition by any Person or group (within the meaning of Section 13(d)(3) or Section 14(d)(2) of the Exchange Act, or any successor provision), including any group acting for the purpose of acquiring, holding or disposing of securities (within the meaning of Rule 13d-5(b)(1) under the Exchange Act), other than the Permitted Holders or any of their Related Parties, in a single transaction or in a related series of transactions, by way of merger, consolidation or other business combination or purchase of beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act, or any successor provision) of 50% or more of the aggregate voting power of the Voting Stock of the Company, and such Person or group beneficially owns Voting Stock having greater aggregate voting power than the Permitted Holders and their Related Parties; or (iii) a majority of the members of the Board of Directors of the Company cease to be Continuing Directors. "Consolidated Cash Flow" means, with respect to any Person for any period, the Consolidated Net Income of such Person for such period plus (i) an amount equal to any extraordinary loss plus any net loss realized in connection with an Asset Sale (to the extent such losses were deducted in computing such Consolidated Net Income), plus (ii) provision for taxes based on income or profits of such Person and its Restricted Subsidiaries for such period, to the extent that such provision for 119 127 taxes was deducted in computing such Consolidated Net Income, plus (iii) consolidated interest expense of such Person and its Restricted Subsidiaries for such period, whether paid or accrued and whether or not capitalized (including, without limitation, amortization of original issue discount, non-cash interest payments, the interest component of any deferred payment obligations, the interest component of all payments associated with Capital Lease Obligations, commissions, discounts and other fees and charges incurred in respect of letter of credit or bankers' acceptance financings, and net payments (if any) pursuant to Hedging Obligations), to the extent that any such expense was deducted in computing such Consolidated Net Income, plus (iv) depreciation, amortization (including amortization of goodwill and other intangibles but excluding amortization of prepaid cash operating expenses that were paid in a prior period) and other non-cash charges of such Person and its Restricted Subsidiaries for such period to the extent that such depreciation, amortization and other non-cash charges were deducted in computing such Consolidated Net Income, minus (v) cash outlays that were made by such Person or any of its Restricted Subsidiaries during such period in respect of any item that was reflected as a non-cash charge in a prior period, provided that such non-cash charge was added to Consolidated Net Income in determining Consolidated Cash Flow for such prior period. "Consolidated Net Income" means, with respect to any Person for any period, the aggregate of the Net Income of such Person and its Restricted Subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP; provided that (i) the Net Income (but not loss) for such period of any Person that is not a Restricted Subsidiary or that is accounted for by the equity method of accounting shall be included only to the extent of the amount of dividends or distributions paid in cash to the referent Person or a Wholly Owned Restricted Subsidiary thereof, (ii) the Net Income of any Restricted Subsidiary shall be excluded to the extent that the declaration or payment of dividends or similar distributions by that Restricted Subsidiary of that Net Income is not at the date of determination permitted without any prior governmental approval (that has not been obtained) or, directly or indirectly, by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Restricted Subsidiary or its stockholders, (iii) the Net Income of any Person acquired in a pooling of interests transaction for any period prior to the date of such acquisition shall be excluded, (iv) the cumulative effect of a change in accounting principles shall be excluded and (v) the Net Income of any Unrestricted Subsidiary shall be excluded, whether or not distributed to the Company or one of its Restricted Subsidiaries. "Continuing Directors" means, as of any date of determination, any member of the Board of Directors who (i) was a member of such Board of Directors on the date of the Indenture or (ii) was nominated for election or elected to such Board of Directors with, or whose election to such Board of Directors was approved by, the affirmative vote of a majority of the Continuing Directors who were members of such Board of Directors at the time of such nomination or election or (iii) is any designee of the Permitted Holders or their Affiliates or was nominated by the Permitted Holders or their Affiliates or any designees of the Permitted Holders or their Affiliates on the Board of Directors. "Default" means any event that is or with the passage of time or the giving of notice or both would be an Event of Default. "Disqualified Stock" means any Capital Stock that, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at the option of the holder thereof, in whole or in part, on or prior to the date on which the Exchange Notes mature. "Equity Interests" means Capital Stock and all warrants, options or other rights to acquire Capital Stock (but excluding any debt security that is convertible into, or exchangeable for, Capital Stock). 120 128 "Excludable Current Liabilities" means, with respect to the consideration received by the Company in connection with any Asset Sale, (i) each trade payable incurred in the ordinary course of business of the Company or any Restricted Subsidiary, (ii) each current liability that is in an amount less than $50,000 on an individual basis, and (iii) each liability due within 90 days of the date of consummation of such Asset Sale, in the case of each of clauses (i) through (iii), that is assumed by the transferee of the assets that are subject to such Asset Sale pursuant to customary assumption provisions. "Existing Indebtedness" means Indebtedness of the Company and its Restricted Subsidiaries (other than Indebtedness under the Bank Credit Agreement) in existence on the date of the Indenture, until such amounts are repaid. "Fixed Charge Coverage Ratio" means with respect to any Person for any period, the ratio of the Consolidated Cash Flow of such Person and its Restricted Subsidiaries for such period to the Fixed Charges of such Person and its Restricted Subsidiaries for such period. In the event that the Company or any of its Restricted Subsidiaries incurs, assumes, Guarantees or redeems any Indebtedness (other than revolving credit borrowings) or issues Preferred Stock subsequent to the commencement of the period for which the Fixed Charge Coverage Ratio is being calculated but on or prior to the date on which the event for which the calculation of the Fixed Charge Coverage Ratio is made (the "Calculation Date"), then the Fixed Charge Coverage Ratio shall be calculated giving pro forma effect to such incurrence, assumption, Guarantee or redemption of Indebtedness, or such issuance or redemption of Preferred Stock, as if the same had occurred at the beginning of the applicable four-quarter reference period. In calculating the Fixed Charge Coverage Ratio, acquisitions will be given pro forma effect as follows: (i) (A) acquisitions that have been made or are being made by the Company or any of its Restricted Subsidiaries during the four-quarter reference period or subsequent to such reference period and on or prior to the Calculation Date (including through mergers or consolidations and including any related financing transactions) shall be deemed to have occurred on the first day of the four-quarter reference period, and (B) for purposes of determining the pro forma effects of any such acquisition, Consolidated Cash Flow shall be increased to reflect the annualized amount of any cost savings expected by the Company to be realized in connection with such acquisition (from steps to be taken not later than the first anniversary of such acquisition, and without reduction for any non-recurring charges expected in connection with such acquisition), as set forth in an Officers' Certificate signed by the Company's chief executive and chief financial officers (which shall be determinative of such matters) which states (x) the amount of such increase, (y) that such increase is based on the reasonable beliefs of the officers executing such Officers' Certificate at the time of such execution (and that estimates of cost savings from prior acquisitions have been reevaluated and updated) and (z) that any related incurrence of Indebtedness is permitted pursuant to the Indenture. (ii) Consolidated Cash Flow shall be further increased to reflect the annualized amount of any cost savings expected by the Company but not yet realized in respect of any acquisition made by the Company during the four fiscal quarters immediately preceding the four-quarter reference period prior to the Calculation Date, to the extent such cost savings are (x) expected to result from steps taken not later than the first anniversary of the relevant acquisition and (y) determined and certified as set forth in clause (i) above. 121 129 In addition, in calculating the Fixed Charge Coverage Ratio, discontinued operations will be given pro forma effect as follows: (1) the Consolidated Cash Flow attributable to discontinued operations, as determined in accordance with GAAP, and operations or businesses disposed of on or prior to the Calculation Date, shall be excluded, and (2) the Fixed Charges attributable to discontinued operations, as determined in accordance with GAAP, and operations or businesses disposed of on or prior to the Calculation Date, shall be excluded, but only to the extent that the obligations giving rise to such Fixed Charges will not be obligations of the Company or any of its Restricted Subsidiaries following the Calculation Date. "Fixed Charges" means, with respect to any Person for any period, the sum of (i) the consolidated interest expense of such Person and its Restricted Subsidiaries for such period, whether paid or accrued (including, without limitation, amortization of original issue discount, non-cash interest payments, the interest component of any deferred payment obligations, the interest component of all payments associated with Capital Lease Obligations, commissions, discounts and other fees and charges incurred in respect of letter of credit or bankers' acceptance financings, and net payments (if any) pursuant to Hedging Obligations) and (ii) the consolidated interest expense of such Person and its Restricted Subsidiaries that was capitalized during such period, and (iii) any interest expense on Indebtedness of another Person that is Guaranteed by such Person or one of its Restricted Subsidiaries or secured by a Lien on assets of such Person or one of its Restricted Subsidiaries (whether or not such Guarantee or Lien is called upon) and (iv) the product of (a) all cash dividend payments (and non-cash dividend payments in the case of a Person that is a Restricted Subsidiary) paid to any Person other than the Company or a Restricted Subsidiary on any series of Preferred Stock of such Person, times (b) a fraction, the numerator of which is one and the denominator of which is one minus the then current combined federal, state and local statutory tax rate of such Person paying the dividend, expressed as a decimal, in each case, on a consolidated basis and in accordance with GAAP. "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as have been approved by a significant segment of the accounting profession, which are in effect on the date of the Indenture. "Government Securities" means securities that are (a) direct obligations of the United States of America for the timely payment of which its full faith and credit is pledged or (b) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America the timely payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, which, in either case, are not callable or redeemable at the option of the issuer thereof, and shall also include a depository receipt issued by a bank (as defined in Section 3(a)(2) of the Securities Act), as custodian with respect to any such Government Security or a specific payment of principal of or interest on any such Government Security held by such custodian for the account of the holder of such depository receipt; provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the Government Security or the specific payment of principal of or interest on the Government Security evidenced by such depository receipt. "Guarantee" means a guarantee (other than by endorsement of negotiable instruments for collection in the ordinary course of business), direct or indirect, in any manner (including, without limitation, letters of credit and reimbursement agreements in respect thereof), of all or any part of any Indebtedness. 122 130 "Guarantors" means each Subsidiary of the Company that executes a Senior Subordinated Guarantee in accordance with the provisions of the Indenture, and, in each case, their respective successors and assigns, while such Senior Subordinated Guarantee is outstanding. "Hedging Obligations" means, with respect to any Person, the obligations of such Person under (i) currency exchange or interest rate swap agreements, currency exchange or interest rate cap agreements and currency exchange or interest rate collar agreements and (ii) other agreements or arrangements designed to protect such Person against fluctuations in currency exchange or interest rates. "Holder" means a holder of any of the Notes or the Exchange Notes. "Indebtedness" means, with respect to any Person, any indebtedness of such Person, whether or not contingent, in respect of borrowed money or evidenced by bonds, notes, debentures or similar instruments or letters of credit (or reimbursement agreements in respect thereof) or banker's acceptances or representing Capital Lease Obligations or the balance deferred and unpaid of the purchase price of any property or representing any Hedging Obligations, except any such balance that constitutes an accrued expense or trade payable, if and to the extent any of the foregoing indebtedness (other than letters of credit and Hedging Obligations) would appear as a liability upon a balance sheet of such Person prepared in accordance with GAAP, as well as all indebtedness of others secured by a Lien on any asset of such Person (whether or not such indebtedness is assumed by such Person) and, to the extent not otherwise included, the Guarantee by such Person of any Indebtedness of any other Person. "Independent Financial Advisor" means an accounting, appraisal, investment banking firm or consultant of nationally recognized standing that is not an Affiliate of the Company and that is, in the judgment of the Company's Board of Directors, qualified to perform the task for which it has been engaged. "Investments" means, with respect to any Person, all investments by such Person in other Persons (including Affiliates) in the forms of direct or indirect loans (including guarantees of Indebtedness or other obligations), advances (other than cash advances made to suppliers with respect to current or anticipated purchases of inventory in the ordinary course of business) or capital contributions (excluding commission, travel and similar advances to officers and employees made in the ordinary course of business), purchases or other acquisitions of Indebtedness, Equity Interests or other securities (directly from the issuer thereof or from third parties) together with all items that are or would be classified as investments on a balance sheet prepared in accordance with GAAP; provided that an acquisition of Equity Interests or other securities by the Company for consideration consisting of common equity securities of the Company shall not be deemed to be an Investment. If the Company or any Subsidiary of the Company sells or otherwise disposes of any Equity Interests of any direct or indirect Subsidiary of the Company such that, after giving effect to any such sale or disposition, the Company no longer owns, directly or indirectly, greater than 50% of the outstanding Equity Interests of such Subsidiary, the Company shall be deemed to have made an Investment on the date of any such sale or disposition equal to the fair market value of the Equity Interests of such Subsidiary not sold or disposed of. "Joint Ventures" means all corporations, partnerships, associations or other business entities (i) that are engaged in a Principal Business and (ii) of which 50% of the total voting power of shares of Capital Stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by the Company or one or more Restricted Subsidiaries of the Company (or a combination thereof). "Letter of Credit Obligations" means all Obligations in respect of Indebtedness of the Company or any of its Restricted Subsidiaries with respect to letters of credit issued pursuant to the Bank Credit Agreement, which Indebtedness shall be deemed to consist of (a) the aggregate maximum 123 131 amount then available to be drawn under all such letters of credit (the determination of such maximum amount to assume compliance with all conditions for drawing), and (b) the aggregate amount that has then been paid by, and not reimbursed to, the issuers under such letters of credit. "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset, whether or not filed, recorded or otherwise perfected under applicable law (including any conditional sale or other title retention agreement, any lease in the nature thereof, any option or other agreement to sell or give a security interest in and any filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction). "Mortgage Financing" means the incurrence by the Company or a Restricted Subsidiary of the Company of any Indebtedness secured by a mortgage or other Lien on real property acquired or improved by the Company or any Restricted Subsidiary of the Company after the date of the Indenture. "Mortgage Refinancing" means the incurrence by the Company or a Restricted Subsidiary of the Company of any Indebtedness secured by a mortgage or other Lien on real property subject to a mortgage or other Lien existing on the date of the Indenture or created or incurred subsequent to the date of the Indenture as permitted by the terms of the Indenture and owned by the Company or any Restricted Subsidiary of the Company. "Net Income" means, with respect to any Person, the net income (loss) of such Person, determined in accordance with GAAP and before any reduction in respect of Preferred Stock dividends, excluding, however, (i) any gain (but not loss), together with any related provision for taxes on such gain (but not loss), realized in connection with (a) any Asset Sale (including, without limitation, dispositions pursuant to sale and leaseback transactions) or (b) the disposition of any securities by such Person or any of its Restricted Subsidiaries or the extinguishment of any Indebtedness of such Person or any of its Restricted Subsidiaries and (ii) any extraordinary or nonrecurring gain (but not loss), together with any related provision for taxes on such extraordinary or nonrecurring gain (but not loss). "Net Proceeds" means the aggregate cash proceeds received by the Company or any of its Restricted Subsidiaries in respect of any Asset Sale (including, without limitation, any cash received upon the sale or other disposition of any non-cash consideration received in any Asset Sale), net of the direct costs relating to such Asset Sale (including, without limitation, legal, accounting and investment banking fees, and brokerage and sales commissions) and any relocation expenses incurred as a result thereof, taxes paid or payable as a result thereof (after taking into account any available tax credits or deductions and any tax sharing arrangements), amounts required to be applied to the repayment of Indebtedness (other than Bank Debt) secured by a Lien on the asset or assets that were the subject of such Asset Sale and any reserve for adjustment in respect of the sale price of such asset or assets established in accordance with GAAP. "Non-Guarantor Subsidiary" means each Subsidiary of the Company that is not a Guarantor. "Non-Recourse Debt" means Indebtedness of an Unrestricted Subsidiary (i) as to which neither the Company nor any of its Restricted Subsidiaries (a) provides credit support of any kind (including any undertaking, agreement or instrument that would constitute Indebtedness), (b) is directly or indirectly liable (as a guarantor or otherwise), or (c) constitutes the lender; and (ii) no default with respect to which (including any rights that the holders thereof may have to take enforcement action against an Unrestricted Subsidiary) would permit (upon notice, lapse of time or both) any holder of any other Indebtedness of the Company or any of its Restricted Subsidiaries to declare a default on such other Indebtedness of the Company or any of its Restricted Subsidiaries or cause the payment thereof to be accelerated or payable prior to its stated maturity; and (iii) as to which the lenders have been notified in writing that they will not have any recourse to the stock or assets of the Company or any of its Restricted Subsidiaries. 124 132 "Obligations" means any principal, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness. "Officers' Certificate" means a certificate signed on behalf of the Company, by two officers of the Company, one of whom must be the principal executive officer, the principal financial officer, the treasurer or the principal accounting officer of the Company, that meets the requirements set forth in the Indenture. "Permitted Holders" means Goldman, Sachs & Co. and any of its Affiliates. "Permitted Investments" means (a) any Investment in the Company or in a Restricted Subsidiary of the Company (including the acquisition of any Equity Interest in a Restricted Subsidiary) (b) any investment in cash and Cash Equivalents; (c) any Investment by the Company or any Restricted Subsidiary of the Company in a Person, if as a result of such Investment (A) such Person becomes a Restricted Subsidiary of the Company or (B) such Person, in one transaction or a series of related transactions, is merged, consolidated or amalgamated with or into, or transfers or conveys substantially all of its assets to, or is liquidated into, the Company or a Restricted Subsidiary of the Company; (d) any Investment made as a result of the receipt of consideration not constituting cash or Cash Equivalents from an Asset Sale that was made pursuant to and in compliance with the covenant described above under "-- Repurchase at the Option of Holders -- Asset Sales"; (e) any Investment existing on the date of the Indenture; (f) any Investment by Restricted Subsidiaries in other Restricted Subsidiaries and Investments by Subsidiaries that are not Restricted Subsidiaries in other Subsidiaries that are not Restricted Subsidiaries; (g) advances to employees not in excess of $2.5 million outstanding at any one time; (h) any Investment acquired by the Company or any of its Restricted Subsidiaries (A) in exchange for any other Investment or accounts receivable held by the Company or any such Restricted Subsidiary in connection with or as a result of a bankruptcy, workout, reorganization or recapitalization of the issuer of such other Investment or accounts receivable or (B) as a result of a foreclosure by the Company or any of its Restricted Subsidiaries with respect to any secured Investment or other transfer of title with respect to any secured Investment in default; (i) Hedging Obligations; (j) loans and advances to officers, directors and employees for business-related travel expenses, moving expenses and other similar expenses, in each case incurred in the ordinary course of business; (k) Investments the payment for which consists exclusively of Equity Interests (exclusive of Disqualified Stock) of the Company; and (l) additional Investments having an aggregate fair market value, taken together with all other Investments made pursuant to this clause (l) that are at that time outstanding, not to exceed $15 million plus 5% of the increase in Total Assets since the Closing Date at the time of such Investment (with the fair market value of each Investment being measured at the time made and without giving effect to subsequent changes in value). "Permitted Refinancing Indebtedness" means any Indebtedness of the Company or any of its Restricted Subsidiaries issued in exchange for, or the net proceeds of which are used to extend, refinance, renew, replace, defease or refund other Indebtedness of the Company or any of its Restricted Subsidiaries in whole or in part; provided that: (i) the principal amount (or accreted value, if applicable) of such Permitted Refinancing Indebtedness does not exceed the principal amount (or accreted value, if applicable) of the Indebtedness so extended, refinanced, renewed, replaced, defeased or refunded (plus the amount of reasonable expenses incurred in connection therewith); (ii) such Permitted Refinancing Indebtedness has a final maturity date on or later than the final maturity date of, and has a Weighted Average Life to Maturity equal to or greater than the Weighted Average Life to Maturity of, the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; (iii) if the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded is subordinated in right of payment to the Exchange Notes, such Permitted Refinancing Indebtedness has a final maturity date later than the final maturity date of the Exchange Notes, and is subordinated in right of payment to the Exchange Notes, on terms at least as favorable to the Holders of Exchange Notes as those contained in the documentation governing the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; and 125 133 (iv) such Indebtedness is incurred either by the Company or by the Restricted Subsidiary who is the obligor on the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded. "Person" means any individual, corporation, partnership, limited liability company, joint venture, association, joint-stock company, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity. "Preferred Stock" means any Equity Interest with preferential right of payment of dividends or upon liquidation, dissolution, or winding up. "Principal Business" means (i) the design, manufacture and distribution of party goods and related products, including, but not limited to, tableware (such as plates, cups, cutlery, napkins and table covers), decorations, banners, balloons, novelties, horns, party hats, party favors, stationery, invitations, greeting cards, gift wrap, ribbons, gift boxes, gift bags, giftware, costumes, masks and makeup, and (ii) any activity or business incidental, directly related or similar to those set forth in clause (i) of this definition, or any business or activity that is a reasonable extension, development or expansion thereof or ancillary thereto. "Regulation S" means Regulation S promulgated under the Securities Act. "Related Parties" means any Person controlled by the Permitted Holders, including any partnership of which any of the Permitted Holders or their Affiliates is a general partner. "Repurchase Offer" means an offer made by the Company to purchase all or any portion of the Exchange Notes pursuant to the provisions described under the covenants entitled " -- Repurchase at the Option of Holders -- Change of Control" or " -- Repurchase at the Option of Holders -- Asset Sales". "Restricted Investment" means an Investment other than a Permitted Investment. "Restricted Subsidiary" of a Person means any Subsidiary of the referent Person that is not (i) an Unrestricted Subsidiary or (ii) a direct or indirect Subsidiary of an Unrestricted Subsidiary; provided, however, that upon the occurrence of any Unrestricted Subsidiary ceasing to be an Unrestricted Subsidiary, such Subsidiary shall be included in the definition of Restricted Subsidiary. "Rule 144A" means Rule 144A promulgated under the Securities Act. "Senior Guarantees" means the Guarantees by the Guarantors of Obligations under the Bank Credit Agreement. "Senior Subordinated Guarantees" means the Guarantees by the Guarantors of the Obligations under the Indenture and the Exchange Notes. "Senior Subordinated Indebtedness" means the Exchange Notes and any other indebtedness which ranks pari passu in right of payment to the Exchange Notes. "Significant Restricted Subsidiary" means any Restricted Subsidiary that would be a "significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated pursuant to the Act, as such Regulation is in effect on the date of the Indenture. "Specified Real Estate" means the real properties owned by the Company or its Subsidiaries as of the date of the Indenture, comprising the distribution facilities in Chester, New York, Montreal, Quebec, Canada, and Melbourne, Australia. "Stated Maturity"means, with respect to any installment of interest or principal on, or any other payments with respect to, any series of Indebtedness, the date on which such payment of interest or principal or other payment (including any sinking fund payment) was scheduled, or required to be paid, but shall not include any acceleration of such payment or any contingent obligations to repay, redeem or repurchase any such interest or principal prior to the date originally scheduled for the payment thereof. 126 134 "Subordinated Asset Sale Offer" has the meaning set forth under the caption " -- Repurchase at the Option of Holders -- Asset Sales". "Subordinated Indebtedness" means any Indebtedness of the Company or any of its Restricted Subsidiaries which is expressly by its terms subordinated in right of payment to any other Senior Subordinated Indebtedness. "Subsidiary" means, with respect to any Person, (i) any corporation, association or other business entity of which more than 50% of the total voting power of shares of Capital Stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by such Person or one or more of the other Subsidiaries of that Person (or a combination thereof) and (ii) any partnership (a) the sole general partner or the managing general partner of which is such Person or a Subsidiary of such Person or (b) the only general partners of which are such Person or one or more Subsidiaries of such Person (or any combination thereof). "Total Assets" means, with respect to any Person, the total consolidated assets of such Person and its Restricted Subsidiaries, as shown on the most recent balance sheet of such Person. "Unrestricted Subsidiary" means any Subsidiary (other than the Guarantors or any successor to any of them) that is designated by the Board of Directors as an Unrestricted Subsidiary pursuant to a Board Resolution, but only to the extent that such Subsidiary: (a) has no Indebtedness other than Non-Recourse Debt; (b) is not party to any agreement, contract, arrangement or understanding with the Company or any Restricted Subsidiary of the Company unless the terms of any such agreement, contract, arrangement or understanding are no less favorable to the Company or such Restricted Subsidiary than those that might be obtained at the time from Persons who are not Affiliates of the Company; (c) is a Person with respect to which neither the Company nor any of its Restricted Subsidiaries has any direct or indirect obligation (x) to subscribe for additional Equity Interests or (y) to maintain or preserve such Person's financial condition or to cause such Person to achieve any specified levels of operating results; (d) has not guaranteed and does not otherwise directly or indirectly provide credit support for any Indebtedness of the Company or any of its Restricted Subsidiaries; and (e) has at least one director on its board of directors that is not a director or executive officer of the Company or any of its Restricted Subsidiaries and has at least one executive officer that is not a director or executive officer of the Company or any of its Restricted Subsidiaries. Any such designation by the Board of Directors shall be evidenced to the Trustee by filing with the Trustee a certified copy of the Board Resolution giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing conditions and was permitted by the covenant described above under "Certain Covenants -- Restricted Payments". If, at any time, any Unrestricted Subsidiary would fail to meet the foregoing requirements as an Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for purposes of the Indenture and, so long as such Unrestricted Subsidiary remains a Subsidiary, any Indebtedness of such Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of the Company as of such date (and, if such Indebtedness is not permitted to be incurred as of such date under the covenant described under " -- Incurrence of Indebtedness and Issuance of Disqualified Stock', the Company shall be in default of such covenant). The Board of Directors of the Company may at any time designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such designation shall be deemed to be an incurrence of Indebtedness by a Restricted Subsidiary of the Company of any outstanding Indebtedness of such Unrestricted Subsidiary and such designation shall only be permitted if (i) such Indebtedness is permitted under the covenant described under "Certain Covenants - -- Incurrence of Indebtedness and Issuance of Disqualified Stock", and (ii) no Default or Event of Default would be in existence following such designation. "Voting Stock" means, with respect to any Person, any class or series of capital stock of such Person that is ordinarily entitled to vote in the election of directors thereof at a meeting of 127 135 stockholders called for such purpose, without the occurrence of any additional event or contingency. "Weighted Average Life to Maturity" means, when applied to any Indebtedness at any date, the number of years obtained by dividing (i) the sum of the products obtained by multiplying (a) the amount of each then remaining installment, sinking fund, serial maturity or other required payments of principal, including payment at final maturity, in respect thereof, by (b) the number of years (calculated to the nearest one-twelfth) that will elapse between such date and the making of such payment, by (ii) the then outstanding principal amount of such Indebtedness. "Wholly Owned Restricted Subsidiary" is any Wholly Owned Subsidiary that is a Restricted Subsidiary. "Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person all of the outstanding Capital Stock or other ownership interests of which (other than directors' qualifying shares) shall at the time be owned by such Person or by one or more Wholly Owned Subsidiaries of such Person or by such Person and one or more Wholly Owned Subsidiaries of such Person. 128 136 DESCRIPTION OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF AN INVESTMENT IN THE EXCHANGE NOTES The following is a summary of certain federal income tax consequences associated with the acquisition, ownership, and disposition of the Exchange Notes by holders who acquire the Exchange Notes in the Exchange Offer. The following summary does not discuss all of the aspects of federal income taxation that may be relevant to such a prospective holder of the Exchange Notes in light of his or her particular circumstances, or to certain types of holders (including dealers in securities, insurance companies, tax-exempt organizations, financial institutions, broker-dealers, S corporations, and except as discussed below, foreign corporations, persons who are not citizens or residents of the United States and persons who hold the Exchange Notes as part of a hedge, straddle, "synthetic security" or other integrated investment) which are subject to special treatment under the federal income tax laws. This discussion also does not address the tax consequences to nonresident aliens or foreign corporations that are subject to United States federal income tax on a net basis on income with respect to an Exchange Note because such income is effectively connected with the conduct of a U.S. trade or business. Such holders generally are taxed in a similar manner to U.S. Holders (as defined below); however, certain special rules apply. In addition, this discussion is limited to holders who hold the Exchange Notes as capital assets within the meaning of Section 1221 of the Code. This summary also does not describe any tax consequences under state, local, or foreign tax laws. The discussion is based upon the Code, Treasury Regulations, IRS rulings and pronouncements and judicial decisions all in effect as of the date hereof, all of which are subject to change at any time by legislative, judicial or administrative action. Any such changes may be applied retroactively in a manner that could adversely affect a holder of the Exchange Notes. The Company has not sought and will not seek any rulings or opinions from the IRS or counsel with respect to the matters discussed below. There can be no assurance that the IRS will not take positions concerning the tax consequences of the purchase, ownership or disposition of the Exchange Notes which are different from those discussed herein. PERSONS CONSIDERING THE PURCHASE, OWNERSHIP OR DISPOSITION OF EXCHANGE NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE U.S. FEDERAL INCOME TAX CONSEQUENCES THAT MAY APPLY TO THEM, AS WELL AS THE APPLICATION OF STATE, LOCAL, FOREIGN AND OTHER TAX LAWS. CERTAIN FEDERAL INCOME TAX CONSEQUENCES TO U.S. HOLDERS A U.S. Holder is any holder who or which is (i) a citizen or resident of the United States; (ii) a domestic corporation or domestic partnership; (iii) an estate other than a "foreign estate" as defined in Section 7701(a)(31) of the Code; or (iv) a trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more United States persons have the authority to control all substantial decisions of the trust. Taxation of Stated Interest. In general, U.S. Holders of the Exchange Notes will be required to include interest received thereon in taxable income as ordinary income at the time it accrues or is received, in accordance with the holder's regular method of accounting for federal income tax purposes. Effect of Optional Redemption and Repurchase. Under certain circumstances the Company may be entitled to redeem a portion of the Exchange Notes. In addition, under certain circumstances, each holder of Exchange Notes will have the right to require the Company to repurchase all or any part of such holder's Exchange Notes. Treasury Regulations contain special rules for determining the yield to maturity and maturity on a debt instrument in the event the debt instrument provides for a contingency that could result in the acceleration or deferral of one or more payments. The Company does not believe that these rules should apply to either the Company's right to redeem Exchange Notes or to the holders' rights to require the Company to repurchase Exchange 129 137 Notes. Therefore, the Company has no present intention of treating such redemption and repurchase provisions of the Exchange Notes as affecting the computation of the yield to maturity or maturity date of the Exchange Notes. Sale or other Taxable Disposition of the Exchange Notes. The sale, exchange, redemption, retirement or other taxable disposition of an Exchange Note will result in the recognition of gain or loss to a U.S. Holder in an amount equal to the difference between (a) the amount of cash and fair market value of property received in exchange therefor (except to the extent attributable to the payment of accrued but unpaid stated interest) and (b) the holder's adjusted tax basis in such Exchange Note. A U.S. Holder's basis in an Exchange Note acquired in exchange for a Note pursuant to the terms set forth in this Prospectus should be the same as such U.S. Holder's basis in the Notes exchanged therefor. See "Certain Federal Income Tax Consequences of the Exchange Offer", above. Otherwise, a U.S. Holder's initial tax basis in an Exchange Note purchased by such Holder will be equal to the price paid for the Exchange Note. Any gain or loss on the sale or other taxable disposition of an Exchange Note generally will be capital gain or loss. Payments on such disposition for accrued interest not previously included in income will be treated as ordinary interest income. Backup Withholding. The backup withholding rules require a payor to deduct and withhold a tax if (i) the payee fails to furnish a taxpayer identification number ("TIN") in the prescribed manner, (ii) the IRS notifies the payor that the TIN furnished by the payee is incorrect, (iii) the payee has failed to report properly the receipt of "reportable payments" and the IRS has notified the payor that withholding is required, or (iv) the payee fails to certify under the penalty of perjury that such payee is not subject to backup withholding. If any one of the events discussed above occurs with respect to a holder of Exchange Notes, the Company, its paying agent or other withholding agent will be required to withhold a tax equal to 31% of any "reportable payment" made in connection with the Exchange Notes of such holder. A "reportable payment" includes, among other things, amounts paid in respect of interest on an Exchange Note. Any amounts withheld from a payment to a holder under the backup withholding rules will be allowed as a refund or credit against such holder's federal income tax, provided that the required information is furnished to the IRS. Certain holders (including, among others, corporations and certain tax-exempt organizations) are not subject to backup withholding. MARKET DISCOUNT AND PREMIUM If a U.S. Holder of an Exchange Note has a tax basis in the Exchange Note that is less than its "stated redemption price at maturity," the amount of the difference will be treated as "market discount" for U.S. federal income tax purposes, unless such difference is less than a specified de minimis amount. Under the market discount rules of the Code, a U.S. Holder will be required to treat any principal payment on, or any gain on the sale, exchange, retirement or other disposition of, an Exchange Note as ordinary income to the extent of any accured market discount that has not previously been included in income. Market discount generally accrues on a straight-line basis over the term of a debt instrument remaining after the acquisition. A U.S. Holder may not be allowed to deduct immediately all or a portion of the interest expense on any indebtedness incurred or continued to purchase or to carry such Exchange Note (or the Note for which the Exchange Note was exchanged, as the case may be). A U.S. Holder may elect to include market discount in income currently as it accrues (either on a straight-line basis or, if the U.S. Holder so elects, on a constant yield basis), in which case the interest deferral rule set forth in the preceding sentence will not apply. Such an election will apply to all bonds acquired by the U.S. Holder on or after the first day of the first taxable year to which such election applies and may be revoked only with the consent of the IRS. 130 138 If a U.S. Holder purchases an Exchange Note (or purchased the Note for which the Exchange Note was exchanged, as the case may be) for an amount greater than the sum of all amounts payable on the Exchange Note (or Note) after the purchase date, other than stated interest, such holder will be considered to have purchased such Exchange Note (or such Note) with "amortizable bond premium" equal in amount to such excess, and may elect (in accordance with applicable Code provisions) to amortize such premium, using a constant yield method over the remaining term. The amount amortized in any year will be treated as a reduction of the U.S. Holder's interest income from the Exchange Note in such year. A U.S. Holder that elects to amortize bond premium must reduce its tax basis in the Exchange Note by the amount of the premium amortized in any year. An election to amortize bond premium applies to all taxable debt obligations then owned and thereafter acquired by the U.S. Holder and may be revoked only with the consent of the IRS. CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES FOR NON-U.S. HOLDERS This section discusses special rules applicable to a Non-U.S. Holder of Exchange Notes. This summary does not address the tax consequences to stockholders, partners or beneficiaries in a Non-U.S. Holder. For purposes hereof, a "Non-U.S. Holder" is any person who is not a U.S. Holder and is not subject to U.S. federal income tax on a net basis on income with respect to an Exchange Note because such income is effectively connected with the conduct of a U.S. trade or business. Interest. Payments of interest to a Non-U.S. Holder that do not qualify for the portfolio interest exception discussed below will be subject to withholding of U.S. federal income tax at a rate of 30% unless a U.S. income tax treaty applies to reduce the rate of withholding. To claim a treaty reduced rate, the Non-U.S. Holder must provide a properly executed Form 1001. Interest that is paid to a Non-U.S. Holder on an Exchange Note will not be subject to U.S. income or withholding tax if the interest qualifies as "portfolio interest". Generally, interest on the Exchange Notes that is paid by the Company will qualify as portfolio interest if (i) the Non-U.S. Holder does not own, actually or constructively, 10% or more of the total combined voting power of all classes of stock of the Company entitled to vote; (ii) the Non-U.S. Holder is not a controlled foreign corporation that is related to the Company actually or constructively through stock ownership for U.S. federal income tax purposes; (iii) the Non-U.S. Holder is not a bank receiving interest on a loan entered into in the ordinary course of business; and (iv) either (x) the beneficial owner of the Exchange Note provides the Company or its paying agent with a properly executed certification on IRS Form W-8 (or a suitable substitute form) signed under penalties of perjury that the beneficial owner is not a "U.S. person" for U.S. federal income tax purposes and that provides the beneficial owner's name and address, or (y) a securities clearing organization, bank or other financial institution that holds customers' securities in the ordinary course of its business holds the Exchange Note and certifies to the Company or its agent under penalties of perjury that the IRS Form W-8 (or a suitable substitute) has been received by it from the beneficial owner of the Exchange Note or a qualifying intermediary and furnishes the payor a copy thereof. Recently issued Treasury regulations (the "Withholding Regulations") that will be effective with respect to payments made after December 31, 1998, will provide alternative methods for satisfying the certification requirements described in clause (iv) above. The Withholding Regulations also will require, in the case of Exchange Notes held by a foreign partnership, that (x) the certification described in clause (iv) above be provided by the partners and (y) the partnership provide certain information, including its taxpayer identification number. A look-through rule will apply in the case of tiered partnerships. Sale, Exchange or Retirement of Exchange Notes. Any gain realized by a Non-U.S. Holder on the sale, exchange or retirement of the Exchange Notes, will generally not be subject to U.S. federal income tax or withholding unless (i) the Non-U.S. Holder is an individual who was present in the U.S. for 183 days or more in the taxable year of the disposition and meets certain other 131 139 requirements; or (ii) the Non-U.S. Holder is subject to tax pursuant to certain provisions of the Code applicable to certain individuals who renounce their U.S. citizenship or terminate long-term U.S. residency. If a Non-U.S. Holder falls under (ii) above, the holder will be taxed on the net gain derived from the sale under the graduated U.S. federal income tax rates that are applicable to U.S. citizens and resident aliens, and may be subject to withholding under certain circumstances. If a Non-U.S. Holder falls under (i) above, the holder generally will be subject to U.S. federal income tax at a rate of 30% on the gain derived from the sale (or reduced treaty rate) and may be subject to withholding in certain circumstances. U.S. Information Reporting and Backup Withholding Tax. Back-up withholding generally will not apply to an Exchange Note issued in registered form that is beneficially owned by a Non-U.S. Holder if the certification of Non-U.S. Holder status is provided to the Company or its agent as described above in "Certain Federal Income Tax Consequences to Non-U.S. Holders -- Interest", provided that the payor does not have actual knowledge that the holder is a U.S. person. The Company may be required to report annually to the IRS and to each Non-U.S. Holder the amount of interest paid to, and the tax withheld, if any, with respect to each Non-U.S. Holder. If payments of principal and interest are made to the beneficial owner of an Exchange Note by or through the foreign office of a custodian, nominee or other agent of such beneficial owner, or if the proceeds of the sale of Exchange Notes are paid to the beneficial owner of an Exchange Note through a foreign office of a "broker" (as defined in the pertinent Regulations), the proceeds will not be subject to backup withholding (absent actual knowledge that the payee is a U.S. person). Information reporting (but not backup withholding) will apply, however, to a payment by a foreign office of a custodian, nominee, agent or broker that is (i) a U.S. person, (ii) a controlled foreign corporation for U.S. federal income tax purposes, or (iii) a foreign person that derives 50% or more of its gross income from the conduct of a U.S. trade or business for a specified three-year period or, effective after December 31, 1998, by a foreign office of certain other persons; unless the broker has in its records documentary evidence that the holder is a Non-U.S. Holder and certain conditions are met (including that the broker has no actual knowledge that the holder is a U.S. Holder) or the holder otherwise establishes an exemption. Payment through the U.S. office of a custodian, nominee, agent or broker is subject to both backup withholding at a rate of 31% and information reporting, unless the holder certifies that it is a Non-U.S. Holder under penalties of perjury or otherwise establishes an exemption. Any amount withheld under the backup withholding rules from a payment to a Non-U.S. Holder will be allowed as a credit against, or refund of, such holder's U.S. federal income tax liability, provided that certain information is provided by the holder to the IRS. 132 140 PLAN OF DISTRIBUTION Each broker-dealer that receives Exchange Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of Exchange Notes received in exchange for Notes where such Notes were acquired as a result of market-making activities or other trading activities. The Company has agreed that, for a period of 195 days after the Registration Statement is declared effective, it will make this Prospectus, as amended or supplemented, available to any broker-dealer for use in connection with any such resale. In addition, until May , 1998 (90 days after commencement of the Exchange Offer), all dealers effecting transactions in the Exchange Notes may be required to deliver a Prospectus. The Company will not receive any proceeds from any sales of the Exchange Notes by broker-dealers. Exchange Notes received by broker-dealers for their own account pursuant to the Exchange Offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the Exchange Notes or a combination of such methods of resale, or negotiated prices. Any such resale may be made directly to the purchaser or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such broker-dealer and/or the purchasers of any such Exchange Notes. Any broker-dealer that resells the Exchange Notes that were received by it for its own account pursuant to the Exchange Offer and any broker or dealer that participates in a distribution of such Exchange Notes may be deemed to be an "underwriter" within the meaning of the Securities Act and any profit on any such resale of Exchange Notes and any commissions or concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act. The Letter of Transmittal states that, by acknowledging that it will deliver and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. For a period of 195 days after the Registration Statement is declared effective, the Company will promptly send additional copies of this Prospectus and any amendment or supplement to this Prospectus to any broker-dealer that requests such documents in the Letter of Transmittal. The Company has agreed to pay certain expenses incident to the Exchange Offer, other than commission or concessions of any brokers or dealers, and will indemnify the holders of the Exchange Notes (including any broker-dealers) against certain liabilities, including liabilities under the Securities Act. By acceptance of this Exchange Offer, each broker-dealer that receives Exchange Notes for its own account pursuant to the Exchange Offer agrees that, upon receipt of notice from the company of the happening of any event which makes any statement in the Prospectus untrue in any material respect or which requires the making of any changes in the Prospectus in order to make the statements therein not misleading (which notice the Company agrees to deliver promptly to such broker-dealer), such broker-dealer will suspend use of the Prospectus until the Company has amended or supplemented the Prospectus to correct such misstatement or omission and has furnished copies of the amended or supplemental Prospectus to such broker-dealer. EXPERTS The financial statements and schedule of the Company as of December 31, 1995 and 1996 and for the years ended December 31, 1994, 1995 and 1996, included in this Prospectus, have been included herein and in the Registration Statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein and in the Registration Statement, and upon the authority of said firm as experts in accounting and auditing. VALIDITY OF THE EXCHANGE NOTES The validity of the Exchange Notes will be passed upon for the Company by Wachtell, Lipton, Rosen & Katz, New York, New York, counsel to the Company. 133 141 INDEX TO FINANCIAL STATEMENTS
PAGE ------ Audited Financial Statements and Schedule: Report of Independent Auditors....................................................... F-2 Consolidated Balance Sheets -- December 31, 1996 and 1995............................ F-3 Consolidated Statements of Income -- For the Years Ended December 31, 1996, 1995 and 1994............................................................... F-4 Consolidated Statements of Stockholders' Equity -- For the Years Ended December 31, 1996, 1995 and 1994.................................................. F-5 Consolidated Statements of Cash Flows -- For the Years Ended December 31, 1996, 1995 and 1994.................................................. F-6 Notes to Consolidated Financial Statements........................................... F-8 Schedule -- Valuation and Qualifying Accounts........................................ F-31 Unaudited Financial Statements: Consolidated Balance Sheets -- September 30, 1997 and December 31, 1996.............. F-32 Consolidated Statements of Income -- For the Nine Months Ended September 30, 1997 and 1996....................................................... F-33 Consolidated Statement of Stockholders' Equity -- For the Nine Months Ended September 30, 1997................................................................ F-34 Consolidated Statements of Cash Flows -- For the Nine Months Ended September 30, 1997 and 1996....................................................... F-35 Notes to Consolidated Financial Statements........................................... F-36
F-1 142 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders AMSCAN HOLDINGS, INC.: We have audited the accompanying consolidated financial statements of Amscan Holdings, Inc. and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Amscan Holdings, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG PEAT MARWICK LLP February 14, 1997, except for Notes 16 and 18 which are as of December 19, 1997 Stamford, Connecticut F-2 143 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
DECEMBER 31, ---------------------- 1996 1995 -------- -------- ASSETS Current assets: Cash and cash equivalents....................................... $ 1,589 $ 2,492 Accounts receivable, net of allowances of $4,138 and $2,505, respectively................................................. 37,378 31,880 Inventories..................................................... 45,693 45,013 Deposits and other.............................................. 11,360 2,920 -------- -------- Total current assets......................................... 96,020 82,305 Property, plant and equipment, net................................ 34,663 29,173 Intangible assets, net............................................ 7,443 350 Other assets, net................................................. 2,148 2,773 -------- -------- Total assets................................................. $140,274 $114,601 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Loans and notes payable......................................... $ 29,328 $ 37,849 Subordinated debt and other to stockholders..................... 1,393 18,453 Accounts payable................................................ 7,128 5,855 Accrued expenses................................................ 10,225 9,526 Current installments of long-term indebtedness.................. 2,541 2,239 -------- -------- Total current liabilities.................................... 50,615 73,922 Long-term indebtedness, excluding current installments............ 15,085 12,284 Deferred tax liabilities.......................................... 5,662 -- Other............................................................. 963 1,190 -------- -------- Total liabilities............................................ 72,325 87,396 Stockholders' equity: Preferred stock................................................. -- -- Common stock.................................................... 2,070 393 Additional paid-in capital...................................... 61,503 9,090 Retained earnings............................................... 4,748 18,462 Foreign currency translation adjustment......................... (372) (653) Treasury stock, at cost......................................... -- (87) -------- -------- Total stockholders' equity................................... 67,949 27,205 -------- -------- Total liabilities and stockholders' equity................... $140,274 $114,601 ========= =========
See accompanying notes to consolidated financial statements. F-3 144 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------- 1996 1995 1994 --------- -------- -------- Net sales.......................................... $ 192,705 $167,403 $132,029 Cost of sales...................................... 123,913 108,654 86,748 -------- -------- -------- Gross profit.................................. 68,792 58,749 45,281 Operating expenses: Selling.......................................... 11,838 12,241 11,309 General and administrative....................... 19,266 15,002 14,460 Art and development.............................. 5,173 4,256 2,796 Non-recurring compensation in connection with the IPO........................................... 15,535 Special bonuses.................................. 4,222 2,581 2,200 -------- -------- -------- Total operating expenses...................... 56,034 34,080 30,765 -------- -------- -------- Income from operations........................ 12,758 24,669 14,516 Interest expense, net.............................. 6,691 5,772 3,843 Other expense (income), net........................ 335 (309) 82 -------- -------- -------- Income before income taxes and minority interests........................................ 5,732 19,206 10,591 Income taxes....................................... 1,952 731 464 Minority interests................................. 1,653 1,041 160 -------- -------- -------- Net income.................................... $ 2,127 $ 17,434 $ 9,967 ======== ======== ======== Pro forma data (unaudited) (note (16)): Income before income taxes....................... $ 4,079 $ 18,165 $ 10,431 Pro forma income tax expense..................... 1,827 7,403 4,238 -------- -------- -------- Pro forma net income.......................... $ 2,252 $ 10,762 $ 6,193 ======== ======== ======== Pro forma net income used for pro forma net income per share calculation................ $ 12,010 Pro forma net income per share................ $ 11,891 Pro forma weighted average common shares outstanding................................. 1,010
See accompanying notes to consolidated financial statements. F-4 145 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS)
FOREIGN ADDITIONAL CURRENCY COMMON PAID-IN RETAINED TRANSLATION TREASURY STOCK CAPITAL EARNINGS ADJUSTMENT STOCK TOTAL ------- ---------- --------- ---------- -------- --------- Balance as of December 31, 1993..... $ 393 $ 9,090 $ 9,520 $ (420) $ (87) $ 18,496 Net income.......................... 9,967 9,967 Subchapter S distributions and other............................. (7,450) (7,450) Net change in cumulative translation adjustment........................ (193) (193) ------ ------- -------- ----- ---- -------- Balance as of December 31, 1994..... 393 9,090 12,037 (613) (87) 20,820 Net income.......................... 17,434 17,434 Subchapter S distributions and other............................. (11,009) (11,009) Net change in cumulative translation adjustment........................ (40) (40) ------ ------- -------- ----- ---- -------- Balance as of December 31, 1995..... 393 9,090 18,462 (653) (87) 27,205 Net income.......................... 2,127 2,127 Net adjustment for exchange of shares issued in the Organization...................... 1,123 (1,210) 87 -- Subchapter S distributions and other............................. (7,583) (15,841) (23,424) Net proceeds from IPO............... 400 42,940 43,340 Shares issued to officer............ 66 7,854 7,920 Shares issued for acquisition....... 63 7,437 7,500 Contribution to ESOP and stock bonuses........................... 25 2,975 3,000 Net change in cumulative translation adjustment........................ 281 281 ------ ------- -------- ----- ---- -------- Balance as of December 31, 1996..... $2,070 $ 61,503 $ 4,748 $ (372) $ -- $ 67,949 ====== ======= ======== ===== ==== ========
See accompanying notes to consolidated financial statements. F-5 146 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, -------------------------------------- 1996 1995 1994 --------- --------- -------- Cash flows from operating activities: Net income.................................................... $ 2,127 $ 17,434 $ 9,967 Adjustments to reconcile net income to net cash provided by operating activities: Stock compensation expenses in connection with the IPO...... 10,920 Depreciation and amortization............................... 5,137 4,332 3,672 Loss (gain) on disposal of property and equipment........... 660 (5) 35 Provision for doubtful accounts............................. 2,350 1,581 2,676 Changes in operating assets and liabilities, net of acquisitions: Accounts receivable....................................... (7,848) (9,614) (5,041) Inventories............................................... (680) (10,548) (5,682) Deposits and other, net................................... (3,048) (101) (155) Other assets.............................................. 683 (1,172) (1,265) Accounts payable and accrued expenses..................... 1,972 2,814 912 --------- --------- -------- Net cash provided by operating activities................. 12,273 4,721 5,119 Cash flows from investing activities: Capital expenditures.......................................... (7,613) (4,522) (7,392) Proceeds from disposal of property and equipment.............. 9 98 --------- --------- -------- Net cash used in investing activities..................... (7,613) (4,513) (7,294) Cash flows from financing activities: Net proceeds from IPO......................................... 43,340 Proceeds from loans, notes payable and long-term indebtedness................................................ 3,273 42,311 6,324 Repayment of loans, notes payable and long-term indebtedness.. (11,968) (32,313) (2,434) Proceeds from loans, notes payable and subordinated indebtedness to Principal Stockholder....................... 4,000 6,316 Repayment of loans, notes payable and subordinated indebtedness to Principal Stockholder....................... (17,179) (2,842) Subchapter S distributions and other.......................... (23,424) (11,009) (7,450) --------- --------- -------- Net cash (used in) provided by financing activities....... (5,958) 147 2,756 Effect of exchange rate changes on cash....................... 395 (92) 270 --------- --------- -------- Net increase (decrease) in cash and cash equivalents...... (903) 263 851 Cash and cash equivalents at beginning of year.................. 2,492 2,229 1,378 --------- --------- -------- Cash and cash equivalents at end of year........................ $ 1,589 $ 2,492 $ 2,229 ========= ========= ======== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest...................................................... $ 7,826 $ 4,486 $ 4,025 Taxes......................................................... 1,085 601 112
See accompanying notes to consolidated financial statements. F-6 147 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED) (DOLLARS IN THOUSANDS) SUPPLEMENTAL INFORMATION ON NONCASH ACTIVITIES: Capital lease obligations of $3,395 and $648 were incurred in 1996 and 1994 respectively. There were no capital lease obligations incurred in 1995. In conjunction with the IPO, John A. Svenningsen (the "Principal Stockholder") and certain affiliates of the Principal Stockholder exchanged shares in Amscan Inc. and certain affiliated entities for 15,024,616 and 138,461 shares, respectively, in the Company. In conjunction with the IPO, the Company entered into an agreement to purchase an additional 50% of Am-Source, Inc. The Am-Source, Inc. stockholders exchanged all of their outstanding capital stock for 624,999 shares of the Company's stock valued at $7,500. In conjunction with the IPO, the Company incurred stock compensation expense of $7,920 for the issuance of stock to an officer and $3,000 for the establishment of the ESOP for the benefit of the Company's domestic employees and the payment of stock bonuses to certain of such employees. See accompanying notes to consolidated financial statements. F-7 148 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 (1) ORGANIZATION AND DESCRIPTION OF BUSINESS Amscan Holdings, Inc. ("Amscan Holdings") was incorporated on October 3, 1996 for the purpose of becoming the holding company for Amscan Inc. and certain affiliated entities in connection with an initial public offering of common stock ("IPO") involving the sale of 4,000,000 shares of its common stock at $12.00 per share. The IPO was completed on December 18, 1996 pursuant to which the Principal Stockholder and certain affiliates of the Principal Stockholder exchanged shares in Amscan Inc. and certain affiliates for 15,024,616 and 138,461 shares, respectively, in Amscan Holdings (the "Organization") and in the case of the Principal Stockholder, $133,000 in cash. Prior to the IPO, certain subsidiaries of Amscan Holdings were operated as Subchapter S corporations for federal and, where available, for state income tax purposes. In connection with the IPO, such subsidiaries declared a dividend representing distributions of accumulated Subchapter S corporation profits and a return of capital. These amounts were reflected as subordinated debt and repaid from the net proceeds of the IPO. Amscan Holdings and its subsidiaries (collectively the "Company") design, manufacture, contract for manufacture and distribute party and novelty goods principally in the United States, Canada and Europe. BASIS OF PRESENTATION The consolidated financial statements include the accounts of Amscan Holdings and its majority-owned subsidiaries (or with respect to less than majority-owned subsidiaries, on the equity basis). In connection with the IPO, there was a transfer of ownership between the former stockholders of Amscan Inc. and certain of its affiliates and Amscan Holdings whereby Amscan Holdings became the holding company for the business conducted by Amscan Inc. and certain of its affiliates. Such transfer of ownership was accounted for in a manner similar to a pooling of interests and resulted in Amscan Inc., Am-Source, Inc., JCS Realty Corp. and SSY Realty Corp. being taxed as Subchapter C corporations under federal and certain state income tax requirements. All material intercompany balances and transactions have been eliminated in consolidation. For periods prior to December 18, 1996, financial statements are presented on a combined basis. The name, Amscan Holdings' ownership and a brief description of the principal business activity of each consolidated subsidiary is presented below.
SUBSIDIARY OWNERSHIP PRINCIPAL ACTIVITY - ------------------------------------ --------- --------------------------------------------- Amscan Inc.......................... 100% Manufacturer -- paper tableware; and distributor -- worldwide Am-Source, Inc...................... 100 Manufacturer -- plastic products Trisar, Inc......................... 100 Manufacturer -- gift products Amscan Distributors (Canada) Ltd.... 100 Distributor -- Canada Amscan Holdings Limited............. 75 Distributor -- United Kingdom Amscan (Asia-Pacific) Pty. Ltd...... 85 Distributor -- Australia and Asia Amscan Partyartikel GmbH............ 95 Distributor -- Germany Amscan Svenska AB................... 100 Distributor -- Sweden Amscan de Mexico, S.A. de C.V....... 50 Distributor -- Mexico JCS Realty Corp..................... 100 Real estate -- Canada SSY Realty Corp..................... 100 Real estate -- United States
F-8 149 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) ACQUISITIONS In conjunction with the IPO, the Company entered into an agreement to acquire an additional 50% of Am-Source, Inc. The stockholders of Am-Source, Inc. exchanged all of their outstanding capital stock for 624,999 shares of the Company's stock valued at $7,500,000. The acquisition has been accounted for as a purchase and the excess purchase price over the fair value of the net assets acquired of $7,443,000 is being amortized on a straight-line basis over thirty years. The results of operations for the acquisition of the 50% balance of Am-Source, Inc. are included in the accompanying financial statements from the date of acquisition. The results of operations for this acquisition for the years ended December 31, 1996, 1995 and 1994 had the acquisition occurred at the beginning of 1994, are not significant. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH EQUIVALENTS Highly liquid investments with a maturity of three months or less when purchased are considered to be equivalents. INVENTORIES Substantially all inventories of the Company are valued at the lower cost or market (principally on the first-in, first-out method). PROPERTY, PLANT, AND EQUIPMENT Property, plant and equipment are stated at cost. Machinery and equipment under capital leases are stated at the present value of the minimum lease payments at the inception of the lease. Depreciation is calculated principally on the straight-line method over the estimated useful lives of the assets. Machinery and equipment held under capital leases and leasehold improvements are amortized straight-line over the shorter of the lease term or estimated useful life of the asset. INTANGIBLE ASSETS Intangible assets are comprised of $7,443,000 and $350,000 at December 31, 1996 and 1995 respectively, of goodwill, net of amortization, which represents the excess of the purchase price of acquired companies over the estimated fair value of the net assets acquired. Goodwill is being amortized on a straight-line basis over periods ranging from three years to thirty years. Accumulated amortization was $1,050,000 and $700,000 as of December 31, 1996 and 1995, respectively. The Company adopted Financial Accounting Standards No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS No. 121"). Such adoption had no impact on the Company's financial statements. In accordance with SFAS No. 121, the Company systematically reviews the recoverability of its intangible and other long-lived assets by comparing their unamortized carrying value to their related anticipated undiscounted future cash flows. Any impairment related to long-lived assets is measured by reference to the assets' fair market value, and any impairment related to goodwill is measured against discounted cash flows. Impairments are charged to expense when such determination is made. F-9 150 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) REVENUE RECOGNITION The Company recognizes revenue from product sales when the goods are shipped to the customers. Product returns and warranty costs are immaterial. CATALOGUE COSTS The Company expenses costs associated with the production of annual catalogues when incurred. ART AND DEVELOPMENT COSTS Art and development costs are primarily internal costs that are not easily associated with specific designs which may not reach commercial production. Accordingly, the Company expenses these costs as incurred. INCOME TAXES Prior to the IPO, Amscan Inc., Am-Source, Inc., JCS Realty Corp. and SSY Realty Corp. were operated as Subchapter S corporations for federal income and, where available, for state income tax purposes. As a result, these corporations did not record or pay any federal or state income taxes except in states which do not recognize Subchapter S corporation status. Since December 18, 1996, the Company has been taxed as a Subchapter C corporation, and as a result, the Company accounts for income taxes in accordance with the provisions of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109"). Under the asset and liability method of SFAS 109, certain income and expense items are reported differently for financial reporting and income tax purposes. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities and operating loss and tax credit carryforwards applying enacted statutory tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance when, in the judgment of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. NON-RECURRING COMPENSATION EXPENSES In conjunction with the IPO, the Company has recorded non-recurring compensation expenses of $15,535,000 in 1996 related to stock and cash payments of $12,535,000 to certain executives in connection with the termination of prior employment agreements and $3,000,000 for the establishment of an ESOP for the benefit of the Company's domestic employees and the payment of stock bonuses to certain of such employees. STOCK-BASED COMPENSATION The Company has accounted for the distribution of stock and for the issuance of stock options under its stock option plan in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25 "Accounting for Stock Issued to Employees" and related interpretations ("APB 25"). As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 allows entities to apply the provisions of APB Opinion No. 25 and provide pro forma net F-10 151 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123 (see note (10)). FOREIGN CURRENCY TRANSACTIONS AND TRANSLATION Realized foreign currency exchange gains or losses, which result from the settlement of receivables or payables in currencies other than U.S. dollars, are credited or charged to operations. Unrealized gains or losses on foreign currency exchanges are insignificant. The balance sheets of foreign subsidiaries are translated into U.S. dollars at the exchange rates in effect on the balance sheet date. The results of operations of foreign subsidiaries are translated into U.S. dollars at the average exchange rates effective for the periods presented. The differences from historical exchange rates are reflected as a separate component of stockholders' equity. CONCENTRATION OF CREDIT RISK While the Company's customers are geographically disbursed throughout North America, South America, Europe, Asia and Australia, there is a concentration of sales made to and accounts receivable from the stores which operate in the party superstore channel of distribution. At December 31, 1996 and 1995, the Company's two largest customers, with approximately 185 stores, accounted for 21.7% and 12%, respectively, of consolidated accounts receivable. For the years ended December 31, 1996, 1995 and 1994, sales to the Company's two largest customers represented 21.5%, 17% and 10%, respectively, of consolidated net sales. Of such amount, sales to the Company's largest customer represented 14.5%, 11% and 8%, respectively. No other group or combination of customers subjected the Company to a concentration of credit risk. RECLASSIFICATIONS In connection with the preparation of the accompanying financial statements, the Company has classified printing plates purchased from third party vendors as property, plant and equipment. Previously, the Company classified such printing plates that are used in the Company's manufacturing process as other assets. Prior balances of property, plant and equipment and other assets have been reclassified accordingly. Certain other amounts in prior financial statements have been reclassified to conform to the current year presentation. USE OF ESTIMATES Management has made estimates and assumptions relating to the reporting of assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. F-11 152 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (3) INVENTORIES Inventories at December 31, 1996 and 1995 consisted of the following (dollars in thousands):
1996 1995 ------- ------- Finished goods.............................................. $42,127 $42,125 Raw materials............................................... 3,863 2,277 Work-in-process............................................. 1,388 1,839 ------- ------- 47,378 46,241 Less: reserve for slow moving and obsolete inventory........ (1,685) (1,228) ------- ------- $45,693 $45,013 ======== ========
(4) PROPERTY, PLANT AND EQUIPMENT Major classifications of property, plant and equipment at December 31, 1996 and 1995 consisted of the following (dollars in thousands):
ESTIMATED 1996 1995 USEFUL LIVES -------- -------- ------------ Machinery and equipment................... $ 31,621 $ 25,530 3-15 Buildings................................. 10,153 9,524 31-40 Data processing equipment................. 9,259 6,123 5 Leasehold improvements.................... 3,449 4,784 25 Furniture and fixtures.................... 3,071 2,370 10 Land...................................... 1,917 1,917 -- -------- -------- 59,470 50,248 Less: accumulated depreciation and amortization............................ (24,807) (21,075) -------- -------- $ 34,663 $ 29,173 ========= =========
Depreciation and amortization expense was $4,787,000, $3,982,000 and $3,322,000 for the years ended December 31, 1996, 1995 and 1994, respectively. (5) LOANS AND NOTES PAYABLE The Company has entered into a revolving credit agreement with several banks which expires on September 20, 2000. Amounts available for borrowing under this agreement, subject to asset availability and other restrictions, are as follows (dollars in thousands): September 20, 1996 -- September 19, 1997................................ $55,000 September 20, 1997 -- September 20, 2000................................ 60,000
Such revolving credit agreement is collateralized by a first lien on certain of the assets of the Company. The revolving credit agreement provides for interest on the borrowings to be based on either a prime borrowing rate or LIBOR plus 0.875%, whichever is lower. Additionally, the revolving credit agreement requires the Company to comply with certain covenants including the maintenance of financial ratios, as defined. At December 31, 1996, the Company was in compliance with all such covenants. F-12 153 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Loans and notes payable outstanding at December 31, 1996 and 1995 consisted of the following (dollars in thousands):
1996 1995 ------- ------- Revolving credit line with interest at LIBOR plus 0.875% (6.75% and 6.41%, at December 31, 1996 and 1995, respectively)................. $ 5,000 $35,000 Revolving credit line with interest at the prime rate (8.25% and 8.5%, at December 31, 1996 and 1995, respectively)........................ 23,950 2,060 Revolving credit line denominated in Canadian Dollars with interest at the Canadian prime rate (4.75% at December 31, 1996)................ 378 Revolving credit line denominated in British Pounds Sterling with interest at the U.K. Base rate plus 2% (8.5% at December 31, 1995)............................................................... 789 ------- ------- $29,328 $37,849 ======= =======
The weighted average interest rates on loans and notes payable outstanding at December 31, 1996 and 1995 were 7.95% and 6.57%, respectively. The Company is currently involved in three interest rate swap transactions covering $25,000,000 of its outstanding obligation under the revolving credit agreement. The transactions fix the interest rates as indicated below and entitles the Company to settle with the counterparty on a quarterly basis, the product of the notional amount times the amount, if any, by which the ninety day LIBOR exceeds the fixed rate. Net payments to the counterparty under the swap agreements for the years ended December 31, 1996, 1995 and 1994, which have been recorded as additional interest expense, were as follows (dollars in thousands):
ADDITIONAL INTEREST EXPENSE NOTIONAL FIXED --------------------- DATE OF CONTRACT AMOUNT TERM RATE 1996 1995 1994 - ------------------------------------- -------- -------- ------ ---- ---- --- September 28, 1994................... $ 5,000 10 years 7.945% $122 $ 94 $34 May 12, 1995......................... 10,000 5 years 6.590 105 42 July 20, 1995........................ 10,000 10 years 6.750 122 38 ---- ---- --- $349 $174 $34 ==== ==== ===
(6) LONG-TERM INDEBTEDNESS Long-term indebtedness at December 31, 1996 and 1995 consisted of the following (dollars in thousands):
1996 1995 ------- ------- Mortgage obligations(a)..................................... $ 6,654 $ 6,956 Term loans(b)............................................... 5,778 5,152 Capital lease obligations(c)................................ 5,194 2,415 ------- ------- Total long-term indebtedness.............................. 17,626 14,523 Less: current installments.................................. (2,541) (2,239) ------- ------- Long-term indebtedness, excluding current installments...... $15,085 $12,284 ======= =======
(a) The Company has mortgage obligations payable to financial institutions relating to certain distribution facilities due through September 13, 2004. The mortgages are F-13 154 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) collateralized by specific real estate assets of the Company and carry interest rates ranging from the Canadian prime rate plus 0.5% (5.25% and 8.0% as of December 31, 1996 and 1995, respectively) to 8.51%. At December 31, 1996 and 1995, $2,100,000 and $1,800,000 of mortgage obligations, respectively, are denominated in Canadian dollars. (b) The Company has various term loans payable to financial institutions due through April 1, 2002. The loans are collateralized by specific assets of the Company and carry interest rates which range from 8.01% to 9.5%. (c) The Company has entered into various capital leases for machinery and equipment with implicit interest rates ranging from 4.71% to prime rate plus 1.0% (9.25% at December 31, 1996) which extend to 2003. At December 31, 1996, principal maturities of long-term indebtedness consisted of the following (dollars in thousands):
CAPITAL MORTGAGES LEASE AND LOANS OBLIGATIONS TOTAL --------- ----------- ------- 1997.......................................... $ 1,682 $ 1,139 $ 2,821 1998.......................................... 1,741 1,243 2,984 1999.......................................... 1,718 1,176 2,894 2000.......................................... 1,682 1,136 2,818 2001.......................................... 1,682 1,281 2,963 Thereafter.................................... 3,927 147 4,074 ------- ------ ------- 12,432 6,122 18,554 Amount representing interest.................. (928) (928) ------- ------ ------- Long-term indebtedness........................ $12,432 $ 5,194 $17,626 ======= ====== =======
(7) DUE TO PRINCIPAL STOCKHOLDER At December 31, 1996 and 1995, the Company owed the Principal Stockholder $1,274,000 and $16,000,000, respectively, under a subordinated note with interest payable monthly. This note is subject to a subordination agreement among the Principal Stockholder, Amscan Inc., and the lenders involved with the revolving credit agreement as discussed in note (5). Interest is the prime rate plus 0.5% (8.75% and 9% at December 31, 1996 and 1995, respectively). Prior to the IPO, certain subsidiaries of the Company declared a dividend representing distributions of accumulated Subchapter S profits of $15,841,000 and a return of capital of $7,583,000. These amounts and nearly all of the previous balances of subordinated debt were repaid from the net proceeds of the IPO. A waiver was obtained from the banks for the repayment of these amounts due to the Principal Stockholder. Further, the Company had unsecured current loans payable to the Principal Stockholder aggregating $2,453,000 at December 31, 1995 at interest rates ranging from 7% to 12%. The loans had different forms of collateral but were generally subordinated to the credit facility discussed in note (5). During 1996, these amounts were converted to subordinated debt. (8) EMPLOYEE BENEFIT PLANS Certain subsidiaries of the Company maintain a profit-sharing plan for all eligible employees providing for annual discretionary contributions to a trust. As of January 1, 1995, the plan required F-14 155 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the subsidiaries to match 25% to 50% of the first 6% of an employee's annual salary contributed to the plan. Benefit expense for the years ended December 31, 1996, 1995 and 1994 totaled $731,000, $558,000 and $548,000, respectively. In connection with the IPO, the Company established the Employee Stock Ownership Plan (the "ESOP") for the benefit of its domestic employees and authorized the payments of stock bonuses to certain of such employees. There was a special one-time issuance of 250,000 shares of common stock of the Company, valued at $1,898,000 for the establishment of the ESOP and $1,102,000 for payment of stock bonuses. (9) SPECIAL BONUSES During the periods presented, Amscan Inc. had employment agreements with certain key executives and senior managers which provided for these individuals to receive annual bonuses based upon the pre-tax income of Amscan, Inc. and certain of its affiliates. These bonuses, which amounted to approximately 18% to 20% of pre-tax income, are reflected in the Consolidated Statements of Operations in the caption "Special Bonuses". These individuals will not receive such special bonuses after 1996. At December 31, 1996 and 1995, respectively, $1,584,000 and $2,581,000 were accrued for such bonuses and included in accrued expenses. (10) STOCK OPTION PLAN In 1996, the Company adopted a stock option plan (the "Plan") pursuant to which a committee of the Company's Board of Directors may grant stock options to officers and key employees. The Plan authorizes grants of options to purchase up to 2,000,000 shares of authorized but unissued common stock. Stock options are granted with an exercise price no less than the stock's fair market value at the date of grant. An option may not be exercised within one year of grant and no option will be exercisable after ten years from the date granted. Participants may exercise approximately 25% of the total number of shares granted in each year subsequent to the year of the grant. The Company has adopted the disclosure-only provisions of SFAS No. 123. Accordingly, no compensation cost has been recognized in connection with the issuance of options under the stock option plan. Had the Company's stock option plan been determined based on the fair value of the options granted at the grant date, the compensation cost for 1996 would not have been material. Options were issued in connection with the IPO totaling 425,000 shares of common stock at the initial offering price. It has been assumed that the estimated fair value of the options is amortized on a straight line basis to compensation expense over the vesting period of the grant, which is approximately four years. The estimated fair value of each option on the date of grant is $5.22, using the Black-Scholes option-pricing model with the following assumptions: dividend yield of 0%; expected volatility of 25%; risk-free interest rate of 6.43%; and expected lives of 7 years. All options issued were outstanding and none was exercisable as of December 31, 1996. (11) INCOME TAXES Prior to the consummation of the IPO, Amscan Inc., Am-Source, Inc., JCS Realty Corp. and SSY Realty Corp. elected to be taxed as Subchapter S corporations under the Internal Revenue Code. Accordingly, these companies were not subject to federal and state income taxes, to the extent that states recognize Subchapter S corporation status. Upon the termination of the Subchapter S corporation status in connection with the IPO, the aforementioned companies became subject to federal and state income taxes. The cumulative effect of such tax status change relating to the F-15 156 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) recording of deferred taxes as of December 18, 1996 was $786,000 and has been included in the income tax expense for the year ended December 31, 1996. A summary of the domestic and foreign pre-tax income for the years ended December 31, 1996, 1995 and 1994 were as follows (dollars in thousands):
1996 1995 1994 ------ ------- ------- Domestic.......................................... $3,137 $17,750 $10,009 Foreign........................................... 2,595 1,456 582
The provision for income taxes consisted of the following (dollars in thousands):
YEARS ENDED DECEMBER 31, -------------------------- 1996 1995 1994 ------ ---- ---- Current: Foreign.............................................. $ 992 $731 $464 State................................................ 212 ------ ---- ---- Total current provision........................... 1,204 731 464 ------ ---- ---- Deferred: Change in tax status................................. 786 Foreign.............................................. 100 Federal.............................................. (113) State................................................ (25) ------ ---- ---- Total deferred provision.......................... 748 -- -- ------ ---- ---- Income tax expense..................................... $1,952 $731 $464 ====== ==== ====
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. At December 31, 1996, the deferred assets and liabilities consisted of the following (dollars in thousands): Current deferred tax assets: Provision for doubtful accounts........................................ $1,692 Accrued liabilities.................................................... 1,568 Inventories............................................................ 1,438 Other.................................................................. 175 ------ Current deferred tax assets......................................... $4,873 ====== Non-current deferred tax liabilities: Property, plant and equipment.......................................... $4,484 Future taxable income resulting from a change in accounting method for tax purposes........................................................ 823 Other.................................................................. 355 ------ Non-current deferred tax liabilities..................................... $5,662 ======
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate F-16 157 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences. The difference between the Company's effective tax rate and the federal statutory rate of 35% is reconciled below:
YEARS ENDED DECEMBER 31, --------------------------- 1996 1995 1994 ----- ----- ----- Provision at federal statutory rate.................... 35.0% 35.0% 35.0% Effect of Subchapter S income not subject to federal income taxes......................................... (19.1) (32.3) (33.1) Change in tax status................................... 13.7 Other.................................................. 4.5 1.1 2.5 ----- ----- ----- Effective tax rate..................................... 34.1% 3.8% 4.4% ===== ===== =====
(12) STOCKHOLDERS' EQUITY INITIAL PUBLIC OFFERING On December 18, 1996, the Company completed the IPO in which it sold 4,000,000 shares of its common stock for $12.00 per share. The proceeds, net of underwriter's discount, fees and expenses, of $43,340,000 were used to repay subordinated debt outstanding to stockholders and loans payable to banks. At December 31, 1996, the Company's authorized capital stock consisted of 5,000,000 shares of preferred stock, $0.10 par value, of which no shares were issued or outstanding, and 50,000,000 shares of common stock, $0.10 par value, of which 20,698,076 shares were issued and outstanding. (13) LEASES The Company is obligated under various capital leases for certain machinery and equipment which expire on various dates through October 1, 2001 (see also note (6)). At December 31, 1996 and 1995, the amount of machinery and equipment and related accumulated amortization recorded under capital leases and included with property, plant and equipment consisted of the following (dollars in thousands):
1996 1995 ------- ------ Machinery and equipment...................................... $ 6,452 $3,174 Less: accumulated amortization............................... (1,042) (564) ------- ------ $ 5,410 $2,610 ======= ======
Amortization of assets held under capitalized leases is included with depreciation expense. The Company has several noncancelable operating leases with unaffiliated third parties, primarily for office and manufacturing space, showrooms, and warehouse equipment that expire F-17 158 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) over the next eight years. These leases generally contain renewal options and require the Company to pay real estate taxes, utilities and related insurance. At December 31, 1996, the Company also had noncancelable operating leases with the Principal Stockholder and real estate entities owned either directly or indirectly by the Principal Stockholder ("Unconsolidated Affiliates") for warehouse and office space that expire over the next five years. Rent due to Unconsolidated Affiliates represents future commitments associated with property leased by the Company from the Principal Stockholder or such entities owned directly or indirectly by the Principal Stockholder. At December 31, 1996 future minimum lease payments under all operating leases consisted of the following (dollars in thousands):
UNCONSOLIDATED THIRD PARTIES AFFILIATES TOTAL ------------- -------------- ------- 1997..................................... $ 3,831 $2,246 $ 6,077 1998..................................... 3,883 2,309 6,192 1999..................................... 2,713 2,374 5,087 2000..................................... 1,908 1,239 3,147 2001..................................... 1,908 167 2,075 2002-2006................................ 6,184 6,184 2007-2011................................ 4,631 4,631 2012-2016................................ 4,325 4,325 Thereafter............................... 505 505 ------- ------ ------- $29,888 $8,335 $38,223 ======= ====== =======
Rent expense for the years ended December 31, 1996, 1995 and 1994 was $5,300,000, $2,547,000 and $2,245,000, respectively, of which $2,134,000, $936,000 and $893,000, respectively, related to leases with Unconsolidated Affiliates. On April 5, 1996, the Company entered into an operating lease agreement with a third party whereby the Company may lease up to $11,000,000 of machinery and equipment. The agreement provides for equal monthly payments over 12 years, including renewal options. In connection with this agreement, the Company has entered into commitments for equipment with a fair value of approximately $10,800,000 as of December 31, 1996. Assuming the entire lease facility is utilized, future minimum lease payments will be increased as follows (dollars in thousands): 1997......................................................... $ 1,305 1998......................................................... 1,305 1999......................................................... 1,305 2000......................................................... 1,305 2001......................................................... 1,305 Thereafter................................................... 9,135 ------- $15,660 =======
F-18 159 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (14) SEGMENT INFORMATION INDUSTRY SEGMENTS The Company operates in one industry segment which involves the design, manufacture, contract for manufacture and distribution of party and novelty goods. GEOGRAPHIC SEGMENTS The Company's export sales, other than those intercompany sales reported below as sales between geographic areas, are not material. Sales between geographic areas primarily consist of sales of finished goods for distribution in the foreign markets of Australia, Canada, Germany, Mexico, Sweden, and the United Kingdom. No one single foreign operation is significant to the Company's consolidated operations. Intersegment sales between geographic areas are made at cost plus a share of operating profit. The Company's geographic area data for each of the three fiscal years ended December 31, 1996, 1995 and 1994 were as follows (dollars in thousands):
DOMESTIC FOREIGN ELIMINATIONS CONSOLIDATED -------- -------- ------------ ------------ 1996 Sales to unaffiliated customers....... $168,165 $ 24,540 $192,705 Sales between geographic areas........ 8,643 116 $ (8,759) -- -------- -------- -------- -------- Net sales............................. $176,808 $ 24,656 $ (8,759) $192,705 ======== ======== ======== ======== Income from operations................ $ 10,643 $ 2,115 $ 12,758 ======== ======== Interest expense, net................. 6,691 Other expense, net.................... 335 -------- Income before income taxes and minority interests.................. $ 5,732 ======== Identifiable assets................... $127,472 $ 12,802 $140,274 ======== ======== ======== 1995 Sales to unaffiliated customers....... $146,198 $ 21,205 $167,403 Sales between geographic areas........ 8,508 60 $ (8,568) -- -------- -------- -------- -------- Net sales............................. $154,706 $ 21,265 $ (8,568) $167,403 ======== ======== ======== ======== Income from operations................ $ 22,782 $ 1,887 $ 24,669 ======== ======== Interest expense, net................. 5,772 Other income, net..................... (309) -------- Income before income taxes and minority interests.................. $ 19,206 -------- Identifiable assets................... $ 99,123 $ 15,478 $114,601 ======== ======== ========
F-19 160 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DOMESTIC FOREIGN ELIMINATIONS CONSOLIDATED -------- -------- -------- -------- 1994 Sales to unaffiliated customers....... $115,196 $ 16,833 $132,029 Sales between geographic areas........ 5,645 89 $ (5,734) -- -------- -------- -------- -------- Net sales............................. $120,841 $ 16,922 $ (5,734) $132,029 ======== ======== ======== ======== Income from operations................ $ 13,468 $ 1,048 $ 14,516 Interest expense, net................. 3,843 Other expense, net.................... 82 -------- -------- -------- -------- Income before income taxes and minority interests.................. $ 10,591 Identifiable assets................... $ 80,117 $ 13,767 $ 93,884 ======== ======== ======== ========
(15) FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts for cash and cash equivalents, accounts receivables, deposits and other current assets, loans and notes payable, accounts payable, accrued expenses (non-derivatives) and other current liabilities approximates fair value at December 31, 1996 because of the short term maturity of those instruments or their variable rate of interest. The carrying amounts for long term debt approximates fair value at December 31, 1996. Fair value has been estimated by discounting the future cash flow of each instrument at rates currently offered for similar debt instruments of comparable maturity. The fair value of interest rate swaps is the estimated amount that the bank would receive or pay to terminate the swap agreements at the reporting date, taking into account current interest rates and the current creditworthiness of the swap counterparties. Termination of the swap agreements at December 31, 1996 would require the Company to pay the bank $719,500. (16) PRO FORMA DATA (UNAUDITED) Pro forma net income for the years ended December 31, 1996, 1995 and 1994 give effect to pro forma income tax provisions at statutory rates (40.5%) assuming Amscan Inc., Am-Source, Inc., JCS Realty Corp. and SSY Realty Corp. had not elected Subchapter S corporation status for those periods. For purposes of the pro forma net income per share calculation for the year ended December 31, 1996, net income has been adjusted to give effect to (i) the reduction in compensation expenses ($14,173,000) paid to an officer assuming the officer was a stockholder as of the beginning of the period presented, (ii) the reduction in interest expense related to bank debt and subordinated indebtedness due to the Principal Stockholder assuming such debt was repaid from the net proceeds of the IPO as of the beginning of the period presented ($2,228,000), and (iii) additional pro forma income taxes calculated at 40.5% assuming Amscan Inc., Am-Source, Inc., JCS Realty Corp. and SSY Realty Corp. had not elected Subchapter S corporation status ($6,518,000). The pro forma weighted average common shares outstanding represents the number of common shares outstanding following the Effective Time (see note (18)). F-20 161 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (17) SUBSEQUENT EVENT On January 8, 1997, an additional 422,400 shares of common stock were sold at $12.00 per share to cover the over-allotments as provided for in the underwriting agreements between the Company and the underwriters associated with the IPO. The proceeds, net of underwriter's discount, fees and expenses, of $4,588,984 were used to repay borrowings outstanding to banks. (18) MERGER TRANSACTION On August 10, 1997, Amscan Holdings and Confetti Acquisition, Inc. ("Confetti"), a newly formed Delaware corporation affiliated with GS Capital Partners II, L.P. and certain other private investment funds managed by Goldman, Sachs & Co. (collectively, "GSCP"), entered into an Agreement and Plan of Merger (the "Merger Agreement") providing for a recapitalization of Amscan Holdings in which Confetti will be merged with and into Amscan Holdings (the "Merger"), with Amscan Holdings as the surviving corporation. On December 19, 1997 (the "Effective Time"), the Merger was consummated pursuant to the Merger Agreement. Confetti was merged with and into the Company, with the Company as the surviving corporation. At the Effective Time, each share of the Common Stock, par value $0.10 per share, of the Company (the "Company Common Stock"), issued and outstanding immediately prior to the Effective Time (other than shares of Company Common Stock owned, directly or indirectly, by the Company or by Confetti) were converted, at the election of each of the Company's stockholders, into the right to receive from the Company either (A) $16.50 in cash (the "Cash Consideration") or (B) $9.33 in cash plus a retained interest in the Company equal to one share of Company Common Stock for every 150,000 shares held by such stockholder (the "Mixed Consideration"), with fractional shares of Company Common Stock paid in cash. The Estate of John A. Svenningsen (the "Estate"), which owned approximately 72% of the outstanding Company Common Stock immediately prior to the Effective Time, elected to retain almost 10% of the outstanding shares of Company Common Stock. No stockholder other than the Estate elected to retain shares. Also pursuant to the Merger Agreement, at the Effective Time each outstanding share of Common Stock, par value $0.10 per share, of Confetti ("Confetti Common Stock"), was converted into an equal number of shares of Company Common Stock as surviving corporation in the Merger. Pursuant to certain employment arrangements, certain employees of the Company purchased an aggregate of 10 shares of Company Common Stock following the Effective Time. Accordingly, in the Merger the 825 shares of Confetti Common Stock owned by GSCP immediately prior to the Effective Time were converted into 825 shares of Company Common Stock, representing approximately 81.7% of the 1,010 issued and outstanding shares of the Company immediately following the Effective Time. The Merger was financed with an equity contribution of approximately $67.5 million (including contributions of Company Common Stock by certain employee stockholders and including issuances of restricted stock), $117 million from a senior term loan and $110 million from the issuance of senior subordinated notes. The senior subordinated notes are guaranteed jointly and severally, fully and unconditionally, by each of the Company's wholly-owned domestic subsidiaries, which include Amscan Inc., Trisar, Inc., Am-Source, Inc., SSY Realty Corp. and JCS Realty Corp. F-21 162 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Non-guarantor companies include the following: - Amscan Distributors (Canada) Ltd. - Amscan Holdings Limited - Amscan (Asia-Pacific) Pty. Ltd. - Amscan Partyartikel GmbH - Amscan Svenska AB - Amscan de Mexico, S.A. de C.V. The following consolidating information presents consolidating balance sheets as of December 31, 1996 and 1995, and the related consolidating statements of income and cash flows for the years ended December 31, 1996, 1995, and 1994 for the combined guarantors and the combined non-guarantors and elimination entries necessary to consolidate the entities comprising the combined companies. F-22 163 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONSOLIDATING BALANCE SHEET DECEMBER 31, 1996 (DOLLARS IN THOUSANDS)
AMSCAN HOLDINGS AND COMBINED COMBINED NON- GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED ------------ ---------- ------------ ------------ ASSETS Current assets: Cash and cash equivalents................ $ 272 $ 1,317 $ 1,589 Accounts receivable, net................. 32,605 4,773 37,378 Inventories.............................. 40,101 5,592 45,693 Deposits and other....................... 10,749 611 11,360 --------- -------- --------- --------- Total current assets................ 83,727 12,293 96,020 Property, plant and equipment, net......... 33,387 1,276 34,663 Intangible assets, net..................... 7,443 -- 7,443 Other assets, net.......................... 12,298 -- $(10,150) 2,148 --------- -------- --------- --------- Total assets........................ $136,855 $ 13,569 $(10,150) $140,274 ========= ======== ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Loans and notes payable.................. $ 28,950 $ 378 $ 29,328 Subordinated debt and other due to stockholders.......................... 1,392 1 1,393 Accounts payable......................... 6,843 285 7,128 Accrued expenses......................... 8,650 1575 10,225 Current installments of long-term obligations........................... 2,472 69 2,541 --------- -------- --------- --------- Total current liabilities........... 48,307 2,308 50,615 Long-term obligations, excluding current portion.................................. 14,994 91 15,085 Deferred tax liabilities................... 5,605 57 5,662 Other...................................... 4,021 $ (3,058) 963 --------- -------- --------- --------- Total liabilities................... 68,906 6,477 (3,058) 72,325 Stockholders' equity: Preferred Stock.......................... Common Stock............................. 2,070 339 (339) 2,070 Additional paid-in capital............... 61,503 158 (158) 61,503 Retained earnings........................ 4,748..... 6,911 (6,911) 4,748 Foreign currency translation adjustment............................ (372) (316) 316 (372) --------- -------- --------- --------- Total stockholders' equity.......... 67,949 7,092 (7,092) 67,949 --------- -------- --------- --------- Total liabilities and stockholders' equity........................... $136,855 $ 13,569 $(10,150) $140,274 ========= ======== ========= =========
F-23 164 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONSOLIDATING BALANCE SHEET DECEMBER 31, 1995 (DOLLARS IN THOUSANDS)
AMSCAN HOLDINGS AND COMBINED COMBINED NON- GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED ------------ ---------- ------------ ------------ ASSETS Current assets: Cash and cash equivalents.............. $ 1,593 $ 899 $ 2,492 Accounts receivable, net............... 27,969 3,911 31,880 Inventories............................ 39,643 5,370 45,013 Deposits and other..................... 2,298 622 2,920 -------- ------- ------- -------- Total current assets.............. 71,503 10,802 82,305 Property, plant and equipment, net....... 28,059 1,114 29,173 Intangible assets, net................... 350 350 Other assets, net........................ 6,047 $ (3,274) 2,773 -------- ------- ------- -------- Total assets...................... $105,959 $ 11,916 $ (3,274) $114,601 ======== ======= ======= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Loans and notes payable................ $ 37,060 $ 789 $ 37,849 Subordinated debt and other due to stockholders........................ 18,174 279 18,453 Accounts payable....................... 4,511 1,344 5,855 Accrued expenses....................... 9,526 9,526 Current installments of long-term obligations......................... 2,197 42 2,239 -------- ------- ------- -------- Total current liabilities......... 71,468 2,454 73,922 Long-term obligations, excluding current portion................................ 12,218 66 12,284 Other.................................... 655 3,809 $ (3,274) 1,190 -------- ------- ------- -------- Total liabilities................. 84,341 6,329 (3,274) 87,396 Stockholders' equity: Preferred Stock........................ -- Common Stock........................... 54 339 393 Additional paid-in capital............. 9,082 8 9,090 Retained earnings...................... 12,636 5,826 18,462 Foreign currency translation adjustment.......................... (67) (586) (653) Treasury stock, at cost................ (87) (87) -------- ------- ------- -------- Total stockholders' equity............. 21,618 5,587 27,205 -------- ------- ------- -------- Total liabilities and stockholders' equity........... $105,959 $ 11,916 $ (3,274) $114,601 ======== ======= ======= ========
F-24 165 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONSOLIDATING STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1996 (DOLLARS IN THOUSANDS)
AMSCAN HOLDINGS AND COMBINED COMBINED NON- GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED ------------ ---------- ------------ ------------ Net sales................................ $176,808 $ 24,656 $ (8,759) $192,705 Cost of sales............................ 118,244 15,704 (10,035) 123,913 -------- ------- --------- -------- Gross profit...................... 58,564 8,952 1,276 68,792 Operating expenses: Selling expenses....................... 9,723 2,173 (58) 11,838 General and administrative expenses.... 15,718 4,562 (1,014) 19,266 Art and development.................... 5,173 5,173 Non-recurring compensation in connection with the IPO............. 15,535 15,535 Special bonuses..................... 4,222 4,222 -------- ------- --------- -------- Income from operations............ 8,193 2,217 2,348 12,758 Interest expense, net.................... 6,602 3 86 6,691 Other expense (income), net.............. (5,550) (38) 5,923 335 -------- ------- --------- -------- Income before income taxes and minority interests............. 7,141 2,252 (3,661) 5,732 Income taxes............................. 1,035 917 1,952 Minority interests....................... 1,403 250 1,653 -------- ------- --------- -------- Net income........................ $ 4,703 $ 1,085 $ (3,661) $ 2,127 ======== ======= ========= ======== Pro forma data (unaudited) (note(16)): Income before income taxes............. $ 4,079 Pro forma income tax expense........... 1,827 -------- Pro forma net income.............. $ 2,252 ========
F-25 166 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONSOLIDATING STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1995 (DOLLARS IN THOUSANDS)
AMSCAN HOLDINGS AND COMBINED COMBINED NON- GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED ------------ ---------- ------------ ------------ Net sales................................ $154,706 $ 21,265 $ (8,568) $167,403 Cost of sales............................ 107,009 13,447 (11,802) 108,654 ------------ ---------- ------------ ------------ Gross profit...................... 47,697 7,818 3,234 58,749 Operating expenses: Selling expenses....................... 10,273 1,968 12,241 General and administrative expenses.... 12,188 3,896 (1,082) 15,002 Art and development.................... 4,256 4,256 Special bonuses........................ 2,581 2,581 ------------ ---------- ------------ ------------ Income from operations............ 18,399 1,954 4,316 24,669 Interest expense, net.................. 5,582 304 (114) 5,772 Other expense (income), net............ (3,170) (154) 3,015 (309) ------------ ---------- ------------ ------------ Income before income taxes and minority interests............. 15,987 1,804 1,415 19,206 Income taxes............................. 83 648 731 Minority interests....................... 927 114 1,041 ------------ ---------- ------------ ------------ Net income........................ $ 14,977 $ 1,042 $ 1,415 $ 17,434 ========== ========= ========== ========== Pro forma data (unaudited) (note(16)): Income before income taxes............. $ 18,165 Pro forma income tax expense........... 7,403 ------------ Pro forma net income.............. $ 10,762 ==========
F-26 167 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONSOLIDATING STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1994 (DOLLARS IN THOUSANDS)
AMSCAN HOLDINGS AND COMBINED COMBINED NON- GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED ------------ ---------- ------------ ------------ Net sales................................ $120,841 $ 16,922 $ (5,734) $132,029 Cost of sales............................ 83,512 10,649 (7,413) 86,748 -------- ------- --------- -------- Gross profit...................... 37,329 6,273 1,679 45,281 Operating expenses: Selling expenses....................... 9,427 1,882 11,309 General and administrative expenses 12,528.... 3,321 (1,389) 14,460 Art and development.................... 2,474 322 2,796 Special bonuses........................ 2,200 2,200 -------- ------- --------- -------- Income from operations............ 10,700 1,070 2,746 14,516 Interest expense, net.................... 3,775 68 3,843 Other expense (income), net.............. (2,593) 34 2,641 82 -------- ------- --------- -------- Income before income taxes and minority interests............. 9,518 968 105 10,591 Income taxes............................. 73 391 464 Minority interests....................... 103 57 160 -------- ------- --------- -------- Net income........................ $ 9,342 $ 520 $ 105 $ 9,967 ======== ======= ========= ======== Pro forma data (unaudited) (note(16)): Income before income taxes............. $ 10,431 Pro forma income tax expense........... 4,238 -------- Pro forma net income.............. $ 6,193 ========
F-27 168 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1996 (DOLLARS IN THOUSANDS)
AMSCAN HOLDINGS AND COMBINED COMBINED NON- GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED ------------ ---------- ------------ ------------ Cash flows from operating activities: Net income................................. $ 4,703 $ 1,085 $ (3,661) $ 2,127 Adjustments to reconcile net income to net cash provided by operating activities: Stock compensation expense in connection with the IPO.......................... 10,920 10,920 Depreciation and amortization........... 4,764 373 5,137 Loss on disposal of property and equipment............................. 660 660 Provision for doubtful accounts......... 2,048 302 2,350 Changes in operating assets and liabilities, net of acquisitions: Accounts receivable................ (6,684) (1,164) (7,848) Inventories........................ (1,574) (222) 1,116 (680) Deposits and other, net............ (3,544) 496 (3,048) Other assets....................... (1,670) (215) 2,568 683 Accounts payable and accrued expenses......................... 1,508 516 (52) 1,972 --------- -------- -------- --------- Net cash provided by operating activities....................... 11,131 1,171 (29) 12,273 Cash flows from investing activities: Capital expenditures....................... (7,076) (537) (7,613) --------- -------- -------- --------- Net cash used in investing activities....................... (7,076) (537) (7,613) Cash flows from financing activities: Net proceeds from IPO...................... 43,340 43,340 Proceeds from loans, notes payable and long-term indebtedness.................. 2,777 496 3,273 Repayment of loans, notes payable and long- term indebtedness....................... (11,113) (855) (11,968) Repayment of loans, notes and subordinated indebtedness to Principal Stockholder... (16,900) (279) (17,179) Subchapter S distributions and other....... (23,574) 150 (23,424) --------- -------- -------- --------- Net cash used in financing activities....................... (5,470) (488) (5,958) Effect of exchange rate changes on cash...... 94 272 29 395 --------- -------- -------- --------- Net increase (decrease) in cash and cash equivalents................. (1,321) 418 -- (903) Cash and cash equivalents at beginning of year....................................... 1,593 899 2,492 --------- -------- -------- --------- Cash and cash equivalents at end of year..... $ 272 $ 1,317 -- $ 1,589 ========= ======== ======== =========
F-28 169 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1995 (DOLLARS IN THOUSANDS)
AMSCAN HOLDINGS AND COMBINED COMBINED NON- GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED ------------ ---------- ------------ ------------ Cash flows from operating activities: Net income................................... 14$,977.... $ 1,042 $ 1,415 $ 17,434 Adjustments to reconcile net income to net cash provided by activities: Depreciation and amortization.............. 4,029..... 303 4,332 Gain on disposal of property and equipment................................ (5) (5) Provision for doubtful accounts............ 1,570 11 1,581 Changes in operating assets and liabilities: Accounts receivable................... (8,769) (845) (9,614) Inventories........................... (9,055) (1,493) (10,548) Deposits and other, net............... 128 (229) (101) Other assets.......................... (1,282) 1,525 (1,415) (1,172) Accounts payable and accrued expenses............................ 3,088 (274) 2,814 -------- ------- ------- -------- Net cash provided by operating activities............................... 4,681 40 -- 4,721 Cash flows from investing activities: Capital expenditures......................... (4,033) (489) (4,522) Proceeds from disposal of property and equipment.................................. 9 9 -------- ------- ------- -------- Net cash used in investing activities.......................... (4,024) (489) (4,513) Cash flows from financing activities: Proceeds from loans, notes payable and long-term indebtedness..................... 41,415 896 42,311 Repayment of loans, notes payable and long-term indebtedness..................... (32,246) (67) (32,313) Proceeds from loans, notes and subordinated indebtedness to Principal Stockholder...... 4,000 4,000 Repayment of loans, notes and subordinated indebtedness to Principal Stockholder...... (2,557) (285) (2,842) Subchapter S distributions and other......... (11,009) (11,009) -------- ------- ------- -------- Net cash (used in) provided by financing activities................ (397) 544 147 Effect of exchange rate changes on cash........ (23) (69) (92) -------- ------- ------- -------- Net increase in cash and cash equivalents......................... 237 26 263 Cash and cash equivalents at beginning of year......................................... 1,356 873 2,229 -------- ------- ------- -------- Cash and cash equivalents at end of year....... $ 1,593 $ 899 -- $ 2,492 ======== ======= ======= ========
F-29 170 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1994 (DOLLARS IN THOUSANDS)
AMSCAN HOLDINGS AND COMBINED COMBINED NON- GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED ------------ ---------- ------------ ------------ Cash flows from operating activities: Net income.............................. $ 9,342 $ 520 $ 105 $ 9,967 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization......... 3,522 150 3,672 Loss on disposal of property and equipment........................... 35 35 Provision for doubtful accounts....... 2,676 2,676 Changes in operating assets and liabilities: Accounts receivable.............. (4,495) (546) (5,041) Inventories...................... (4,904) (778) (5,682) Deposits and other, net.......... (1,126) 1,076 (105) (155) Other assets..................... (1,280) 15 (1,265) Accounts payable and accrued expenses....................... 969 (57) 912 ------- ----- ---- ------- Net cash provided by operating activities..................... 4,739 380 -- 5,119 Cash flows from investing activities: Capital expenditures.................... (7,276) (116) (7,392) Proceeds from disposal of property and equipment............................. 98 98 ------- ----- ---- ------- Net cash used in investing activities..................... (7,178) (116) (7,294) Cash flows from financing activities: Proceeds from loans, notes payable and long-term indebtedness................ 6,266 58 6,324 Repayment of loans, notes payable and long-term indebtedness................ (2,434) (2,434) Proceeds from loans, notes and subordinated indebtedness to Principal Stockholder........................... 6,316 6,316 Subchapter S distributions and other.... (7,450) (7,450) ------- ----- ---- ------- Net cash provided by financing activities..................... 2,698 58 2,756 Effect of exchange rate changes on cash... 403 (133) 270 ------- ----- ---- ------- Net increase in cash and cash equivalents.................... 662 189 851 Cash and cash equivalents at beginning of year.................................... 694 684 1,378 ------- ----- ---- ------- Cash and cash equivalents at end of year.................................... $ 1,356 $ 873 -- $ 2,229 ======= ===== ==== =======
F-30 171 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 (DOLLARS IN THOUSANDS)
BEGINNING ENDING BALANCE WRITE-OFFS ADDITIONS BALANCE --------- ---------- --------- ------- Allowance for Doubtful Accounts: For the year ended: December 31, 1994....................... $ 1,104 $1,855 $ 2,676 $ 1,925 December 31, 1995....................... 1,925 1,001 1,581 2,505 December 31, 1996....................... 2,505 717 2,350 4,138
BEGINNING ENDING BALANCE WRITE-OFFS ADDITIONS BALANCE --------- ---------- --------- ------- Inventory Reserves For the year ended: December 31, 1994....................... $ 609 $ 375 $ 600 $ 834 December 31, 1995....................... 834 406 800 1,228 December 31, 1996....................... 1,228 731 1,188 1,685
F-31 172 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
DECEMBER 31, 1996 SEPTEMBER 30, ------------ 1997 (NOTE) ------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents.................................. $ 684 $ 1,589 Accounts receivable, net of allowances..................... 56,276 37,378 Inventories................................................ 48,736 45,693 Deposits and other current assets.......................... 9,680 11,360 -------- -------- Total current assets.................................. 115,376 96,020 Property, plant and equipment, net........................... 37,157 34,663 Intangible assets, net....................................... 7,540 7,443 Other assets, net............................................ 2,687 2,148 -------- -------- Total assets.......................................... $ 162,760 $140,274 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Loans and notes payable.................................... $ 10,020 $ 29,328 Subordinated and other indebtedness due to stockholders.... 1,393 Accounts payable........................................... 11,153 7,128 Accrued expenses........................................... 7,317 9,403 Income taxes payable....................................... 6,458 822 Current portion of long-term obligations................... 5,556 2,541 -------- -------- Total current liabilities............................. 40,504 50,615 Long-term obligations, excluding current portion............. 24,828 15,085 Deferred tax liabilities..................................... 5,585 5,662 Other........................................................ 2,841 963 -------- -------- Total liabilities..................................... 73,758 72,325 Stockholders' equity: Preferred Stock ($0.10 par value; 5,000,000 shares authorized; none issued and outstanding) Common stock ($0.10 par value; 50,000,000 shares authorized; 21,120,476 and 20,698,076 shares issued, respectively)................ 2,112 2,070 Additional paid-in-capital................................... 65,985 61,503 Retained earnings............................................ 21,649 4,748 Foreign currency translation adjustment...................... (454) (372) Treasury stock, at cost (21,691 shares)...................... (290) -------- -------- Total stockholders' equity............................ 89,002 67,949 -------- -------- Total liabilities and stockholders' equity......... $ 162,760 $140,274 ======== ========
Note: The balance sheet at December 31, 1996 has been derived from the audited consolidated financial statements at that date. See accompanying notes to consolidated financial statements. F-32 173 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, -------------------------- 1996 --------- 1997 (NOTE) ----------- (UNAUDITED) Net sales....................................................... $ 161,286 $ 147,008 Cost of sales................................................... 103,460 92,861 ---------- -------- Gross profit.................................................... 57,826 54,147 Operating expenses: Selling expenses.............................................. 9,598 8,691 General and administrative expenses........................... 13,225 14,113 Art and development costs..................................... 3,891 3,671 Special bonuses............................................... 3,300 ---------- -------- Total operating expenses................................. 26,714 29,775 ---------- -------- Income from operations................................... 31,112 24,372 Interest expense, net........................................... 2,654 4,569 Other (income) expense, net..................................... (219) (301) ---------- -------- Income before income taxes and minority interests........ 28,677 20,104 Income taxes.................................................... 11,627 767 Minority interests.............................................. 149 1,242 ---------- -------- Net income............................................... $ 16,901 $ 18,095 ========== ======== Pro forma net income per common share (Note (5))......... $ 16,734 ========== Pro forma weighted average common shares outstanding (Note (5))............................................ 1,010 ========== Pro forma data (Note(6)): Income before income taxes.................................... $ 18,862 Pro forma income tax expense.................................. 7,888 -------- Pro forma net income.......................................... $ 10,974 ========
Note: The statement of income for the nine months ended September 30, 1996 has been derived from the audited consolidated financial statements at that date. See accompany notes to consolidated financial statements. F-33 174 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
FOREIGN ADDITIONAL CURRENCY COMMON PAID-IN RETAINED TRANSLATION TREASURY STOCK CAPITAL EARNINGS ADJUSTMENT STOCK TOTAL ------ ---------- -------- ---------- -------- ------- (DOLLARS IN THOUSANDS) Balance as of December 31, 1996... $2,070 $ 61,503 $ 4,748 $ (372) $67,949 Net income........................ 16,901 16,901 Net proceeds from sale of Common Stock (Note 3).................. 42 4,482 4,524 Payments to acquire treasury stock........................... $ (290) (290) Net change in translation adjustment...................... (82) (82) ------ ---------- -------- ---------- -------- ------- Balance as of September 30, 1997.. $2,112 $ 65,985 $ 21,649 $ (454) $ (290) $89,002 ======= ======== ======== ========= ======= ========
See accompanying notes to consolidated financial statements. F-34 175 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, -------------------------- 1996 --------- 1997 (NOTE) ----------- (UNAUDITED) Cash flows from operating activities: Net income..................................................... $ 16,901 $ 18,095 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............................... 4,505 3,579 Provision for doubtful accounts............................. 1,423 963 Gain on disposal of equipment............................... (29) Changes in operating assets and liabilities: Increase in accounts receivable............................. (24,310) (20,442) Increase in inventories..................................... (3,043) (61) Decrease in deposits and other current assets............... 2,469 262 Increase in accounts payable, accrued expenses and income taxes payable............................................. 7,575 (1,029) Other, net..................................................... 2,988 195 ------- ------- Net cash provided by operating activities.............. 8,479 1,562 Cash flows from investing activities: Capital expenditures........................................... (6,895) (5,574) Proceeds from disposal of equipment............................ 140 ------- Net cash used in investing activities.................. (6,755) (5,574) Cash flows from financing activities: Net proceeds from sale of Common Stock......................... 4,524 Proceeds from loans, notes payable and long-term obligations... 15,620 10,242 Repayment of loans, notes payable and long-term obligations.... (22,208) (2,003) Repayment of subordinated and other indebtedness due to stockholders................................................ (182) (3,220) Payments to acquire treasury stock............................. (290) -- ------- ------- Net cash (used in) provided by financing activities.... (2,536) 5,019 Effect of exchange rate changes on cash and cash equivalents... (93) 31 ------- ------- Net (decrease) increase in cash and cash equivalents........... (905) 1,038 Cash and cash equivalents at beginning of period............... 1,589 2,492 ------- ------- Cash and cash equivalents at end of period..................... $ 684 $ 3,530 ======= ======= SUPPLEMENTAL DISCLOSURE: Interest paid.................................................. $ 2,622 $ 4,970 Taxes paid..................................................... $ 6,612 $ 546
Supplemental information on non-cash activities: Capital lease obligations of $59 and $2,074 were incurred during the nine months ended September 30, 1997 and 1996, respectively. During September 1996, the Company declared the distribution of $7,600 of previously provided capital and $13,067 of previously undistributed earnings. Such amounts were included in subordinated and other indebtedness to stockholders. Note: The statement of cash flows for the nine months ended September 30, 1996 has been derived from the audited consolidated financial statements at that date. See accompanying notes to consolidated financial statements. F-35 176 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1997 (UNAUDITED) NOTE (1) ORGANIZATION AND DESCRIPTION OF BUSINESS Amscan Holdings, Inc. ("Amscan Holdings") was incorporated on October 3, 1996 for the purpose of becoming the holding company for Amscan Inc. and certain affiliated entities (the "Affiliated Group"). An initial public offering of 4,000,000 shares of the Company's Common Stock at $12.00 per share (the "IPO") was completed on December 18, 1996 pursuant to which the principal stockholder (the "Principal Stockholder") and certain affiliates of the Principal Stockholder exchanged shares in the Affiliated Group for 15,024,616 and 138,461 shares, respectively, in Amscan Holdings (the "Organization") and in the case of the Principal Stockholder, $133,000 in cash. Prior to the IPO, certain members of the Affiliated Group were operated as Subchapter S corporations for federal and, where available, state income tax purposes. In connection with the IPO, such members declared dividends representing distributions of accumulated Subchapter S corporation profits and a return of capital. These amounts were reflected as subordinated debt and repaid from the net proceeds of the IPO. Amscan Holdings and its subsidiaries (collectively the "Company") design, manufacture, contract for manufacture and distribute paper and plastic party goods, accessories and novelty items principally in the United States, Canada and Europe. NOTE (2) BASIS OF PRESENTATION The consolidated financial statements include the accounts of Amscan Holdings and its majority-owned subsidiaries. Investments in less than majority-owned subsidiaries are accounted for on an equity basis. As a result of the transfer of ownership between the former stockholders of the Affiliated Group and Amscan Holdings, certain members of the Affiliated Group terminated their Subchapter S election on December 18, 1996 and are being taxed as Subchapter C corporations under federal and certain state income tax requirements. Such transfer of ownership was accounted for in a manner similar to a pooling of interests. For the period prior to December 18, 1996, financial statements are presented on a combined basis. Certain reclassifications have been made to conform to the current year's presentation. The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine month period ended September 30, 1997 are not necessarily indicative of the results that may be expected for the year ending December 31, 1997. The results of operations may be affected by seasonal factors such as the timing of holidays or industry factors that may be specific to a particular period, such as movement in and the general level of raw material costs. For further information, see the financial statements and footnotes thereto included in the Amscan Holdings annual report on Form 10-K for the year ended December 31, 1996. NOTE (3) COMMON STOCK On January 8, 1997, an additional 422,400 shares of the Company's Common Stock were sold at $12.00 per share to cover the over-allotment option as provided for in the underwriting agreement between the Company and the underwriters associated with the IPO. The proceeds, net of F-36 177 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) underwriters' discount, fees and expenses, of $4,523,984 were used to repay outstanding bank borrowings. NOTE (4) INVENTORIES Inventories consisted of the following:
SEPTEMBER 30, DECEMBER 31, 1997 1996 ------------- ------------ (IN THOUSANDS) Finished goods....................................... $45,357 $ 42,127 Raw materials........................................ 3,408 3,863 Work-in-process...................................... 1,708 1,388 ------- ------- 50,473 47,378 Less: reserve for slow moving and obsolete inventory.......................................... (1,737) (1,685) ------- ------- $48,736 $ 45,693 ======= =======
Substantially all inventories are valued at the lower of cost, determined on a first in-first out basis, or market. NOTE (5) PRO FORMA NET INCOME PER COMMON SHARE Pro forma net income per common share is computed by dividing net income by the number of common shares outstanding following the Effective Time (see Note (7)). NOTE (6) INCOME TAXES The consolidated income tax provision for the nine months ended September 30, 1997 was determined based upon an estimate of the Company's consolidated effective income tax rates for the year ending December 31, 1997. The differences between the consolidated effective income tax rate and the U.S. Federal statutory rate are primarily attributable to state income taxes and the effects of foreign operations. The amounts shown as income taxes for the nine months ended September 30, 1996 consisted principally of foreign income taxes as most of the members of the Affiliated Group had elected Subchapter S Corporation status for such period. Pro forma net income for the nine months ended September 30, 1996 gives effect to pro forma income tax provisions at an estimated effective tax rate (40.5%) assuming those members of the Affiliated Group had not elected Subchapter S corporation status for such periods. NOTE (7) MERGER TRANSACTION On August 10, 1997, Amscan Holdings and Confetti Acquisition, Inc. ("Confetti"), a newly formed Delaware corporation affiliated with GS Capital Partners II, L.P. and certain other private investment funds managed by Goldman, Sachs & Co. (collectively, "GSCP"), entered into an Agreement and Plan of Merger (the "Merger Agreement") providing for a recapitalization of Amscan Holdings in which Confetti will be merged with and into Amscan Holdings (the "Merger"), with Amscan Holdings as the surviving corporation. On December 19, 1997 (the "Effective Time"), the Merger was consummated pursuant to the Merger Agreement. Confetti was merged with and into the Company, with the Company as the F-37 178 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) surviving corporation. At the Effective Time, each share of the Common Stock, par value $0.10 per share, of the Company (the "Company Common Stock"), issued and outstanding immediately prior to the Effective Time (other than shares of Company Common Stock owned, directly or indirectly, by the Company or by Confetti) were converted, at the election of each of the Company's stockholders, into the right to receive from the Company either (A) $16.50 in cash (the "Cash Consideration") or (B) $9.33 in cash plus a retained interest in the Company equal to one share of Company Common Stock for every 150,000 shares held by such stockholder (the "Mixed Consideration"), with fractional shares of Company Common Stock paid in cash. The Estate of John A. Svenningsen (the "Estate"), which owned approximately 72% of the outstanding Company Common Stock immediately prior to the Effective Time, elected to retain almost 10% of the outstanding shares of Company Common Stock. No stockholder other than the Estate elected to retain shares. Also pursuant to the Merger Agreement, at the Effective Time each outstanding share of Common Stock, par value $0.10 per share, of Confetti ("Confetti Common Stock"), was converted into an equal number of shares of Company Common Stock as surviving corporation in the Merger. Pursuant to certain employment arrangements, certain employees of the Company purchased an aggregate of 10 shares of Company Common Stock following the Effective Time. Accordingly, in the Merger the 825 shares of Confetti Common Stock owned by GSCP immediately prior to the Effective Time were converted into 825 shares of Company Common Stock, representing approximately 81.7% of the 1,010 issued and outstanding shares of the Company immediately following the Effective Time. The Merger was financed with an equity contribution of approximately $67.5 million (including contributions of Company Common Stock by certain employee stockholders and including issuances of restricted stock), $117 million from a senior term loan and $110 million from the issuance of senior subordinated notes. The senior subordinated notes are guaranteed jointly and severally, fully and unconditionally, by each of the Company's wholly-owned domestic subsidiaries, which include Amscan Inc., Trisar, Inc., Am-Source, Inc., SSY Realty Corp. and JCS Realty Corp. Non-guarantor companies include the following: - Amscan Distributors (Canada) Ltd. - Amscan Holdings Limited - Amscan (Asia-Pacific) Pty. Ltd. - Amscan Partyartikel GmbH - Amscan Svenska AB - Amscan de Mexico, S.A. de C.V. F-38 179 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following consolidating information presents consolidating balance sheets as of September 30, 1997, and the related consolidating statements of income and cash flows for the nine-month periods ended September 30, 1997 and 1996 for the combined guarantors and the combined non-guarantors and the elimination entries necessary to consolidate the entities comprising the combined companies. CONSOLIDATING BALANCE SHEET SEPTEMBER 30, 1997 (DOLLARS IN THOUSANDS) (UNAUDITED)
AMSCAN HOLDINGS AND COMBINED COMBINED NON- GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED ------------ ---------- ------------ ------------ ASSETS Current assets: Cash and cash equivalents..................... $ 111 $ 573 $ 684 Accounts receivable, net...................... 50,253 6,023 56,276 Inventories................................... 40,396 8,340 48,736 Deposits and other current assets............. 8,697 983 9,680 ------ ------ ------ ------ Total current assets...................... 99,457 15,919 115,376 Property, plant and equipment, net............ 35,470 1,687 37,157 Intangible assets, net........................ 7,254 286 7,540 Other assets, net............................. 14,490 $(11,803) 2,687 ------ ------ ------ ------ Total assets.............................. $156,671 $ 17,892 $(11,803) $162,760 ====== ====== ====== ====== LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities: Loans and notes payable $ 9,550 $ 470 $ 10,020 Accounts payable.............................. 10,471 682 11,153 Accrued expenses.............................. 5,872 1,445 7,317 Income taxes payable.......................... 5,953 505 6,458 Current portion of long-term obligations...... 5,489 67 5,556 ------ ------ ------ ------ Total current liabilities................. 37,335 3,169 40,504 Long-term obligations excluding current portion....................................... 24,749 79 24,828 Deferred tax liabilities........................ 5,585 5,585 Other........................................... 6,915 $ (4,074) 2,841 ------ ------ ------ ------ Total liabilities......................... 67,669 10,163 (4,074) 73,758 Stockholders' equity: Preferred Stock............................... -- Common Stock.................................. 2,112 339 (339) 2,112 Additional paid-in capital.................... 65,985 458 (458) 65,985 Retained earnings............................. 21,649 7,322 (7,322) 21,649 Foreign currency translation adjustment....... (454) (390) 390 (454) Treasury stock, at cost....................... (290) (290) ------ ------ ------ ------ Total stockholders' equity................ 89,002 7,729 (7,729) 89,002 ------ ------ ------ ------ Total liabilities and stockholders' equity............................... $156,671 $ 17,892 $(11,803) $162,760 ====== ====== ====== ======
F-39 180 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONSOLIDATING STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (DOLLARS IN THOUSANDS) (UNAUDITED)
AMSCAN HOLDINGS AND COMBINED COMBINED NON- GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED ------------ ---------- ------------ ------------ Net sales................................ $151,378 $ 19,054 $ (9,146) $161,286 Cost of sales............................ 100,485 12,803 (9,828) 103,460 -------- ------- ------- -------- Gross profit........................... 50,893 6,251 682 57,826 Operating expenses: Selling expenses....................... 7,257 2,341 9,598 General and administrative expenses.... 10,654 3,045 (474) 13,225 Art and development costs.............. 3,891 3,891 -------- ------- ------- -------- Total operating expenses.......... 21,802 5,386 (474) 26,714 -------- ------- ------- -------- Income from operations......... 29,091 865 1,156 31,112 Interest expense, net.................... 2,615 39 2,654 Other income, net........................ (1,312) (6) 1,099 (219) -------- ------- ------- -------- Income before income taxes and minority interests........... 27,788 832 57 28,677 Income taxes............................. 11,308 273 46 11,627 Minority interests....................... 149 149 -------- ------- ------- -------- Net income..................... $ 16,480 $ 410 $ 11 $ 16,901 ======== ======= ======= ========
F-40 181 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONSOLIDATING STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (DOLLARS IN THOUSANDS) (UNAUDITED)
AMSCAN HOLDINGS AND COMBINED COMBINED NON- GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED ------------ ---------- ------------ ------------ Net sales................................ $136,816 $ 17,198 $ (7,006) $147,008 Cost of sales............................ 88,326 10,644 (6,109) 92,861 -------- ------- ------- -------- Gross profit........................... 48,490 6,554 (897) 54,147 Operating expenses: Selling expenses....................... 7,168 1,523 8,691 General and administrative expenses.... 11,025 3,628 (540) 14,113 Art and development costs.............. 3,671 3,671 Special bonuses........................ 3,300 3,300 -------- ------- ------- -------- Total operating expenses....... 25,164 5,151 (540) 29,775 -------- ------- ------- -------- Income from operations......... 23,326 1,403 (357) 24,372 Interest expense, net.................... 4,528 41 4,569 Other income, net........................ (1,348) (22) 1,069 (301) -------- ------- ------- -------- Income before income taxes and minority interests........... 20,146 1,384 (1,426) 20,104 Income taxes............................. 268 499 767 Minority interests....................... 1,138 104 1,242 -------- ------- ------- -------- Net income..................... $ 18,740 $ 781 $ (1,426) $ 18,095 ======== ======= ======= ======== Pro forma data (Note (6)): Income before income taxes............. $ 18,862 Pro forma income tax expense........... 7,888 -------- Pro forma net income........... $ 10,974 ========
F-41 182 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (DOLLARS IN THOUSANDS) (UNAUDITED)
AMSCAN HOLDINGS AND COMBINED COMBINED NON- GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED ------------ ---------- ------------ ------------ Cash flows from operating activities: Net income.................................... $ 16,480 $ 410 $ 11 $ 16,901 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization............. 4,233 272 4,505 Provision for doubtful accounts........... 1,116 307 1,423 Gain on disposal of property and equipment.............................. (29) (29) Changes in operating assets and liabilities, net of acquisitions: Increase in accounts receivable........... (22,764) (1,546) (24,310) Increase in inventories................... (232) (2,748) (63) (3,043) Decrease (increase) in deposits and other assets, net............................ 2,841 (372) 2,469 Increase in accounts payable and accrued expenses............................... 6,757 772 46 7,575 Other, net...................................... 121 2,880 (13) 2,988 --------- -------- ----- -------- Net cash provided by (used in) operating activities............................. 8,523 (25) (19) 8,479 Cash flows from investing activities: Capital expenditures.......................... (6,216) (679) (6,895) Proceeds from disposal of equipment........... 140 140 --------- -------- ----- -------- Net cash used in investing activities......... (6,076) (679) (6,755) --------- -------- ----- -------- Cash flows from financing activities: Net proceeds from sale of Common Stock........ 4,524 4,524 Proceeds from loans, notes payable and long term obligations............................ 15,480 140 15,620 Repayment of loans, notes payable and long term obligations............................ (22,154) (54) (22,208) Repayment of subordinated and other indebtedness to stockholder................. (181) (1) (182) Payments to acquire treasury stock............ (290) (290) --------- -------- ----- -------- Net cash provided by (used in) financing activities............................. (2,621) 85 (2,536) Effect of exchange rate changes on cash......... 13 (125) 19 (93) --------- -------- ----- -------- Net decrease in cash and cash equivalents............................ (161) (744) -- (905) Cash and cash equivalents at beginning of period........................................ 272 1,317 1,589 --------- -------- ----- -------- Cash and cash equivalents at end of period...... $ 111 $ 573 -- $ 684 ========= ======== ===== ========
F-42 183 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (DOLLARS IN THOUSANDS) (UNAUDITED)
AMSCAN HOLDINGS AND COMBINED COMBINED NON- GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED ------------ ---------- ------------ ------------ Cash flows from operating activities: Net income.................................... $ 18,740 $ 781 $ (1,426) $ 18,095 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization................. 3,313 266 3,579 Provision for doubtful accounts............... 808 155 963 Changes in operating assets and liabilities: Increase in accounts receivable............... (18,826) (1,616) (20,442) Increase in inventories....................... (244) (1,243) 1,426 (61) Decrease (increase) in deposits and other current assets.............................. 416 (154) 262 (Increase) decrease in other assets........... (263) 969 706 (Decrease) increase in accounts payable, accrued expenses and income taxes payable... (1,586) 557 (1,029) Other, net...................................... (511) (511) -------- ------- ------- -------- Net cash provided by (used in) operating activities............................. 1,847 (285) -- 1,562 Cash flows from investing activities: Capital expenditures.......................... (5,166) (408) (5,574) Proceeds from disposal of property and equipment................................... -------- ------- ------- -------- Net cash used in investing activities..... (5,166) (408) (5,574) Cash flows from financing activities:........... Proceeds from loans, notes payable and long term obligations............................ 8,771 1,471 10,242 Repayment of loans, notes payable and long term obligations............................ (1,819) (184) (2,003) Repayment of subordinated and other indebtedness to stockholder................. (2,941) (279) (3,220) -------- ------- ------- -------- Net cash provided by financing activities............................. 4,011 1,008 5,019 Effect of exchange rate changes on cash and cash equivalents................................... 15 16 31 -------- ------- ------- -------- Net increase in cash and cash equivalents....... 707 331 1,038 Cash and cash equivalents at beginning of period........................................ 1,593 899 2,492 -------- ------- ------- -------- Cash and cash equivalents at end of period...... $ 2,300 $ 1,230 -- $ 3,530 ======== ======= ======= ========
F-43 184 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE (8) OTHER MATTERS On July 7, 1997, a customer accounting for approximately 2% of the Company's consolidated sales for the nine months ended September 30, 1997 and the year ended December 31, 1996, filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code. According to publicly available documents, the customer is currently operating as a debtor-in-possession and plans to reorganize pursuant to the Bankruptcy Code. At September 30, 1997, amounts receivable from the customer which totaled approximately $1.8 million, have been substantially provided for in the Company's allowance for doubtful accounts. The Company does not believe the potential loss of this customer will have a material adverse effect on the Company's future results of operations or its financial condition. During September 1997, the Company entered into an agreement to convert $4.0 million of trade accounts receivable from a customer into an equity interest. The Company subsequently transferred this interest to the Estate for (i) a cash payment of $1.0 million, (ii) satisfaction of approximately $2.0 million of certain debts and future lease obligations owed to the Estate, and (iii) substantially all of the assets of Ya Otta Pinata ("Ya Otta"), a California corporation 100% owned by the Estate, at a valuation of approximately $1.0 million. F-44 185 ========================================================= NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS OR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. ------------------ TABLE OF CONTENTS
PAGE ------ Available Information.................... iv Prospectus Summary....................... 1 Risk Factors............................. 20 The Exchange Offer....................... 27 Certain Federal Income Tax Consequences of the Exchange Offer.................. 35 The Transaction.......................... 36 Capitalization........................... 38 Transaction Pro Forma Consolidated Financial Data (Unaudited)............. 39 Management's Discussion and Analysis of Financial Condition and Results of Operations............................. 52 Business................................. 67 Management............................... 77 Ownership of Capital Stock............... 89 Description of Senior Debt............... 91 Description of Exchange Notes............ 94 Description of Certain Federal Income Tax Consequences of an Investment in the Exchange Notes......................... 129 Plan of Distribution..................... 133 Experts.................................. 133 Validity of the Exchange Notes........... 133 Index to Financial Statements............ F-1 Independent Auditors' Report............. F-2
========================================================= ========================================================= AMSCAN HOLDINGS, INC. OFFER TO EXCHANGE 9 7/8% SENIOR SUBORDINATED NOTES DUE 2007 ($110,000,000 PRINCIPAL AMOUNT) FOR 9 7/8% SENIOR SUBORDINATED NOTES DUE 2007 ($110,000,000 PRINCIPAL AMOUNT OUTSTANDING) ------------------------------ [AMSCAN LOGO] ------------------------------ ========================================================= 186 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 145 of the General Corporation Law of the State of Delaware (the "DGCL") provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that such person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation in such capacity at another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe that such person's conduct was unlawful. Section 145 of the DGCL also provides that a corporation may indemnify any person who was or is a party or threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that such person acted in any of the capacities set forth above, against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit if such person acted under similar standards, except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. Section 145 of the DGCL also provides that to the extent that a director, officer, employee or agent of a corporation is successful on the merits or otherwise in the defense of any action referred to above, or in defense of any claim, issue or matter therein, the corporation must indemnify such person against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection therewith. In accordance with Section 145 of the DGCL, the Registrant's By-laws provide that the Registrant will indemnify, to the maximum extent permitted by applicable law, any person who was or is a party, or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, including any action by or in the right of the Registrant to procure a judgment in its favor, by reason of the fact that such person is or was a director, officer, employee or agent of the Registrant or is or was serving at the request of the Registrant as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding. The Registrant's By-laws also provide that expenses incurred by an officer or director in defending an action, suit or proceeding will be paid by the Registrant in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such person seeking indemnification to repay such amount in the event that it shall be ultimately determined that such person is not entitled to be indemnified by the Registrant by law or pursuant to the Registrant's By-laws. The Registrant's By-laws define the term "expenses" to include, without limitation, costs of and expenses incurred in connection with or in preparation for litigation, II-1 187 attorneys' fees, judgments, fines, penalties, amounts paid in settlement, excise taxes in respect of any employee benefit plan of the Registrant, and interest on any of the foregoing. Section 102(b)(7) of the DGCL permits a corporation to provide in its certificate of incorporation that a director of a corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the directors' duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL (regarding certain illegal distributions) or (iv) for any transaction from which the director derived an improper personal benefit. The Registrant's Certificate of Incorporation provides that the personal liability of the Registrant's directors to the Registrant or any of its stockholders for monetary damages for breach of fiduciary duty by such director as a director is limited to the fullest extent permitted by Delaware law. ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits. 2.1 Agreement and Plan of Merger, by and among Amscan Holdings, Inc. and Confetti Acquisition, Inc., dated as of August 10, 1997. 3.1 Certificate of Incorporation of Amscan Holdings, Inc. 3.2 Amended By-Laws of Amscan Holdings, Inc. 3.3 Certificate of Incorporation of Amscan Inc. 3.4 By-Laws of Amscan Inc. 3.5 Restated Articles of Incorporation of Trisar, Inc. 3.6 By-Laws of Trisar, Inc. 3.7 Original Articles of Incorporation of Am-Source, Inc. 3.8 By-Laws of Am-Source Inc. 3.9 Certificate of Incorporation of SSY Realty Corp. 3.10 By-Laws of SSY Realty Corp. 3.11 Certificate of Incorporation of JCS Realty Corp. 3.12 By-Laws of JCS Realty Corp. 4.1 Indenture, dated as of December 19, 1997, by and among the Company, the Guarantors named therein and IBJ Schroder Bank & Trust Company with respect to the Senior Subordinated Notes. 5.1 Opinion of Wachtell, Lipton, Rosen & Katz. 10.1 Exchange and Registration Rights Agreement, dated as of December 19, 1997, by and among the Company and Goldman, Sachs & Co. 10.2 Revolving Loan Credit Agreement, dated as of December 19, 1997, among the Company, Goldman, Sachs Credit Partners L.P., as Arranger and Syndication Agent, Fleet National Bank as Administrative Agent and the respective lenders signatory thereto.* 10.3 AXEL Credit Agreement, dated as of December 19, 1997, among the Company, Goldman, Sachs Credit Partners L.P., as Arranger and Syndication Agent, Fleet National Bank as Administrative Agent and the respective lenders signatory thereto.* 10.4 Stockholders' Agreement, dated as of December 19, 1997, by and among the Company and the Stockholders thereto. 10.5 Employment Agreement, dated as of August 10, 1997, by and among the Company and Gerald C. Rittenberg.
II-2 188 10.6 Employment Agreement, dated as of August 10, 1997, by and among the Company and James M. Harrison. 10.7 Amscan Holdings, Inc. 1997 Stock Incentive Plan (contained in Exhibit 10.4). 12.1 Statement re computation of ratios. 21.1 Subsidiaries of the Company. 23.1 Consent of KPMG Peat Marwick LLP. 23.2 Consent of Wachtell, Lipton, Rosen & Katz (contained in Exhibit 5.1). 24.1 Powers of Attorney. 25.1 Statement of Eligibility and Qualification of Trustee on Form T-1 of IBJ Schroder Bank & Trust Company under the Trust Indenture Act of 1939. 99.1 Form of Letter of Transmittal for the 9 7/8% Senior Subordinated Notes due 2007. 99.2 Form of Notice of Guaranteed Delivery.
ITEM 22. UNDERTAKINGS. The undersigned Registrant hereby undertakes: (a) (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high and of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement. (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such posteffective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. II-3 189 (b) To respond to requests for information that is incorporated by reference into the prospectus pursuant to Item 4, 10(b), 11 or 13 of this form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. (c) To supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. II-4 190 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on February 23, 1998. AMSCAN HOLDINGS, INC. By: * ------------------------------------ Name: James M. Harrison Title: President Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on February 23, 1998.
NAME TITLE - ------------------------------------------ ------------------------------------------------ * Chief Executive Officer - ------------------------------------------ Gerald C. Rittenberg * President, Chief Financial Officer and Treasurer - ------------------------------------------ James M. Harrison * Secretary and Controller - ------------------------------------------ Michael A. Correale * Chairman of the Board and Director - ------------------------------------------ Terence M. O'Toole * Director - ------------------------------------------ Sanjeev K. Mehra * Director - ------------------------------------------ Joseph P. DiSabato /s/ TERENCE M. O'TOOLE - ------------------------------------------ Terence M. O'Toole Attorney-In-Fact
II-5 191 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on February 23, 1998. AMSCAN INC. By: * ------------------------------------ Name: James M. Harrison Title: Secretary Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on February 23, 1998.
NAME TITLE - ------------------------------------------ ------------------------------------------------ * President and Director - ------------------------------------------ Gerald C. Rittenberg * Treasurer, Secretary and Director - ------------------------------------------ James M. Harrison * Director - ------------------------------------------ Michael A. Correale /s/ TERENCE M. O'TOOLE - ------------------------------------------ Terence M. O'Toole Attorney-In-Fact
II-6 192 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on February 23, 1998. TRISAR, INC. By: * ------------------------------------ Name: James M. Harrison Title: Secretary Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on February 23, 1998.
NAME TITLE - ------------------------------------------ ------------------------------------------------ * President and Director - ------------------------------------------ Gerald C. Rittenberg * Treasurer, Secretary and Director - ------------------------------------------ James M. Harrison * Director - ------------------------------------------ Michael A. Correale /s/ TERENCE M. O'TOOLE - ------------------------------------------ Terence M. O'Toole Attorney-In-Fact
II-7 193 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on February 23, 1998. AM-SOURCE, INC. By: * -------------------------------------- Name: James M. Harrison Title: Secretary Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on February 23, 1998.
NAME TITLE - ------------------------------------------ ------------------------------------------------ * President and Director - ------------------------------------------ Gerald C. Rittenberg * Treasurer, Secretary and Director - ------------------------------------------ James M. Harrison * Director - ------------------------------------------ Michael A. Correale /s/ TERENCE M. O'TOOLE - ------------------------------------------ Terence M. O'Toole Attorney-In-Fact
II-8 194 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on February 23, 1998. SSY REALTY CORP. By: * ------------------------------------ Name: James M. Harrison Title: Secretary Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on February 23, 1998.
NAME TITLE - ------------------------------------------ ------------------------------------------------ * President and Director - ------------------------------------------ Gerald C. Rittenberg * Treasurer, Secretary and Director - ------------------------------------------ James M. Harrison * Director - ------------------------------------------ Michael A. Correale /s/ TERENCE M. O'TOOLE - ------------------------------------------ Terence M. O'Toole Attorney-In-Fact
II-9 195 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on February 23, 1998. JCS REALTY CORP. By: * ------------------------------------ Name: James M. Harrison Title: Secretary Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on February 23, 1998.
NAME TITLE - ------------------------------------------ ------------------------------------------------ * President and Director - ------------------------------------------ Gerald C. Rittenberg * Treasurer, Secretary and Director - ------------------------------------------ James M. Harrison * Director - ------------------------------------------ Michael A. Correale /s/ TERENCE M. O'TOOLE - ------------------------------------------ Terence M. O'Toole Attorney-In-Fact
II-10 196 EXHIBIT INDEX
SEQUENTIALLY NUMBERED PAGE ------------ *2.1 Agreement and Plan of Merger, by and among Amscan Holdings, Inc. and Confetti Acquisition, Inc., dated as of August 10, 1997. ............... *3.1 Certificate of Incorporation of Amscan Holdings, Inc. .................. *3.2 Amended By-Laws of Amscan Holdings, Inc. ............................... *3.3 Certificate of Incorporation of Amscan Inc. ............................ *3.4 By-Laws of Amscan Inc. ................................................. *3.5 Restated Articles of Incorporation of Trisar, Inc. ..................... *3.6 By-Laws of Trisar, Inc. ................................................ *3.7 Original Articles of Incorporation of Am-Source, Inc. .................. *3.8 By-Laws of Am-Source Inc. .............................................. *3.9 Certificate of Incorporation of SSY Realty Corp. ....................... *3.10 By-Laws of SSY Realty Corp. ............................................ *3.11 Certificate of Incorporation of JCS Realty Corp. ....................... *3.12 By-Laws of JCS Realty Corp. ............................................ *4.1 Indenture, dated as of December 19, 1997, by and among the Company, the Guarantors named therein and IBJ Schroder Bank & Trust Company with respect to the Senior Subordinated Notes. .............................. *5.1 Opinion of Wachtell, Lipton, Rosen & Katz. ............................. *10.1 Exchange and Registration Rights Agreement, dated as of December 19, 1997, by and among the Company and Goldman, Sachs & Co. ................ 10.2 Revolving Loan Credit Agreement, dated as of December 19, 1997, among the Company, Goldman, Sachs Credit Partners L.P., as Arranger and Syndication Agent, Fleet National Bank as Administrative Agent and the respective lenders signatory thereto.*.................................. 10.3 AXEL Credit Agreement, dated as of December 19, 1997, among the Com- pany, Goldman, Sachs Credit Partners L.P., as Arranger and Syndication Agent, Fleet National Bank as Administrative Agent and the respective lenders signatory thereto.*............................................. 10.4 Stockholders' Agreement, dated as of December 19, 1997, by and among the Company and the Stockholders thereto. .................................. *10.5 Employment Agreement, dated as of August 10, 1997, by and among the Company and Gerald C. Rittenberg. ...................................... *10.6 Employment Agreement, dated as of August 10, 1997, by and among the Company and James M. Harrison. ......................................... *10.7 Amscan Holdings, Inc. 1997 Stock Incentive Plan (contained in Exhibit 10.4). ................................................................. 12.1 Statement re computation of ratios. .................................... *21.1 Subsidiaries of the Company. ........................................... *23.1 Consent of KPMG Peat Marwick LLP. ...................................... *23.2 Consent of Wachtell, Lipton, Rosen & Katz (contained in Exhibit 5.1). .................................................................. *24.1 Powers of Attorney. ....................................................
197
SEQUENTIALLY NUMBERED PAGE ------------ *25.1 Statement of Eligibility and Qualification of Trustee on Form T-1 of IBJ Schroder Bank & Trust Company under the Trust Indenture Act of 1939. ... 99.1 Form of Letter of Transmittal for the 9 7/8% Senior Subordinated Notes due 2007. .............................................................. 99.2 Form of Notice of Guaranteed Delivery...................................
- --------------- * Previously filed. EX-10.2 2 REVOLVING LOAN CREDIT AGREEMENT 1 Exhibit 10.2 ================================================================================ REVOLVING LOAN CREDIT AGREEMENT DATED AS OF DECEMBER 19, 1997 AMONG AMSCAN HOLDINGS, INC., AS BORROWER, THE LENDERS LISTED HEREIN, AS LENDERS, GOLDMAN SACHS CREDIT PARTNERS L.P., AS ARRANGER AND SYNDICATION AGENT, AND FLEET NATIONAL BANK, AS ADMINISTRATIVE AGENT ================================================================================ 2 AMSCAN HOLDINGS, INC. REVOLVING LOAN CREDIT AGREEMENT TABLE OF CONTENTS Page ---- SECTION 1. DEFINITIONS............................... 3 1.1 Certain Defined Terms..................................... 3 1.2 Accounting Terms; Utilization of GAAP for Purposes of Calculations Under Agreement.............................. 41 1.3 Other Definitional Provisions and Rules of Construction... 41 SECTION 2. AMOUNTS AND TERMS OF COMMITMENTS AND LOANS................ 42 2.1 Commitments; Making of Loans; the Register; Notes......... 42 2.2 Interest on the Revolving Loans........................... 46 2.3 Fees...................................................... 49 2.4 Prepayments and Reductions in Revolving Loan Commitments; General Provisions Regarding Payments; Application of Proceeds of Collateral and Payments Under Subsidiary Guaranty.................................................. 50 2.5 Use of Proceeds........................................... 55 2.6 Special Provisions Governing Eurodollar Rate Loans........ 55 2.7 Increased Costs; Taxes; Capital Adequacy.................. 58 2.8 Obligation of Lenders and Issuing Lenders to Mitigate..... 62 2.9 Defaulting Lenders........................................ 63 2.10 Removal or Replacement of a Lender........................ 64 SECTION 3. LETTERS OF CREDIT............................ 66 3.1 Issuance of Letters of Credit and Lenders' Purchase of Participations Therein.................................... 66 3.2 Letter of Credit Fees..................................... 69 3.3 Drawings and Reimbursement of Amounts Paid Under Letters of Credit................................................. 70 3.4 Obligations Absolute...................................... 73 3.5 Indemnification; Nature of Issuing Lenders' Duties........ 74 3.6 Increased Costs and Taxes Relating to Letters of Credit... 75 SECTION 4. CONDITIONS TO LOANS AND LETTERS OF CREDIT................ 76 4.1 Conditions to Initial Revolving Loans..................... 76 (i) 3 Page ---- 4.2 Conditions to All Revolving Loans......................... 84 4.3 Conditions to Letters of Credit........................... 85 SECTION 5. COMPANY'S REPRESENTATIONS AND WARRANTIES................. 86 5.1 Organization, Powers, Qualification, Good Standing, Business and Subsidiaries................................. 86 5.2 Authorization of Borrowing, etc........................... 87 5.3 Financial Condition....................................... 88 5.4 No Material Adverse Change; No Restricted Junior Payments.................................................. 89 5.5 Title to Properties; Liens; Real Property................. 89 5.6 Litigation; Adverse Facts................................. 90 5.7 Payment of Taxes.......................................... 90 5.8 Performance of Agreements; Materially Adverse Agreements; Material Contracts........................................ 91 5.9 Governmental Regulation................................... 91 5.10 Securities Activities..................................... 91 5.11 Employee Benefit Plans.................................... 91 5.12 Certain Fees.............................................. 92 5.13 Environmental Protection.................................. 92 5.14 Employee Matters.......................................... 93 5.15 Solvency.................................................. 93 5.16 Matters Relating to Collateral............................ 93 5.17 Related Agreements........................................ 94 5.18 Disclosure................................................ 95 5.19 AXEL Credit Agreement..................................... 95 SECTION 6. COMPANY'S AFFIRMATIVE COVENANTS..................... 96 6.1 Financial Statements and Other Reports.................... 96 6.2 Corporate Existence, etc..................................102 6.3 Payment of Taxes and Claims; Tax Consolidation............102 6.4 Maintenance of Properties; Insurance; Application of Net Insurance/Condemnation Proceeds...........................102 6.5 Inspection Rights; Audits of Inventory and Accounts Receivable; Lender Meeting................................104 6.6 Compliance with Laws, etc.................................105 6.7 Environmental Review and Investigation, Disclosure, Etc.; Company's Actions Regarding Hazardous Materials Activities, Environmental Claims and Violations of Environmental Laws......................................................105 6.8 Execution of Subsidiary Guaranty and Personal Property Collateral Documents by Certain Subsidiaries and Future Subsidiaries..............................................108 (ii) 4 Page ---- 6.9 Conforming Leasehold Interests; Matters Relating to ` Real Property Collateral..................................109 6.10 Interest Rate Protection..................................112 6.11 Cash Management Systems...................................112 SECTION 7. COMPANY'S NEGATIVE COVENANTS.......................113 7.1 Indebtedness..............................................113 7.2 Liens and Related Matters.................................116 7.3 Investments; Joint Ventures...............................117 7.4 Contingent Obligations....................................118 7.5 Restricted Junior Payments................................119 7.6 Financial Covenants.......................................119 7.7 Restriction on Fundamental Changes; Asset Sales and Acquisitions..............................................124 7.8 Consolidated Capital Expenditures.........................126 7.9 Sales and Lease-Backs.....................................127 7.10 Transactions with Shareholders and Affiliates.............127 7.11 Disposal of Subsidiary Stock..............................127 7.12 Conduct of Business.......................................128 7.13 Amendments or Waivers of Certain Related Agreements; Amendments of Documents Relating to Subordinated Indebtedness..............................................128 7.14 Fiscal Year...............................................128 SECTION 8. EVENTS OF DEFAULT............................129 8.1 Failure to Make Payments When Due.........................129 8.2 Default in Other Agreements...............................129 8.3 Breach of Certain Covenants...............................129 8.4 Breach of Warranty........................................129 8.5 Other Defaults Under Revolving Loan Documents.............130 8.6 Involuntary Bankruptcy; Appointment of Receiver, etc......130 8.7 Voluntary Bankruptcy; Appointment of Receiver, etc........130 8.8 Judgments and Attachments.................................131 8.9 Dissolution...............................................131 8.10 Employee Benefit Plans....................................131 8.11 Change in Control.........................................131 8.12 Invalidity of Subsidiary Guaranty; Failure of Security; Repudiation of Obligations................................132 8.13 Failure to Consummate Merger..............................132 8.14 Amendment of Certain Documents of Company.................132 SECTION 9. AGENTS..................................133 (iii) 5 Page 9.1 Appointment...............................................133 9.2 Powers and Duties; General Immunity.......................135 9.3 Representations and Warranties; No Responsibility For Appraisal of Creditworthiness............................136 9.4 Right to Indemnity........................................137 9.5 Successor Agent...........................................137 9.6 Collateral Documents and Guaranties.......................138 SECTION 10. MISCELLANEOUS..............................139 10.1 Assignments and Participations in Loans and Letters of Credit....................................................139 10.2 Expenses..................................................142 10.3 Indemnity.................................................143 10.4 Set-Off; Security Interest in Deposit Accounts............144 10.5 Ratable Sharing...........................................144 10.6 Amendments and Waivers....................................145 10.7 Independence of Covenants.................................146 10.8 Notices...................................................146 10.9 Survival of Representations, Warranties and Agreements....147 10.10 Failure or Indulgence Not Waiver; Remedies Cumulative................................................147 10.11 Marshalling; Payments Set Aside...........................147 10.12 Severability..............................................148 10.13 Obligations Several; Independent Nature of Lenders' Rights....................................................148 10.14 Headings..................................................148 10.15 Applicable Law............................................148 10.16 Successors and Assigns....................................148 10.17 Consent to Jurisdiction and Service of Process............149 10.18 Waiver of Jury Trial......................................149 10.19 Confidentiality...........................................150 10.20 Counterparts; Effectiveness...............................150 Signature pages S-1 (iv) 6 EXHIBITS I FORM OF NOTICE OF BORROWING II FORM OF NOTICE OF CONVERSION/CONTINUATION III FORM OF NOTICE OF ISSUANCE OF LETTER OF CREDIT IV [INTENTIONALLY OMITTED] V FORM OF REVOLVING NOTE VI FORM OF COMPLIANCE CERTIFICATE VII-A FORM OF OPINION OF WACHTELL, LIPTON, ROSEN & KATZ VII-B FORM OF OPINION OF KURZMAN & EISENBERG VIII FORM OF OPINION OF O'MELVENY & MYERS IX FORM OF ASSIGNMENT AGREEMENT X FORM OF CERTIFICATE RE NON-BANK STATUS XI FORM OF FINANCIAL CONDITION CERTIFICATE XII FORM OF COMPANY PLEDGE AGREEMENT XIII FORM OF COMPANY SECURITY AGREEMENT XIV FORM OF SUBSIDIARY GUARANTY XV FORM OF SUBSIDIARY PLEDGE AGREEMENT XVI FORM OF SUBSIDIARY SECURITY AGREEMENT XVII FORM OF MORTGAGE XVIII FORM OF COLLATERAL ACCESS AGREEMENT XIX FORM OF BORROWING BASE CERTIFICATE (v) 7 SCHEDULES 2.1 LENDERS' COMMITMENTS AND PRO RATA SHARES 4.1C CORPORATE AND CAPITAL STRUCTURE; OWNERSHIP; MANAGEMENT 4.1F INDEBTEDNESS TO BE REPAID UNDER EXISTING CREDIT AGREEMENTS 5.1 SUBSIDIARIES OF COMPANY 5.5 REAL PROPERTY 5.6 LITIGATION 5.8 MATERIAL CONTRACTS 5.13 ENVIRONMENTAL MATTERS 6.11 CASH MANAGEMENT SYSTEM 7.1 CERTAIN EXISTING INDEBTEDNESS 7.2 CERTAIN EXISTING LIENS 7.3 CERTAIN EXISTING INVESTMENTS 7.4 CERTAIN EXISTING CONTINGENT OBLIGATIONS 7.10 CERTAIN TRANSACTIONS WITH SHAREHOLDERS AND AFFILIATES (vi) 8 AMSCAN HOLDINGS, INC. REVOLVING LOAN CREDIT AGREEMENT This REVOLVING LOAN CREDIT AGREEMENT is dated as of December 19, 1997 and entered into by and among AMSCAN HOLDINGS, INC., a Delaware corporation ("Company"), GOLDMAN SACHS CREDIT PARTNERS L.P., ("GSCP") as arranger (in such capacity, "Arranger"), and as syndication agent (in such capacity, "Syndication Agent"), THE FINANCIAL INSTITUTIONS LISTED ON THE SIGNATURE PAGES HEREOF (each, including GSCP and Fleet (as hereinafter defined), individually referred to herein as a "Lender" and collectively as "Lenders"), and FLEET NATIONAL BANK ("Fleet"), as administrative agent for Lenders (in such capacity, "Administrative Agent"). R E C I T A L S WHEREAS, GSII (this and other capitalized terms used in these recitals without definition being used as defined in subsection 1.1) has formed Confetti Acquisition, Inc., a Delaware corporation ("Newco") for the purpose of entering into a series of recapitalization transactions pursuant to the Recapitalization Agreement; WHEREAS, on or before the Closing Date, Newco and Company shall have consummated the transactions contemplated under the Recapitalization Agreement, and in connection with such transactions, Company will have, following the Merger of Newco with and into Company, not less than $75,000,000 of equity financing, consisting of (i) approximately $7,500,000 in shares of Company retained by current shareholders, (ii) approximately $750,000 in cash common equity contributions by certain Management Investors (which contributions will be financed by Company and will be made following consummation of the Merger) and (iii) approximately $67,500,000 in equity financing from Newco, which equity financing shall have been contributed to Newco immediately prior to the Merger as follows: (x) an amount not less than $61,875,000 in cash by GSII, (y) approximately $4,500,000 of Old Management Shares (valued at the highest cash price offered to public shareholders in the Acquisition) contributed by a certain Management Investor in exchange for common stock of Newco which will be converted in the Merger into shares of Company Common Stock and (z) approximately $1,125,000 of restricted shares of common stock of Newco granted to a certain Management Investor which will be converted in the Merger into shares of Company Common Stock; WHEREAS, pursuant to the Recapitalization Agreement, on the Closing Date, Newco will be merged with and into Company, with Company being the surviving corporation in such merger; REVOLVING LOAN CREDIT AGREEMENT EXECUTION 9 WHEREAS, on or before the Closing Date, Company will issue and sell not less than $110,000,000 in aggregate principal amount of Senior Subordinated Notes; WHEREAS, on the date hereof Company has entered into a separate AXEL Credit Agreement (such credit agreement as amended, supplemented, refinanced, renewed, extended, or otherwise modified from time to time, the "AXEL Credit Agreement") with Fleet National Bank as administrative agent, (the "AXEL Facility Agent"), Goldman Sachs Credit Partners L.P. as arranger and syndication agent and the financial institutions named therein as lenders (the "AXEL Lenders") pursuant to which AXEL Lenders have agreed to extend certain credit facilities to Company the proceeds of which will be used together with the proceeds of the issuance and sale of the Senior Subordinated Notes and the equity financing described above, to fund the Recapitalization Financing Requirements. WHEREAS, Lenders have agreed to extend certain credit facilities to Company pursuant to the terms and conditions of this Agreement, the proceeds of which will be used (i) together with the proceeds of the AXEL facility under the AXEL Credit Agreement and the issuance and sale of the Senior Subordinated Notes and the equity financing described above, to fund the Recapitalization Financing Requirements, and (ii) to provide financing for working capital and other general corporate purposes of Company and its Subsidiaries; WHEREAS, on the date hereof the Administrative Agent and the AXEL Facility Agent have entered into an Intercreditor Agreement pursuant to which the Administrative Agent and the AXEL Facility Agent have appointed Fleet to serve as collateral agent and representative (in such capacity, the "Collateral Agent") for the Lenders, the AXEL Lenders, the Administrative Agent, the AXEL Facility Agent and the other agents under this Agreement and the AXEL Credit Agreement (collectively, the "Secured Parties") and agreed to the terms on which Collateral, the benefits of guarantees and the proceeds thereof will be shared between the credit facilities; WHEREAS, Company desires to secure all of the Obligations hereunder and under the other Loan Documents by granting to Collateral Agent, on behalf of Secured Parties, a first priority Lien on substantially all of its real, personal and mixed property, including a pledge of all of the capital stock of each of its Domestic Subsidiaries and 66% of the capital stock of each of its Foreign Subsidiaries; and WHEREAS, all of the Domestic Subsidiaries of Company have agreed to guarantee the Obligations hereunder and under the other Loan Documents and to secure their guaranties by granting to Collateral Agent, on behalf of Secured Parties, a first priority Lien on substantially all of their respective personal and mixed property, including a pledge of all of the capital stock of each of their respective Domestic Subsidiaries and 66% of the capital stock of each of their respective Foreign Subsidiaries: NOW, THEREFORE, in consideration of the premises and the agreements, provisions and covenants herein contained, Company, Lenders and Agents agree as follows: REVOLVING LOAN CREDIT AGREEMENT EXECUTION 2 10 SECTION 1. DEFINITIONS 1.1 Certain Defined Terms. The following terms used in this Agreement shall have the following meanings: "Account" means, with respect to any Person, all present and future rights of such Person to payment for goods sold or leased or for services rendered (except those evidenced by instruments or chattel paper), whether now existing or hereafter arising and wherever arising, and whether or not they have been earned by performance. "Adjusted Eurodollar Rate" means, for any Interest Rate Determination Date with respect to an Interest Period for a Eurodollar Rate Loan, the interest rate per annum (rounded upward, if necessary, to the nearest 1/32 of one percent) as determined on the basis of the offered rates for deposits in U.S. dollars, for a period of time comparable to such Interest Period which appears on the Telerate Page 3750 as of 11:00 a.m. (New York time) two Business Days before the first day of such Interest Period; provided, however, that if the rate described above does not appear on the Telerate System on any applicable interest determination date, the Adjusted Eurodollar Rates shall be the rate (rounded upward as described above, if necessary) for deposits in U.S. dollars for a period substantially equal to the interest period on the Reuters Page "LIBO" (or such other page as may replace the LIBO page on that service for the purpose of displaying such rates), as of 11:00 a.m. (London time) two Business Days before the first day of such Interest Period. If both the Telerate and Reuters system are unavailable, then the rate for that date will be determined on the basis of the offered rates for deposits in U.S. dollars for a period of time comparable to such Interest Period which are offered by four major banks in the London interbank market at approximately 11:00 a.m. (New York time) two Business Days before the first day of such Interest Period as selected by the Administrative Agent. The principal London office of each of the four major London banks will be requested to provide a quotation of its U.S. dollar deposit offered rate. If at least two such quotations are provided, the rate for that date will be the arithmetic mean of the quotations. If fewer than two quotations are provided as requested, the rate for that date will be determined on the basis of the rates quoted for loans in U.S. dollars to leading European banks for a period of time comparable to such Interest Period offered by major banks in New York City at approximately 11:00 a.m. (New York time) two Business Days before the first day of such Interest Period. In the event that the Administrative Agent is unable to obtain any such quotation as provided above, it will be deemed that the Adjusted Eurodollar Rate for such Interest Rate cannot be determined. REVOLVING LOAN CREDIT AGREEMENT EXECUTION 3 11 In the event that the Board of Governors of the Federal Reserve System shall impose a Eurodollar Rate Reserve Percentage with respect to Eurocurrency Liabilities, the Adjusted Eurodollar Rate for an Interest Period shall be equal to the amount determined above for such Interest Period divided by a percentage equal to 100% minus the Eurodollar Rate Reserve Percentage for such Interest Period. "Administrative Agent" has the meaning assigned to that term in the introduction to this Agreement and also means and includes any successor Administrative Agent appointed pursuant to subsection 9.5A. "Affected Lender" has the meaning assigned to that term in subsection 2.6C. "Affiliate", as applied to any Person, means any other Person directly or indirectly controlling, controlled by, or under common control with, that Person. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlling", "controlled by" and "under common control with"), as applied to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of that Person, whether through the ownership of voting securities or by contract or otherwise. "Agent" means, individually, each of Arranger, Syndication Agent, Collateral Agent and Administrative Agent and "Agents" means Arranger, Syndication Agent, Collateral Agent and Administrative Agent, collectively. "Agreement" means this Revolving Loan Credit Agreement dated as of December 19, 1997, as it may be amended, supplemented or otherwise modified from time to time. "Applicable Leverage Ratio" means, with respect to any date of determination, the Consolidated Leverage Ratio set forth in the most recent Compliance Certificate delivered pursuant to subsection 6.1(iv) hereof, provided that (i) the Applicable Leverage Ratio for the period from the Closing Date to but excluding the fifth Business Day following delivery of the first Compliance Certificate pursuant to subsection 6.1(iv) hereof, shall be deemed to be no less than 5.25:1, (ii) no change in the Applicable Leverage Ratio shall be effective until five Business Days after the date on which Administrative Agent receives a Compliance Certificate pursuant to subsection 6.1(iv) calculating the Consolidated Leverage Ratio and (iii) in the event the Company fails to deliver to the Administrative Agent a Compliance Certificate calculating the Consolidated Leverage Ratio in accordance with subsection 6.1(iv) when required thereunder, then the Applicable Leverage Ratio shall be deemed to be not less than 5.25:1 from the date such Compliance Certificate was due until the date the Company shall deliver such Compliance Certificate. REVOLVING LOAN CREDIT AGREEMENT EXECUTION 4 12 "Applicable Revolving Base Rate Margin" means, as at any date of determination, a rate per annum equal to the percentage set forth below opposite the Applicable Leverage Ratio in effect as of such date of determination with any change in the Applicable Revolving Base Rate Margin to be effective on the date of any corresponding change in the Applicable Leverage Ratio.
================================================================================ Applicable Leverage Ratio Applicable Revolving Base Rate Margin - -------------------------------------------------------------------------------- 5.25:1.00 or greater 1.25% - -------------------------------------------------------------------------------- 4.75:1.00 or greater, but less than 1.00% 5.25:1.00 - -------------------------------------------------------------------------------- 4.25:1.00 or greater, but less than 0.75% 4.75:1.00 - -------------------------------------------------------------------------------- 3.75:1.00 or greater, but less than 0.50% 4.25:1.00 - -------------------------------------------------------------------------------- 3.25:1.00 or greater, but less than 0.25% 3.75:1.00 - -------------------------------------------------------------------------------- less than 3.25:1.00 0.00% ================================================================================
"Applicable Revolving Commitment Fee Percentage" means, as at any date of determination, a rate per annum equal to the percentage set forth below opposite the Applicable Leverage Ratio in effect as of such date of determination, any change in the Applicable Revolving Commitment Fee Percentage to be effective on the date of any corresponding change in the Applicable Leverage Ratio:
================================================================================ Applicable Leverage Ratio Applicable Revolving Commitment Fee Percentage - -------------------------------------------------------------------------------- 4.75:1.00 or greater 0.50% - -------------------------------------------------------------------------------- 3.75:1.00 or greater, but less than 0.375% 4.75: 1.00 - -------------------------------------------------------------------------------- less than 3.75:1.00 0.25% ================================================================================
"Applicable Revolving Eurodollar Rate Margin" means, as at any date of determination, with respect to any Eurodollar Rate Loans a rate per annum equal to the percentage set forth below opposite the Applicable Leverage Ratio in effect as of the first day of the Interest Period for such Eurodollar Rate Loans: REVOLVING LOAN CREDIT AGREEMENT EXECUTION 5 13
================================================================================ Applicable Leverage Ratio Applicable Revolving Eurodollar Rate Margin - -------------------------------------------------------------------------------- 5.25:1.00 or greater 2.25% - -------------------------------------------------------------------------------- 4.75:1.00 or greater, but less than 2.00% 5.25: 1.00 - -------------------------------------------------------------------------------- 4.25:1.00 or greater, but less than 1.750% 4.75:1.00 - -------------------------------------------------------------------------------- 3.75:1.00 or greater, but less than 1.50% 4.25:1.00 - -------------------------------------------------------------------------------- 3.25:1.00 or greater, but less than 1.25% 3.75:1.00 - -------------------------------------------------------------------------------- 2.75:1.00 or greater, but less than 0.875% 3.25:1.00 - -------------------------------------------------------------------------------- less than 2.75:1.00 0.625% ================================================================================
"Arranger" has the meaning assigned to that term in the introduction to this Agreement. "Asset Sale" means the sale by Company or any of its Subsidiaries to any Person other than Company or any of its wholly-owned Subsidiaries of (i) any of the stock of any of Company's Subsidiaries, (ii) substantially all of the assets of any division or line of business of Company or any of its Subsidiaries, or (iii) any other assets (whether tangible or intangible) of Company or any of its Subsidiaries (other than (a) inventory sold in the ordinary course of business (b) sales of Cash Equivalents for the fair market value thereof, and (c) any such other assets to the extent that the aggregate value of such assets sold in any single transaction or related series of transactions is equal to $500,000 or less). "Assignment Agreement" means an Assignment Agreement in substantially the form of Exhibit IX annexed hereto. "Auxiliary Pledge Agreement" means each pledge agreement or similar instrument governed by the laws of a country other than the United States, executed on the Closing Date pursuant to subsection 4.1I(v) or from time to time thereafter in accordance with subsection 6.8 by Company or any Domestic Subsidiary that owns capital stock of one or more Foreign Subsidiaries organized in such country, in form and substance satisfactory to Collateral Agent, as such Auxiliary Pledge Agreement may be amended, supplemented or otherwise modified from time to time, and "Auxiliary Pledge Agreements" means all such pledge agreements or instruments, collectively. REVOLVING LOAN CREDIT AGREEMENT EXECUTION 6 14 "AXEL(TM)" or "AXELs(TM)" means a loan made by an AXEL Lender to Company as an amortization extended loan pursuant to the AXEL Credit Agreement. The term AXEL is a registered trademark of Goldman, Sachs & Co. "AXEL Credit Agreement" means the AXEL Credit Agreement dated as of December 19, 1997 among Company, the financial institutions from time to time parties thereto, GSCP, as arranger and syndication agent, and Fleet, as administrative agent as such AXEL Credit Agreement may be amended, supplemented, refinanced, renewed, extended or otherwise modified from time to time. "AXEL Commitment" means a commitment of an AXEL Lender to extend an AXEL under the AXEL Credit Agreement, and "AXEL Commitments" means such commitments of all AXEL Lenders in the aggregate. "AXEL Facility Agent" has the meaning assigned to that term in the introduction to this Agreement. "AXEL Lender" means a lender under the AXEL Credit Agreement holding an outstanding AXEL or having an AXEL Commitment, and "AXEL Lenders" means any such lender or lenders under the AXEL Credit Agreement, collectively. "AXEL Loan Documents" means the AXEL Credit Agreement, the AXEL Notes, the Subsidiary Guaranty, the Collateral Documents and the Intercreditor Agreement. "AXEL Notes" means the promissory notes of Company issued pursuant to the AXEL Credit Agreement as they may be amended, supplemented or otherwise modified from time to time. "Bankruptcy Code" means Title 11 of the United States Code entitled "Bankruptcy", as now and hereafter in effect, or any successor statute. "Base Rate" means, at any time, the higher of (x) the Prime Rate or (y) the rate which is 1/2 of 1% in excess of the Federal Funds Effective Rate. "Base Rate Loans" means Revolving Loans bearing interest at rates determined by reference to the Base Rate as provided in subsection 2.2A. "Borrowing Base" means, as at any date of determination, an aggregate amount (determined with reference to the most recent Borrowing Base Certificate delivered pursuant to subsection 6.1(xviii)) equal to: (i) eighty-five percent (85%) of Eligible Accounts Receivable of Company and Subsidiary Guarantors plus REVOLVING LOAN CREDIT AGREEMENT EXECUTION 7 15 (ii) fifty-five percent (55%) of Eligible Inventory of Company and Subsidiary Guarantors minus (iii) the aggregate amount of any reserves established by Administrative Agent, in the exercise of its commercially reasonable judgment, against Eligible Accounts Receivable and Eligible Inventory of Company and Subsidiary Guarantors; provided that Administrative Agent, in the exercise of its commercially reasonable judgment, may (a) increase or decrease reserves against Eligible Accounts Receivable and Eligible Inventory of any Loan Party and (b) reduce the advance rates provided in this definition, or (c) restore such advance rates to any level equal to or below the advance rates in effect as of the Closing Date and provided further that if any Inventory is held on or in any leased property, leased trailer or warehouse and the applicable lessor or warehouseman has not entered into a Collateral Access Agreement in favor of Administrative Agent, Administrative Agent may take a reserve against the value of such Inventory equal to the lesser of (a) the value of such Inventory included in the Borrowing Base and (b) two months lease payments or warehouse storage payments payable to the applicable lessor or warehouseman. "Borrowing Base Certificate" means a completed certificate substantially in the form of Exhibit XIX annexed hereto. "Business Day" means any day excluding Saturday, Sunday and any day which is a legal holiday under the laws of the State of New York or is a day on which banking institutions located in such state are authorized or required by law or other governmental action to close. "Capital Lease", as applied to any Person, means any lease of any property (whether real, personal or mixed) by that Person as lessee that, in conformity with GAAP, is accounted for as a capital lease on the balance sheet of that Person. "Cash" means money, currency or a credit balance in a Deposit Account. "Cash Equivalents" means, as at any date of determination, (i) marketable securities (a) issued or directly and unconditionally guaranteed as to interest and principal by the United States Government or (b) issued by any agency of the United States the obligations of which are backed by the full faith and credit of the United States, in each case maturing within one year after such date; (ii) marketable direct obligations issued by any state of the United States of America or any political subdivision of any such state or any public instrumentality thereof, in each case maturing within one year after such date and having, at the time of the acquisition thereof, the highest rating obtainable from either Standard & Poor's Ratings Group ("S&P") or Moody's Investors Service, Inc. ("Moody's"); (iii) commercial paper REVOLVING LOAN CREDIT AGREEMENT EXECUTION 8 16 maturing no more than one year from the date of creation thereof and having, at the time of the acquisition thereof, a rating of at least A-1 from S&P or at least P-1 from Moody's; (iv) certificates of deposit or bankers' acceptances maturing within one year after such date and issued or accepted by any Lender or by any commercial bank organized under the laws of the United States of America or any state thereof or the District of Columbia that (a) is at least "adequately capitalized" (as defined in the regulations of its primary Federal banking regulator) and (b) has Tier 1 capital (as defined in such regulations) of not less than $100,000,000 (each Lender and each commercial bank being referred to herein as a "Cash Equivalent Bank"); (v) shares of any money market mutual fund that (a) has at least 95% of its assets invested continuously in the types of investments referred to in clauses (i) and (ii) above, (b) has net assets of not less than $500,000,000, and (c) has the highest rating obtainable from either S&P or Moody's; and (vi) with respect to Foreign Subsidiaries, investments of the types described in clause (iv) above issued by a Cash Equivalent Bank or any commercial bank of recognized international standing chartered in the country where such Foreign Subsidiary is domiciled having unimpaired capital and surplus of at least $500,000,000. "Certificate of Merger" means the Certificate of Merger dated as of December 19, 1997 for the Merger of Newco with and into Company, as in effect on the Closing Date. "Certificate re Non-Bank Status" means a certificate substantially in the form of Exhibit X annexed hereto delivered by a Lender to Administrative Agent pursuant to subsection 2.7B(iii). "Closing Date" means the date on or before December 19, 1997, on which the initial Revolving Loans or AXELs are funded. "Collateral" means, collectively, all of the real, personal and mixed property (including capital stock) in which Liens are purported to be granted pursuant to the Collateral Documents as security for the Obligations. "Collateral Access Agreement" means any landlord waiver, mortgagee waiver, bailee letter or any similar acknowledgement or agreement of any landlord in respect of any Leased Property or mortgagee in respect of any real property in which Company or any of its Subsidiaries owns or holds a fee interest and which is subject to a mortgage, held by such mortgagee, in either case where any Collateral is located or any warehouseman or processor in possession of any Inventory of any Loan Party, substantially in the form of Exhibit XVIII annexed hereto with such changes thereto as may be agreed to by Collateral Agent in the reasonable exercise of its discretion. "Collateral Accounts" has the meaning assigned to that term in the Intercreditor Agreement. REVOLVING LOAN CREDIT AGREEMENT EXECUTION 9 17 "Collateral Agent" has the meaning assigned to that term in the introduction to this Agreement. "Collateral Documents" means the Company Pledge Agreement, the Company Security Agreement, the Subsidiary Pledge Agreements, the Subsidiary Security Agreements, the Mortgages, the Auxiliary Pledge Agreements and all other instruments or documents delivered by any Loan Party pursuant to this Agreement or any of the other Loan Documents in order to grant to Collateral Agent, on behalf of Secured Parties, a Lien on any real, personal or mixed property of that Loan Party as security for the Obligations. "Commercial Letter of Credit" means any letter of credit or similar instrument issued for the purpose of providing the primary payment mechanism in connection with the purchase of any materials, goods or services by Company or any of its Subsidiaries in the ordinary course of business of Company or such Subsidiary. "Company" means Company as the surviving corporation in the Merger. "Company Common Stock" means the shares of common stock of Company par value $0.10 per share. "Company Pledge Agreement" means the Company Pledge Agreement executed and delivered by Company on the Closing Date, substantially in the form of Exhibit XII annexed hereto, as such Company Pledge Agreement may thereafter be amended, supplemented or otherwise modified from time to time. "Company Security Agreement" means the Company Security Agreement executed and delivered by Company on the Closing Date, substantially in the form of Exhibit XIII annexed hereto, as such Company Security Agreement may thereafter be amended, supplemented or otherwise modified from time to time. "Compliance Certificate" means a certificate substantially in the form of Exhibit VI annexed hereto delivered to Administrative Agent and Lenders by Company pursuant to subsection 6.1(iv). "Confidential Information Memorandum" means that certain Confidential Information Memorandum prepared by GSCP relating to the AXELs and Revolving Loans dated November 1997. "Conforming Leasehold Interest" means any Recorded Leasehold Interest as to which the lessor has agreed in writing for the benefit of Administrative Agent (which writing has been delivered to Collateral Agent), whether under the terms of the applicable lease, under the terms of a Landlord Consent and Estoppel, or otherwise, to the matters described in the definition of ""Landlord Consent and REVOLVING LOAN CREDIT AGREEMENT EXECUTION 10 18 Estoppel," which interest, if a subleasehold or sub-subleasehold interest, is not subject to any contrary restrictions contained in a superior lease or sublease. "Consolidated Adjusted EBITDA" means, for any period, the sum of the amounts for such period of (i) Consolidated Net Income, (ii) Consolidated Interest Expense, (iii) provisions for taxes based on income, (iv) total depreciation expense, (v) total amortization expense, (vi) to the extent otherwise deducted in determining Consolidated Net Income, (a) non-recurring expenses and fees relating to Company's initial public offering in December 1996 in an amount not to exceed $16,000,000 and (b) certain special bonuses paid by Company in 1996, in an aggregate amount not to exceed $4,200,000 pursuant to certain profit-sharing arrangements that were terminated by Company in connection with such initial public offering, (vii) to the extent otherwise deducted in determining Consolidated Net Income, non-recurring expenses and charges relating to the transactions contemplated by the Related Agreements and the Loan Documents including any special bonuses payable in connection therewith and (viii) other non-cash items reducing Consolidated Net Income including provisions for minority interests but only to the extent such items have been deducted from operating income for such period in determining Consolidated Net Income less other non-cash items increasing Consolidated Net Income, all of the foregoing as determined on a consolidated basis for Company and its Subsidiaries in conformity with GAAP. "Consolidated Capital Expenditures" means, for any period, the sum, without duplication, of (i) the aggregate of all expenditures (whether paid in cash or other consideration or accrued as a liability) by Company and its Subsidiaries during that period that, in conformity with GAAP, are included in "additions to property, plant or equipment" or comparable items reflected in the consolidated statement of cash flows of Company and its Subsidiaries, but excluding any such expenditures relating to future acquisitions and (ii) the aggregate amount of all additions to assets on the consolidated balance sheet of Company and its Subsidiaries during that period in conformity with GAAP in connection with Capital Leases consummated by Company and its Subsidiaries. Notwithstanding the foregoing, Consolidated Capital Expenditures shall not include any amounts reinvested from Net Asset Sale Proceeds, Net Insurance/Condemnation Proceeds or any amounts spent on Permitted Business Acquisitions. "Consolidated Cash Interest Expense" means, for any period, amounts included in Consolidated Interest Expense for such period paid or payable in Cash (excluding amortization of original issue discount and amortization of debt issuance costs). "Consolidated Current Assets" means, as at any date of determination, the total assets of Company and its Subsidiaries on a consolidated basis which may REVOLVING LOAN CREDIT AGREEMENT EXECUTION 11 19 properly be classified as current assets in conformity with GAAP, excluding any Cash and Cash Equivalents. "Consolidated Current Liabilities" means, as at any date of determination, the total liabilities of Company and its Subsidiaries on a consolidated basis which may properly be classified as current liabilities in conformity with GAAP excluding all Revolving Loans and the current portion of any long-term Indebtedness. "Consolidated Excess Cash Flow" means, for any period, an amount (if positive) equal to (i) the sum, without duplication, of the amounts for such period of (a) Consolidated Adjusted EBITDA and (b) the Consolidated Working Capital Adjustment minus (ii) the sum, without duplication, of the amounts for such period of (a) voluntary and scheduled repayments of Consolidated Total Debt (excluding repayments of Revolving Loans except to the extent the Revolving Loan Commitments are permanently reduced in connection with such repayments), (b) the sum of Consolidated Capital Expenditures and any expenditures during such period relating to acquisitions to the extent excluded from Consolidated Capital Expenditures (in each case net of any proceeds of any related financings with respect to such expenditures), (c) Consolidated Cash Interest Expense, (d) the provision for current taxes based on income of Company and its Subsidiaries and payable in cash with respect to such period and (e) any non-recurring restructuring charges and charges related to cost savings paid in cash during such period. "Consolidated Fixed Charges" means, for any period, the sum (without duplication) of the amounts for such period of (i) Consolidated Cash Interest Expense, (ii) provisions for taxes based on income, (iii) scheduled repayments of principal on the Loans and other Indebtedness, and (iv) Consolidated Capital Expenditures to the extent paid for in cash, all of the foregoing as determined on a consolidated basis for Company and its Subsidiaries in conformity with GAAP. "Consolidated Interest Expense" means, for any period, total interest expense (without reduction for interest income) (including that portion attributable to Capital Leases in accordance with GAAP and capitalized interest) of Company and its Subsidiaries on a consolidated basis with respect to all outstanding Indebtedness of Company and its Subsidiaries, including (i) all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing and net costs under Interest Rate Agreements, in each case, attributable to such period and (ii) commitment fees on the unused portion of the Revolving Loan Commitment as set forth in subsection 2.3A, but excluding, however, any amounts referred to in subsection 2.3B payable to Agents and Lenders on or before the Closing Date and any amounts referred to in subsection 2.3B of the AXEL Credit Agreement payable to the AXEL Facility Agent, any other agents under the AXEL Credit Agreement and the AXEL Lenders on or before the Closing Date. REVOLVING LOAN CREDIT AGREEMENT EXECUTION 12 20 "Consolidated Leverage Ratio" means, as at any date of determination, the ratio of (i) Consolidated Total Debt as of such date of determination to (ii) Consolidated Adjusted EBITDA for the four-Fiscal Quarter period ending (a) on such date of determination or (b) if such date of determination is not the last day of a Fiscal Quarter, on the last day of the Fiscal Quarter immediately preceding such date of determination. "Consolidated Net Income" means, for any period, the net income (or loss) of Company and its Subsidiaries on a consolidated basis for such period taken as a single accounting period determined in conformity with GAAP; provided that there shall be excluded (i) the income (or loss) of any Person (other than a Subsidiary of Company) in which any other Person (other than Company or any of its Subsidiaries) has a joint interest, except to the extent of the amount of dividends or other distributions actually paid to Company or any of its Subsidiaries by such Person during such period, (ii) the income (or loss) of any Person accrued prior to the date it becomes a Subsidiary of Company or is merged into or consolidated with Company or any of its Subsidiaries or that Person's assets are acquired by Company or any of its Subsidiaries, (iii) the income of any Subsidiary of Company to the extent that the declaration or payment of dividends or similar distributions by that Subsidiary of that income is not at the time permitted by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Subsidiary, (iv) any after-tax gains or losses attributable to Asset Sales or returned surplus assets of any Pension Plan, and (v) (to the extent not included in clauses (i) through (iv) above) any net extraordinary gains or net non-cash extraordinary losses. "Consolidated Net Worth" means, as at any date of determination, the sum of the capital stock and additional paid-in capital plus retained earnings (or minus accumulated deficits) of Company and its Subsidiaries on a consolidated basis determined in conformity with GAAP. "Consolidated Total Debt" means, as at any date of determination, the aggregate stated balance sheet amount of all Indebtedness of Company and its Subsidiaries, determined on a consolidated basis in accordance with GAAP. "Consolidated Working Capital" means, as at any date of determination, Consolidated Current Assets minus Consolidated Current Liabilities. "Consolidated Working Capital Adjustment" means, for any period on a consolidated basis, the amount (which may be a negative number) equal to Consolidated Working Capital as of the beginning of such period minus Consolidated Working Capital as of the end of such period. REVOLVING LOAN CREDIT AGREEMENT EXECUTION 13 21 "Contingent Obligation", as applied to any Person, means any direct or indirect liability, contingent or otherwise, of that Person (i) with respect to any Indebtedness, lease, dividend or other obligation of another if the primary purpose or intent thereof by the Person incurring the Contingent Obligation is to provide assurance to the obligee of such obligation of another that such obligation of another will be paid or discharged, or that any agreements relating thereto will be complied with, or that the holders of such obligation will be protected (in whole or in part) against loss in respect thereof, (ii) with respect to any letter of credit issued for the account of that Person or as to which that Person is otherwise liable for reimbursement of drawings, or (iii) under Hedge Agreements. Contingent Obligations shall include (a) the direct or indirect guaranty, endorsement (otherwise than for collection or deposit in the ordinary course of business), co-making, discounting with recourse or sale with recourse by such Person of the obligation of another, (b) the obligation to make take-or-pay or similar payments if required regardless of non-performance by any other party or parties to an agreement, and (c) any liability of such Person for the obligation of another through any agreement (contingent or otherwise) (X) to purchase, repurchase or otherwise acquire such obligation or any security therefor, or to provide funds for the payment or discharge of such obligation (whether in the form of loans, advances, stock purchases, capital contributions or otherwise) or (Y) to maintain the solvency or any balance sheet item, level of income or financial condition of another if, in the case of any agreement described under subclauses (X) or (Y) of this sentence, the primary purpose or intent thereof is as described in the preceding sentence. The amount of any Contingent Obligation shall be equal to the amount of the obligation so guaranteed or otherwise supported or, if less, the amount to which such Contingent Obligation is specifically limited. "Contractual Obligation", as applied to any Person, means any provision of any Security issued by that Person or of any material indenture, mortgage, deed of trust, contract, undertaking, agreement or other instrument to which that Person is a party or by which it or any of its properties is bound or to which it or any of its properties is subject. "Currency Agreement" means any foreign exchange contract, currency swap agreement, futures contract, option contract, synthetic cap or other similar agreement or arrangement to which Company or any of its Subsidiaries is a party. "Default Excess" has the meaning assigned to that term in subsection 2.9. "Default Period" has the meaning assigned to that term in subsection 2.9. "Defaulted Revolving Loan" has the meaning assigned to that term in subsection 2.9. "Defaulting Lender" has the meaning assigned to that term in subsection 2.9. REVOLVING LOAN CREDIT AGREEMENT EXECUTION 14 22 "Deposit Account" means a demand, time, savings, passbook or like account with a bank, savings and loan association, credit union or like organization, other than an account evidenced by a negotiable certificate of deposit. "Dollars" and the sign "$" mean the lawful money of the United States of America. "Domestic Subsidiary" means a Subsidiary of Company that is organized under the laws of a state of the United States or the District of Columbia. "Eligible Accounts Receivable" means, with respect to Company or any Subsidiary Guarantor, the aggregate amount of Accounts of such Loan Party deemed by Administrative Agent, in the exercise of its commercially reasonable judgment, to be eligible for inclusion in the calculation of the Borrowing Base. In determining the amount to be so included, the face amount of such Accounts shall be reduced by the amount of all returns, discounts, deductions, claims, credits, charges, or other allowances. Unless otherwise approved in writing by Administrative Agent, an Account shall not be included in Eligible Account Receivable if: (i) it arises out of a sale made by such Loan Party to another Loan Party; or (ii) it is unpaid for (a) more than 60 days after its due date or (b) either more than 120 days after the date of invoice if such Account is not a Seasonal/Promotional Account or 180 days after the date of the invoice if such Account is a Seasonal/Promotional Account; or (iii) it is from the same account debtor or its Affiliate and fifty percent (50%) or more of all Accounts from that account debtor (and its Affiliates) are ineligible under clause (ii) above; or (iv) when aggregated with all other Accounts of an account debtor, such Account exceeds 15% in face value of all Accounts of all Loan Parties then outstanding, but only to the extent of such excess, unless such excess is supported by an irrevocable letter of credit or other form of assurance satisfactory to Administrative Agent (as to form, substance and issuer) and assigned to and directly drawable by Administrative Agent provided that this clause (iv) shall not apply to Accounts of Party City Corporation; or (v) the account debtor for such Account is a creditor of such Loan Party, has or has asserted a right of setoff against such Loan Party, or has disputed its liability or otherwise has made any claim with respect to such Account or any other Account which has not been resolved, in each case to the extent of the amount owed by such Loan Party to such account debtor, the amount of REVOLVING LOAN CREDIT AGREEMENT EXECUTION 15 23 such actual or asserted right of setoff, or the amount of such dispute or claim, as the case may be; or (vi) the account debtor is (or its assets are) the subject of an Insolvency Event; or (vii) such Account is not payable in Dollars or the account debtor for such Account is located outside the continental United States, unless such Account is supported by an irrevocable letter of credit satisfactory to Administrative Agent (as to form, substance and issuer) and assigned to and directly drawable by Administrative Agent; or (viii) the sale to the account debtor is on a bill-and-hold, guarantied sale, sale-and-return, sale on approval or consignment basis or was made pursuant to any other written agreement providing for repurchase or return; or (ix) Administrative Agent determines by its own credit analysis that collection of such Account is uncertain or that such Account is not likely to be paid; or (x) the account debtor is the United States of America or any department, agency or instrumentality thereof, unless such Loan Party duly assigns its rights to payment of such Account to Administrative Agent pursuant to the Assignment of Claims Act of 1940, as amended (31 U.S.C. ss.ss.3727 et seq.); or (xi) unless such Account relates to permitted dated receivables, the goods giving rise to such Account have not been shipped and delivered to and accepted by the account debtor, the services giving rise to such Account have not been performed and accepted, or such Account otherwise does not represent a final sale; or (xii) such Account does not comply with all Requirements of Law, including the Federal Consumer Credit Protection Act, the Federal Truth in Lending Act and Regulation Z of the Board of Governors of the Federal Reserve System; or (xiii) such Account is subject to any adverse security deposit, progress payment or other similar advance made by or for the benefit of the applicable account debtor; or (xiv) such Account is not subject to a valid and perfected first priority Lien in favor of Administrative Agent for the benefit of Lenders or does not otherwise conform to the representations and warranties contained in the Revolving Loan Documents. REVOLVING LOAN CREDIT AGREEMENT EXECUTION 16 24 provided that Administrative Agent, in the exercise of its commercially reasonable judgment, may impose additional restrictions (or eliminate the same) to the standards of eligibility set forth in this definition. "Eligible Assignee" means (A) (i) a commercial bank organized under the laws of the United States or any state thereof; (ii) a savings and loan association or savings bank organized under the laws of the United States or any state thereof; (iii) a commercial bank organized under the laws of any other country or a political subdivision thereof; provided that (x) such bank is acting through a branch or agency located in the United States or (y) such bank is organized under the laws of a country that is a member of the Organization for Economic Cooperation and Development or a political subdivision of such country; and (iv) any other entity which is an "accredited investor" (as defined in Regulation D under the Securities Act) which extends credit or buys loans as one of its businesses including insurance companies, mutual funds and lease financing companies; and (B) any Lender, and any Related Fund or any Affiliate of any Lender; provided that no Loan Party or any Subsidiary of any Loan Party shall be an Eligible Assignee. "Eligible Inventory" means, with respect to Company or any Subsidiary Guarantor, the aggregate amount of Inventory of such Loan Party deemed by Administrative Agent, in the exercise of its commercially reasonable judgment, to be eligible for inclusion in the calculation of the Borrowing Base. In determining the amount to be so included, Inventory shall be valued at the lower of cost or market on a basis consistent with such Loan Party's current and historical accounting practices. Unless otherwise approved in writing by Administrative Agent, an item of Inventory shall not be included in Eligible Inventory if: (i) it is not owned solely by such Loan Party or such Loan Party does not have good, valid and marketable title thereto; or (ii) it is not located in the United States; or (iii) it is not located on property (including trailers) owned or leased by such Loan Party or in a contract warehouse, in each case subject to a Collateral Access Agreement executed by any applicable mortgagee, lessor or contract warehouseman, as the case may be, (or, if not subject to a Collateral Access Agreement, subject to such reserves against such Inventory as the Administrative Agent may deem appropriate as set forth in the second proviso of the definition of "Borrowing Base") and segregated or otherwise separately identifiable from goods of others, if any, stored on the premises; provided that any goods in transit to property owned or leased by a Loan Party or to a contract warehouse, in each case subject to a Collateral Access Agreement executed by any applicable mortgagee, lessor or contract warehouseman, shall not be excluded under this clause (iii) so long as title to such goods has REVOLVING LOAN CREDIT AGREEMENT EXECUTION 17 25 passed to a Loan Party, and delivery to the property or warehouse of the Loan Party is reasonably expected within 15 days; or (iv) it is not subject to a valid and perfected first priority Lien in favor of Collateral Agent except, with respect to Inventory stored at sites described in clause (iii) above, to the extent such Lien is subject to Liens for unpaid rent or normal and customary warehousing charges; provided that any goods in transit to property owned or leased by a Loan Party or to a contract warehouse, in each case subject to a Collateral Access Agreement executed by any applicable mortgagee, lessor or contract warehouseman, shall not be excluded under this clause (iv) so long as title to such goods has passed to a Loan Party, and delivery to the property or warehouse of the Loan Party is reasonably expected within 15 days; or (v) it is in excess of the amount required for 18 months supply of such item of Inventory based on sales for the 12-month period ending as of the end of the most recently ended Fiscal Quarter, provided that this clause (v) shall not apply to Inventory in new stock keeping units first purchased or produced by Company on or after the first day of the 12-month period ending as of the end of the most recently ended Fiscal Quarter; or (vi) it consists of goods returned or rejected by such Loan Party's customers that are not first-quality goods or are obsolete or goods in transit to third parties other than to warehouse sites or trailers covered by a Collateral Access Agreement or subject to such reserves as the Administrative Agent may deem appropriate as set forth in the second proviso of the definition of "Borrowing Base"; or (vii) it is not first-quality goods, is obsolete (i.e. such item is not included in the Company's current or next-scheduled catalog) or does not otherwise conform to the representations and warranties contained in the Revolving Loan Documents; provided that Administrative Agent, in the exercise of its commercially reasonable judgment, may impose additional restrictions (or eliminate the same) to the standards of eligibility set forth in this definition. "Employee Benefit Plan" means any "employee benefit plan" as defined in Section 3(3) of ERISA which is or was maintained or contributed to by Company, any of its Subsidiaries or any of their respective ERISA Affiliates. "Employment Agreements" means, collectively, the employment agreements and stock and option agreements between the Company and certain employees of the Company as set forth on Schedule 4.1C annexed hereto, in certain cases providing REVOLVING LOAN CREDIT AGREEMENT EXECUTION 18 26 for the exclusive employment of such Persons by Company, in the form provided to Arranger and Administrative Agent pursuant to subsection 4.1C on or prior to the Closing Date. "Environmental Claim" means any investigation, notice, notice of violation, claim, action, suit, proceeding, demand, abatement order or other order or directive (conditional or otherwise), by any governmental authority or any other Person, arising (i) pursuant to or in connection with any actual or alleged violation of any Environmental Law, (ii) in connection with any Hazardous Materials or any actual or alleged Hazardous Materials Activity, or (iii) in connection with any actual or alleged damage, injury, threat or harm to natural resources or the environment. "Environmental Laws" means any and all current or future statutes, ordinances, orders, rules, regulations, guidance documents, judgments, Governmental Authorizations, or any other requirements of governmental authorities relating to (i) environmental matters, including those relating to any Hazardous Materials Activity, (ii) the generation, use, storage, transportation or disposal of Hazardous Materials, or (iii) occupational safety and health, industrial hygiene, land use or the protection of human, plant or animal health or welfare, in any manner applicable to Company or any of its Subsidiaries or any Facility, including the Comprehensive Environmental Response, Compensation, and Liability Act (42 U.S.C. ss. 9601 et seq.), the Hazardous Materials Transportation Act (49 U.S.C. ss. 1801 et seq.), the Resource Conservation and Recovery Act (42 U.S.C. ss. 6901 et seq.), the Federal Water Pollution Control Act (33 U.S.C. ss. 1251 et seq.), the Clean Air Act (42 U.S.C. ss. 7401 et seq.), the Toxic Substances Control Act (15 U.S.C. ss. 2601 et seq.), the Federal Insecticide, Fungicide and Rodenticide Act (7 U.S.C. ss.136 et seq.), the Occupational Safety and Health Act (29 U.S.C. ss. 651 et seq.), the Oil Pollution Act (33 U.S.C. ss. 2701 et seq) and the Emergency Planning and Community Right-to-Know Act (42 U.S.C. ss. 11001 et seq.), each as amended or supplemented, any analogous present or future state or local statutes or laws, and any regulations promulgated pursuant to any of the foregoing. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and any successor thereto. "ERISA Affiliate" means, as applied to any Person, (i) any corporation which is a member of a controlled group of corporations within the meaning of Section 414(b) of the Internal Revenue Code of which that Person is a member; (ii) any trade or business (whether or not incorporated) which is a member of a group of trades or businesses under common control within the meaning of Section 414(c) of the Internal Revenue Code of which that Person is a member; and (iii) any member of an affiliated service group within the meaning of Section 414(m) or (o) of the Internal Revenue Code of which that Person, any corporation described in clause (i) above or any trade or business described in clause (ii) above is a member. Any REVOLVING LOAN CREDIT AGREEMENT EXECUTION 19 27 former ERISA Affiliate of Company or any of its Subsidiaries shall continue to be considered an ERISA Affiliate of Company or such Subsidiary within the meaning of this definition with respect to the period such entity was an ERISA Affiliate of Company or such Subsidiary and with respect to liabilities arising after such period for which Company or such Subsidiary could be liable under the Internal Revenue Code or ERISA. "ERISA Event" means (i) a "reportable event" within the meaning of Section 4043 of ERISA and the regulations issued thereunder with respect to any Pension Plan (excluding those for which the provision for 30-day notice to the PBGC has been waived by regulation); (ii) the failure to meet the minimum funding standard of Section 412 of the Internal Revenue Code with respect to any Pension Plan (whether or not waived in accordance with Section 412(d) of the Internal Revenue Code) or the failure to make by its due date a required installment under Section 412(m) of the Internal Revenue Code with respect to any Pension Plan or the failure to make any required contribution to a Multiemployer Plan; (iii) the provision by the administrator of any Pension Plan pursuant to Section 4041(a)(2) of ERISA of a notice of intent to terminate such plan in a distress termination described in Section 4041(c) of ERISA; (iv) the withdrawal by Company, any of its Subsidiaries or any of their respective ERISA Affiliates from any Pension Plan with two or more contributing sponsors or the termination of any such Pension Plan resulting in liability pursuant to Section 4063 or 4064 of ERISA; (v) the institution by the PBGC of proceedings to terminate any Pension Plan, or the occurrence of any event or condition which could reasonably be expected to constitute grounds under ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan; (vi) the imposition of liability on Company, any of its Subsidiaries or any of their respective ERISA Affiliates pursuant to Section 4062(e) or 4069 of ERISA or by reason of the application of Section 4212(c) of ERISA; (vii) the withdrawal of Company, any of its Subsidiaries or any of their respective ERISA Affiliates in a complete or partial withdrawal (within the meaning of Sections 4203 and 4205 of ERISA) from any Multiemployer Plan if there is any potential liability therefor, or the receipt by Company, any of its Subsidiaries or any of their respective ERISA Affiliates of notice from any Multiemployer Plan that it is in reorganization or insolvency pursuant to Section 4241 or 4245 of ERISA, or that it intends to terminate or has terminated under Section 4041A or 4042 of ERISA; (viii) the occurrence of an act or omission which could reasonably be expected to give rise to the imposition on Company, any of its Subsidiaries or any of their respective ERISA Affiliates of fines, penalties, taxes or related charges under Chapter 43 of the Internal Revenue Code or under Section 409, Section 502(c), (i) or (l), or Section 4071 of ERISA in respect of any Employee Benefit Plan; (ix) the assertion of a material claim (other than routine claims for benefits) against any Employee Benefit Plan other than a Multiemployer Plan or the assets thereof, or against Company, any of its Subsidiaries or any of their respective ERISA Affiliates in connection with any Employee Benefit Plan; (x) receipt from the Internal Revenue Service of notice of the failure of any REVOLVING LOAN CREDIT AGREEMENT EXECUTION 20 28 Pension Plan (or any other Employee Benefit Plan intended to be qualified under Section 401(a) of the Internal Revenue Code) to qualify under Section 401(a) of the Internal Revenue Code, or the failure of any trust forming part of any Pension Plan to qualify for exemption from taxation under Section 501(a) of the Internal Revenue Code; or (xi) the imposition of a Lien pursuant to Section 401(a)(29) or 412(n) of the Internal Revenue Code or pursuant to ERISA with respect to any Pension Plan. "Eurocurrency Liabilities" has the meaning specified in Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time. "Eurodollar Rate Loans" means Revolving Loans bearing interest at rates determined by reference to the Adjusted Eurodollar Rate as provided in subsection 2.2A. "Eurodollar Rate Reserve Percentage" means, for any Interest Period for all Eurodollar Rate Loans comprising part of the same Borrowing, the reserve percentage applicable two Business Days before the first day of such Interest Period under regulations issued from time to time by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including, without limitation, any emergency, supplemental or other marginal reserve requirement) for a member bank of the Federal Reserve System in New York City with respect to liabilities or assets consisting of or including Eurocurrency Liabilities (or with respect to any other category of liabilities that includes deposits by reference to which the interest rate on Eurodollar Rate Loans is determined) having a term equal to such Interest Period. "Event of Default" means each of the events set forth in Section 8. "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, and any successor statute. "Exchange Rate" means, on any date when an amount expressed in a currency other than Dollars is to be determined with respect to any Letter of Credit, the nominal rate of exchange of the applicable Issuing Lender in the New York foreign exchange market for the purchase by such Issuing Lender (by cable transfer) of such currency in exchange for Dollars at 12:00 noon (New York time) one Business Day prior to such date, expressed as a number of units of such currency per one Dollar. "Existing Credit Agreements" means any and all credit agreements entered into by Company, in each case as amended prior to the Closing Date, as set forth on Schedule 4.1F. "Facilities" means any and all real property (including all buildings, fixtures or other improvements located thereon) now, hereafter or heretofore owned, leased, REVOLVING LOAN CREDIT AGREEMENT EXECUTION 21 29 operated or used by Company or any of its Subsidiaries or any of their respective predecessors or Affiliates. "Federal Funds Effective Rate" means, for any period, a fluctuating interest rate equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by Administrative Agent from three Federal funds brokers of recognized standing selected by Administrative Agent. "Fee Property" means any real property owned in fee simple by any Loan Party, other than any such real property designated from time to time by Collateral Agent in its sole discretion as not being required to be included in the Collateral. "Financial Plan" has the meaning assigned to that term in subsection 6.1(xiii). "First Priority" means, with respect to any Lien purported to be created in any Collateral pursuant to any Collateral Document, that (i) such Lien has priority over any other Lien on such Collateral (other than Liens permitted pursuant to subsection 7.2A) and (ii) such Lien is the only Lien (other than Permitted Encumbrances and Liens permitted pursuant to subsection 7.2) to which such Collateral is subject. "Fiscal Quarter" means a fiscal quarter of any Fiscal Year. "Fiscal Year" means the fiscal year of Company and its Subsidiaries ending on December 31 of each calendar year. For purposes of this Agreement, any particular Fiscal Year shall be designated by reference to the calendar year in which such Fiscal Year ends. "Fleet" has the meaning assigned to that term in the introduction to this Agreement. "Flood Hazard Property" means a Mortgaged Property located in an area designated by the Federal Emergency Management Agency as having special flood or mud slide hazards. "Foreign Subsidiary" means a Subsidiary of Company other than a Domestic Subsidiary. REVOLVING LOAN CREDIT AGREEMENT EXECUTION 22 30 "Funding and Payment Office" means (i) the office of Administrative Agent located at Fleet National Bank, 1 Federal Street, Boston, Massachusetts 02110, or (ii) such other office of Administrative Agent as may from time to time hereafter be designated as such in a written notice delivered by Administrative Agent to Company and each Lender. "Funding Date" means the date of the funding of a Revolving Loan. "Funding Default" has the meaning assigned to that term in subsection 2.9. "GAAP" means, subject to the limitations on the application thereof set forth in subsection 1.2, generally accepted accounting principles set forth in 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 may be approved by a significant segment of the accounting profession, in each case as the same are applicable to the circumstances as of the date of determination. "Governmental Authorization" means any permit, license, authorization, plan, directive, consent order or consent decree of or from any federal, state or local governmental authority, agency or court. "GSCP" has the meaning assigned to that term in the introduction to this Agreement. "GSII" means, collectively, GS Capital Partners II, L.P., GS Capital Partners II Offshore, L.P., Goldman, Sachs & Co. Verwaltungs GmbH, Stone Street Fund 1997, L.P. and Bridge Street Fund 1997, L.P. "Hazardous Materials" means (i) any chemical, material or substance at any time defined as or included in the definition of "hazardous substances", "hazardous wastes", "hazardous materials", "extremely hazardous waste", "acutely hazardous waste", "radioactive waste", "biohazardous waste", "pollutant", "toxic pollutant", "contaminant", "restricted hazardous waste", "infectious waste", "toxic substances", or any other term or expression intended to define, list or classify substances by reason of properties harmful to health, safety or the indoor or outdoor environment (including harmful properties such as ignitability, corrosivity, reactivity, carcinogenicity, toxicity, reproductive toxicity, "TCLP toxicity" or "EP toxicity" or words of similar import under any applicable Environmental Laws); (ii) any oil, petroleum, petroleum fraction or petroleum derived substance; (iii) any drilling fluids, produced waters and other wastes associated with the exploration, development or production of crude oil, natural gas or geothermal resources; (iv) any flammable substances or explosives; (v) any radioactive materials; (vi) any asbestos-containing materials; (vii) urea formaldehyde foam insulation; (viii) electrical equipment which contains any oil or REVOLVING LOAN CREDIT AGREEMENT EXECUTION 23 31 dielectric fluid containing polychlorinated biphenyls; (ix) pesticides; and (x) any other chemical, material or substance, exposure to which is prohibited, limited or regulated by any governmental authority or which may or could pose a hazard to the health and safety of the owners, occupants or any Persons in the vicinity of any Facility or to the indoor or outdoor environment. "Hazardous Materials Activity" means any past, current or future activity, event or occurrence involving any Hazardous Materials, including the use, manufacture, possession, storage, holding, presence, existence, location, Release, threatened Release, discharge, placement, generation, transportation, processing, construction, treatment, abatement, removal, remediation, disposal, disposition or handling of any Hazardous Materials, and any corrective action or response action with respect to any of the foregoing. "Hedge Agreement" means an Interest Rate Agreement or a Currency Agreement designed to hedge against fluctuations in interest rates or currency values, respectively. "Increased Cost Lender" has the meaning assigned to that term in subsection 2.10. "Indebtedness", as applied to any Person, means (i) all indebtedness for borrowed money, (ii) that portion of obligations with respect to Capital Leases that is properly classified as a liability on a balance sheet in conformity with GAAP, (iii) notes payable and drafts accepted representing extensions of credit whether or not representing obligations for borrowed money, (iv) any obligation owed for all or any part of the deferred purchase price of property or services (excluding any such obligations incurred under ERISA), which purchase price is (a) due more than six months from the date of incurrence of the obligation in respect thereof or 12 months in the case of a bona fide trade payable or (b) evidenced by a note or similar written instrument, and (v) all indebtedness secured by any Lien on any property or asset owned or held by that Person regardless of whether the indebtedness secured thereby shall have been assumed by that Person or is nonrecourse to the credit of that Person. Obligations under Interest Rate Agreements and Currency Agreements constitute (X) in the case of Hedge Agreements, Contingent Obligations, and (Y) in all other cases, Investments, and in neither case constitute Indebtedness. Any contingent earnout obligations incurred pursuant to any acquisition agreements shall constitute Contingent Obligations and not Indebtedness until actually earned and thereafter shall constitute Indebtedness until paid. "Indemnitee" has the meaning assigned to that term in subsection 10.3. "Insolvency Event" means, with respect to any Person, the occurrence of any of the events described in subsection 8.6 or 8.7; provided that, solely for purposes of REVOLVING LOAN CREDIT AGREEMENT EXECUTION 24 32 this definition, any references to Company or any of its Subsidiaries in subsection 8.6 or 8.7 shall be deemed to be a reference to such Person. "Insolvency Laws" means the Bankruptcy Code or any other applicable bankruptcy, insolvency or similar law now or hereafter in effect in the United States of America or any state thereof. "Intellectual Property" means all patents, trademarks, tradenames, copyrights, technology, know-how and processes used in or necessary for the conduct of the business of Company and its Subsidiaries as currently conducted that are material to the condition (financial or otherwise), business or operations of Company and its Subsidiaries, taken as a whole. "Intercreditor Agreement" means the Intercreditor Agreement dated as of December 19, 1997 among the Administrative Agent, the AXEL Facility Agent, the Collateral Agent the Company and the Subsidiary Guarantors as such agreement may be amended, supplemented or otherwise modified from time to time. "Interest Payment Date" means (i) with respect to any Base Rate Loan, each March 15, June 15, September 15 and December 15 of each year, commencing on the first such date to occur after the Closing Date, and (ii) with respect to any Eurodollar Rate Loan, the last day of each Interest Period applicable to such Eurodollar Rate Loan; provided that in the case of each Interest Period of longer than three months "Interest Payment Date" shall also include each date that is three months, or an integral multiple thereof, after the commencement of such Interest Period. "Interest Period" has the meaning assigned to that term in subsection 2.2B. "Interest Rate Agreement" means any interest rate swap agreement, interest rate cap agreement, interest rate collar agreement or other similar agreement or arrangement to which Company or any of its Subsidiaries is a party. "Interest Rate Determination Date" means, with respect to any Interest Period, the second Business Day prior to the first day of such Interest Period. "Internal Revenue Code" means the Internal Revenue Code of 1986, as amended to the date hereof and from time to time hereafter, and any successor statute. "Inventory" means, with respect to any Person as of any date of determination, all goods, merchandise and other personal property which are then held by such Person for sale or lease, including raw materials and work in process. REVOLVING LOAN CREDIT AGREEMENT EXECUTION 25 33 "Investment" means (i) any direct or indirect purchase or other acquisition by Company or any of its Subsidiaries of, or of a beneficial interest in, any Securities of any other Person (including any Subsidiary of Company), (ii) any direct or indirect redemption, retirement, purchase or other acquisition for value, by any Subsidiary of Company from any Person other than Company or any of its Subsidiaries, of any equity Securities of such Subsidiary, (iii) any direct or indirect loan, advance (other than advances to employees for moving, entertainment and travel expenses, drawing accounts and similar expenditures in the ordinary course of business) or capital contribution by Company or any of its Subsidiaries to any other Person, including all indebtedness and accounts receivable from that other Person that are not current assets or did not arise from sales to that other Person in the ordinary course of business, or (iv) Interest Rate Agreements or Currency Agreements not constituting Hedge Agreements. The amount of any Investment shall be the original cost of such Investment plus the cost of all additions thereto, without any adjustments for increases or decreases in value, or write-ups, write-downs or write-offs with respect to such Investment. "Issuing Lender" means, with respect to any Letter of Credit, the Lender which agrees or is otherwise obligated to issue such Letter of Credit, determined as provided in subsection 3.1B(ii). "Joint Venture" means a joint venture, partnership or other similar arrangement, whether in corporate, partnership or other legal form; provided that in no event shall any corporate Subsidiary of any Person be considered to be a Joint Venture to which such Person is a party. "Landlord Consent and Estoppel" means, with respect to any Leasehold Property, a letter, certificate or other instrument in writing from the lessor under the related lease, satisfactory in form and substance to Collateral Agent, pursuant to which such lessor agrees, for the benefit of Collateral Agent, (i) to the matters contained in the form of Collateral Access Agreement applicable to a Leasehold Property, and (ii) to such other matters relating to such Leasehold Property as Collateral Agent may reasonably request, including, without limitation that without any further consent of such lessor or any further action on the part of the Loan Party holding such Leasehold Property, such Leasehold Property may be encumbered pursuant to a Mortgage and may be assigned to the purchaser at a foreclosure sale or in a transfer in lieu of such a sale (and to a subsequent third party assignee if Collateral Agent, any Lender, or an Affiliate of either so acquires such Leasehold Property). "Leasehold Property" means any leasehold interest of any Loan Party as lessee under any lease of real property, other than any such leasehold interest designated from time to time by Collateral Agent in its sole discretion as not being required to be included in the Collateral. REVOLVING LOAN CREDIT AGREEMENT EXECUTION 26 34 "Lender" and "Lenders" means the persons identified as "Lenders" and listed on the signature pages of this Agreement, together with their successors and permitted assigns pursuant to subsection 10.1; provided that the term "Lenders", when used in the context of a particular Commitment, shall mean Lenders having that Commitment. "Letter of Credit" or "Letters of Credit" means Commercial Letters of Credit and Standby Letters of Credit issued or to be issued by Issuing Lenders for the account of Company pursuant to subsection 3.1. "Letter of Credit Usage" means, as at any date of determination, the sum of (i) the maximum aggregate amount which is or at any time thereafter may become available for drawing under all Letters of Credit then outstanding plus (ii) the aggregate amount of all drawings under Letters of Credit honored by Issuing Lenders and not theretofore reimbursed by Company (including any such reimbursement out of the proceeds of Revolving Loans pursuant to subsection 3.3B). For purposes of this definition, any amount described in clause (i) or (ii) of the preceding sentence which is denominated in a currency other than Dollars shall be valued based on the applicable Exchange Rate for such currency as of the applicable date of determination. "Lien" means any lien, mortgage, pledge, assignment, security interest, charge or encumbrance of any kind (including any conditional sale or other title retention agreement, any lease in the nature thereof, and any agreement to give any security interest) and any option, trust or other preferential arrangement having the practical effect of any of the foregoing. "Loan Documents" means the Revolving Loan Documents and the AXEL Loan Documents. "Loan Party" means each of Company and any of Company's Subsidiaries from time to time executing a Loan Document, and "Loan Parties" means all such Persons, collectively. "Management Investors" means the management officers and employees of Company and its Subsidiaries identified as Management Investors on Schedule 4.1C annexed hereto. "Margin Stock" has the meaning assigned to that term in Regulation U of the Board of Governors of the Federal Reserve System as in effect from time to time. "Material Adverse Effect" means (i) a material adverse effect upon the business, operations, properties, assets, condition (financial or otherwise) or prospects of Company or any of its Subsidiaries or (ii) the impairment in any material respect REVOLVING LOAN CREDIT AGREEMENT EXECUTION 27 35 of the ability of the Loan Parties, taken as a whole, to perform, or of Administrative Agent or Lenders to enforce, the Obligations. "Material Contract" means any contract or other arrangement to which Company or any of its Subsidiaries is a party (other than the Loan Documents) for which breach, nonperformance, cancellation or failure to renew could reasonably be expected to have a Material Adverse Effect. "Material Domestic Subsidiary" means each Domestic Subsidiary of Company now existing or hereafter acquired or formed by Company which, on a consolidated basis for such Subsidiary and its Subsidiaries, (i) for the most recent Fiscal Year account for more than 5% of the consolidated revenues of Company and its Subsidiaries or (ii) as at the end of such Fiscal Year, was the owner of more than 5% of the consolidated assets of Company and its Subsidiaries. "Material Leasehold Property" means a Leasehold Property reasonably determined by Administrative Agent to be of material value as Collateral or of material importance to the operations of Company or any of its Subsidiaries; provided, however that, excepting any such Leasehold Properties set forth on Schedule 4.1I annexed hereto, no Leasehold Property with respect to which the aggregate amount of all rents payable during any one Fiscal Year is not expected to exceed $500,000 shall be a "Material Leasehold Property". "Merger" means the merger of Newco with and into Company in accordance with the terms of the Recapitalization Agreement, with Company being the surviving corporation in such Merger. "Mortgage" means a security instrument (whether designated as a deed of trust or a mortgage or by any similar title) executed and delivered by any Loan Party, substantially in the form of Exhibit XVII annexed hereto or in such other form as may be approved by Collateral Agent in its sole discretion, in each case with such changes thereto as may be recommended by Collateral Agent's local counsel based on local laws or customary local mortgage or deed of trust practices. "Mortgages" means all such instruments collectively. "Mortgaged Property" has the meaning assigned to that term in subsection 6.9. "Mortgage Policy" has the meaning assigned to that term in subsection 6.9. "Multiemployer Plan" means any Employee Benefit Plan which is a "multiemployer plan" as defined in Section 3(37) of ERISA. REVOLVING LOAN CREDIT AGREEMENT EXECUTION 28 36 "Net Asset Sale Proceeds" means, with respect to any Asset Sale, Cash payments (including any Cash received by way of deferred payment pursuant to, or by monetization of, a note receivable or otherwise, but only as and when so received) received from such Asset Sale, net of any bona fide direct costs, including, without limitation, all transaction costs, incurred in connection with such Asset Sale, including (i) income taxes reasonably estimated to be actually payable within two years of the date of such Asset Sale as a result of any gain recognized in connection with such Asset Sale and (ii) payment of the outstanding principal amount of, premium or penalty, if any, and interest on any Indebtedness that is secured by a Lien on the stock or assets in question and that is prior to the Lien securing the Revolving Loans on such stock or assets and is required to be repaid under the terms thereof as a result of such Asset Sale. "Net Insurance/Condemnation Proceeds" means any Cash payments or proceeds received by Company or any of its Subsidiaries (i) under any business interruption or casualty insurance policy in respect of a covered loss thereunder or (ii) as a result of the taking of any assets of Company or any of its Subsidiaries by any Person pursuant to the power of eminent domain, condemnation or otherwise, or pursuant to a sale of any such assets to a purchaser with such power under threat of such a taking, in each case net of (x) any actual and reasonable documented costs incurred by Company or any of its Subsidiaries in connection with the adjustment or settlement of any claims of Company or such Subsidiary in respect thereof and (y) any amounts required to be applied to the repayment of any Indebtedness secured by a Lien which is prior to any Liens of the Lenders on the asset or assets that are subject to the taking, condemnation or casualty but excluding, however, in each case any payments or proceeds relating to assets having a value of $500,000 or less in any single transaction or related series of transactions. "Newco" has the meaning assigned to that term in the introduction to this Agreement. "Newco Common Stock" means the shares of common stock of Newco par value $0.10 per share to be converted into shares of Company Common Stock upon consummation of the Merger. "Non-Consenting Lender" has the meaning assigned to that term in subsection 2.10. "Notice of Borrowing" means a notice substantially in the form of Exhibit I annexed hereto delivered by Company to Administrative Agent pursuant to subsection 2.1B with respect to a proposed borrowing. "Notice of Conversion/Continuation" means a notice substantially in the form of Exhibit II annexed hereto delivered by Company to Administrative Agent pursuant REVOLVING LOAN CREDIT AGREEMENT EXECUTION 29 37 to subsection 2.2D with respect to a proposed conversion or continuation of the applicable basis for determining the interest rate with respect to the Revolving Loans specified therein. "Notice of Issuance of Letter of Credit" means a notice substantially in the form of Exhibit III annexed hereto delivered by Company to Administrative Agent pursuant to subsection 3.1B(i) with respect to the proposed issuance of a Letter of Credit. "Obligations" means all obligations of every nature of each Loan Party from time to time owed to Agents, Lenders or their respective Affiliates or any of them under the Revolving Loan Documents, whether for principal, interest, reimbursement of amounts drawn under Letters of Credit, fees, expenses, indemnification or otherwise. "Officers' Certificate" means, as applied to any corporation, a certificate executed on behalf of such corporation by its chairman of the board (if an officer) or its president or one of its vice presidents and by its chief financial officer or its treasurer; provided that every Officers' Certificate with respect to the compliance with a condition precedent to the making of any Revolving Loans hereunder shall include (i) a statement that the officer or officers making or giving such Officers' Certificate have read such condition and any definitions or other provisions contained in this Agreement relating thereto, (ii) a statement that, in the opinion of the signers, they have made or have caused to be made such examination or investigation as is necessary to enable them to express an informed opinion as to whether or not such condition has been complied with, and (iii) a statement as to whether, in the opinion of the signers, such condition has been complied with. "Old Management Shares" means shares of Company Common Stock held by Management Investors prior to the consummation of the Merger. "Operating Lease" means, as applied to any Person, any lease (including leases that may be terminated by the lessee at any time) of any property (whether real, personal or mixed) that is not a Capital Lease other than any such lease under which that Person is the lessor. "PBGC" means the Pension Benefit Guaranty Corporation or any successor thereto. "Pension Plan" means any Employee Benefit Plan, other than a Multiemployer Plan, which is subject to Section 412 of the Internal Revenue Code or Section 302 of ERISA. REVOLVING LOAN CREDIT AGREEMENT EXECUTION 30 38 "Permitted Business Acquisition" has the meaning assigned to that term in subsection 7.7(vi). "Permitted Encumbrances" means the following types of Liens (excluding any such Lien imposed pursuant to Section 401(a)(29) or 412(n) of the Internal Revenue Code or by ERISA, any such Lien relating to or imposed in connection with any Environmental Claim, and any such Lien expressly prohibited by any applicable terms of any of the Collateral Documents): (i) Liens for taxes, assessments or governmental charges or claims the payment of which is not, at the time, required by subsection 6.3; (ii) statutory Liens of landlords, statutory Liens of banks and rights of set-off, statutory Liens of carriers, warehousemen, mechanics, repairmen, workmen and materialmen, and other Liens imposed by law, in each case incurred in the ordinary course of business (a) for amounts not yet overdue or (b) for amounts that are overdue and that (in the case of any such amounts overdue for a period in excess of 15 days) are being contested in good faith by appropriate proceedings, so long as (1) such reserves or other appropriate provisions, if any, as shall be required by GAAP shall have been made for any such contested amounts, and (2) in the case of a Lien with respect to any portion of the Collateral, such contest proceedings conclusively operate to stay the sale of any portion of the Collateral on account of such Lien; (iii) Liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security, or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, leases, government contracts, trade contracts, performance and return-of-money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money), so long as no foreclosure, sale or similar proceedings have been commenced with respect to any portion of the Collateral on account thereof; (iv) any attachment or judgment Lien not constituting an Event of Default under subsection 8.8; (v) leases or subleases granted to third parties in accordance with any applicable terms of the Collateral Documents and not interfering in any material respect with the ordinary conduct of the business of Company or any of its Subsidiaries or resulting in a material diminution in the value of any Collateral as security for the Obligations; (vi) easements, rights-of-way, covenants, conditions, restrictions, encroachments, and other defects or irregularities in title, in each case which REVOLVING LOAN CREDIT AGREEMENT EXECUTION 31 39 do not and will not interfere in any material respect with the ordinary conduct of the business of Company or any of its Subsidiaries or result in a material diminution in the value of any Collateral as security for the Obligations; (vii) any (a) interest or title of a lessor or sublessor under any lease permitted by subsection 7.9, (b) restriction or encumbrance that the interest or title of such lessor or sublessor may be subject to, or (c) subordination of the interest of the lessee or sublessee under such lease to any restriction or encumbrance referred to in the preceding clause (b), so long as the holder of such restriction or encumbrance agrees to recognize the rights of such lessee or sublessee under such lease; (viii) Liens arising from filing UCC financing statements relating solely to leases permitted by this Agreement; (ix) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods; (x) any zoning or similar law or right reserved to or vested in any governmental office or agency to control or regulate the use of any real property; (xi) Liens securing obligations (other than obligations representing Indebtedness for borrowed money) under operating, reciprocal easement or similar agreements entered into in the ordinary course of business of Company and its Subsidiaries; and (xii) licenses of patents, trademarks and other intellectual property rights granted by Company or any of its Subsidiaries in the ordinary course of business and not interfering in any material respect with the ordinary conduct of the business of Company or such Subsidiary. "Person" means and includes natural persons, corporations, limited partnerships, general partnerships, limited liability companies, limited liability partnerships, joint stock companies, Joint Ventures, associations, companies, trusts, banks, trust companies, land trusts, business trusts or other organizations, whether or not legal entities, and governments (whether federal, state or local, domestic or foreign, and including political subdivisions thereof) and agencies or other administrative or regulatory bodies thereof. "Pledged Collateral" means, collectively, the "Pledged Collateral" as defined in the Company Pledge Agreement and the Subsidiary Pledge Agreements. REVOLVING LOAN CREDIT AGREEMENT EXECUTION 32 40 "Potential Event of Default" means a condition or event that, after notice or lapse of time or both, would constitute an Event of Default. "Prime Rate" means the rate that Fleet announces from time to time as its prime lending rate, as in effect from time to time. The Prime Rate is a reference rate and does not necessarily represent the lowest or best rate actually charged to any customer. Fleet or any other Lender may make commercial loans or other loans at rates of interest at, above or below the Prime Rate. "Pro Forma Basis" means, with respect to compliance with the Consolidated Leverage Test for purposes of subsections 7.1(viii), 7.1(x) or 7.7(vi), compliance with the Consolidated Leverage Test after giving effect to acquisitions and incurrence or assumption of any Indebtedness in connection therewith. For purposes of such calculations any Indebtedness incurred under subsection 7.1(viii), 7.1(x) or 7.7(vi) or otherwise incurred or assumed in connection with an acquisition subsequent to the beginning of the four quarter calculation period, but on or prior to the date of calculation of the Consolidated Leverage Test, shall be deemed to have been incurred or assumed at the beginning of such four quarter calculation period. In addition, for such purposes, acquisitions will be given pro forma effect as follows: (i) (A) acquisitions that have been made or are being made by the Company or any of its Subsidiaries during the four-quarter reference period or subsequent to such reference period and on or prior to the calculation date (including through mergers or consolidations and including any related financing transactions) shall be deemed to have occurred on the first day of the four-quarter reference period, and (B) for purposes of determining the pro forma effects of any such acquisition, Consolidated Adjusted EBITDA shall be increased to reflect the annualized amount of any cost savings expected by the Company to be realized in connection with such acquisition (from steps to be taken not later than the first anniversary of such acquisition, and without reduction for any non-recurring charges expected in connection with such acquisition), as set forth in an Officers' Certificate signed by the Company's chief executive and chief financial officers (which shall be determinative of such matters) which states (x) the amount of such increase, (y) that such increase is based on the reasonable beliefs of the officers executing such Officers' Certificate at the time of such execution (and that estimates of cost savings from prior acquisitions have been reevaluated and updated) and (z) that any related incurrence of Indebtedness is permitted pursuant to this Agreement. (ii) Consolidated Adjusted EBITDA shall be further increased to reflect the annualized amount of any cost savings expected by the Company but not REVOLVING LOAN CREDIT AGREEMENT EXECUTION 33 41 yet realized in respect of any acquisition made by the Company during the four fiscal quarters immediately preceding the four-quarter calculation period prior to the calculation date, to the extent such cost savings are (x) expected to result from steps taken not later than the first anniversary of the relevant acquisition and (y) determined and certified as set forth in clause (i) above. In addition, in calculating the Consolidated Leverage Ratio, discontinued operations will be given pro forma effect by excluding any Consolidated Adjusted EBITDA attributable to discontinued operations, as determined in accordance with GAAP, and operations or businesses disposed of on or prior to the calculation date. "Pro Rata Share" means with respect to all payments, computations and other matters relating to the Revolving Loan Commitment or the Revolving Loans of any Lender or any Letters of Credit issued or participations therein purchased by any Lender, the percentage obtained by dividing (x) the Revolving Loan Exposure of that Lender by (y) the aggregate Revolving Loan Exposure of all Lenders, in any such case as the applicable percentage may be adjusted by assignments permitted pursuant to subsection 10.1. "Qualified Public Offering" means any sale of capital stock of the Company to the public pursuant to an offering registered under the Securities Act of 1933 pursuant to which the Company receives cash proceeds (net of all fees and expenses (including underwriting discounts and legal, investment banking and accounting and other professional fees) and disbursements actually incurred in connection therewith) in an amount not less than $50,000,000. "Real Property Asset" means, at any time of determination, any interest then owned by any Loan Party in any real property. "Recapitalization Agreement" means that certain Agreement and Plan of Merger between Company and Newco dated as of August 10, 1997, in the form delivered to Arranger, Administrative Agent and Lenders prior to their execution of this Agreement and as such agreement may be amended from time to time thereafter to the extent permitted under subsection 7.15A. "Recapitalization Consideration" means payments required under Article II of the Recapitalization Agreement. "Recapitalization Documents" means the Recapitalization Agreement and all other instruments or documents relating to the Recapitalization Agreement. "Recapitalization Financing Requirements" means the aggregate of all amounts necessary (i) to pay the Recapitalization Consideration, (ii) to refinance all REVOLVING LOAN CREDIT AGREEMENT EXECUTION 34 42 Indebtedness outstanding under the Existing Credit Agreements, and (iii) to pay Transaction Costs. "Recorded Leasehold Interest" means a Leasehold Property with respect to which a Record Document (as hereinafter defined) has been recorded in all places necessary or desirable, in Collateral Agent's reasonable judgment, to give constructive notice of such Leasehold Property to third-party purchasers and encumbrancers of the affected real property. For purposes of this definition, the term "Record Document" means, with respect to any Leasehold Property, (a) the lease evidencing such Leasehold Property or a memorandum thereof, executed and acknowledged by the owner of the affected real property, as lessor, or (b) if such Leasehold Property was acquired or subleased from the holder of a Recorded Leasehold Interest, the applicable assignment or sublease document, executed and acknowledged by such holder, in each case in form sufficient to give such constructive notice upon recordation and otherwise in form reasonably satisfactory to Administrative Agent. "Register" has the meaning assigned to that term in subsection 2.1D. "Regulation D" means Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time. "Reimbursement Date" has the meaning assigned to that term in subsection 3.3B. "Related Agreements" means, collectively, the Certificate of Merger, the Stockholders Agreement, the Voting Agreement, the Employment Agreements, the Tax Indemnification Agreement, the Recapitalization Agreement and the Senior Subordinated Note Indenture. "Related Fund" means, with respect to any Lender that is a fund that invests in commercial loans, any other fund that invests in commercial loans and is managed by the same investment advisor as such Lender or by an Affiliate of such investment advisor. "Release" means any release, spill, emission, leaking, pumping, pouring, injection, escaping, deposit, disposal, discharge, dispersal, dumping, leaching or migration of Hazardous Materials into the indoor or outdoor environment (including the abandonment or disposal of any barrels, containers or other closed receptacles containing any Hazardous Materials), including the movement of any Hazardous Materials through the air, soil, surface water or groundwater. "Replacement Lender" has the meaning assigned to that term in subsection 2.10. REVOLVING LOAN CREDIT AGREEMENT EXECUTION 35 43 "Requirement of Law" means, with respect to any Person, (i) the certificate or articles of incorporation, by-laws and other organizational or governing documents of such Person, (ii) any law, treaty, rule, regulation or determination of an arbitrator, court or other governmental authority binding on such Person or any of its property, or (iii) any franchise, license, lease, permit, certificate, authorization, qualification, easement, right of way, or right of approval binding on such Person or any of its property. "Required Prepayment Date" has the meaning assigned to that term in subsection 2.4. "Requisite Lenders" means Lenders having or holding more than 50% of the aggregate Revolving Loan Exposure of all Lenders. "Restricted Junior Payment" means (i) any dividend or other distribution, direct or indirect, on account of any shares of any class of stock of Company now or hereafter outstanding, except a dividend payable solely in shares of that class of stock to the holders of that class, (ii) any redemption, retirement, sinking fund or similar payment, purchase or other acquisition for value, direct or indirect, of any shares of any class of stock of Company now or hereafter outstanding, (iii) any payment made to retire, or to obtain the surrender of, any outstanding warrants, options or other rights to acquire shares of any class of stock of Company now or hereafter outstanding, and (iv) any payment or prepayment of principal of, premium, if any, or interest on, or redemption, purchase, retirement, defeasance (including in-substance or legal defeasance), sinking fund or similar payment with respect to, any Subordinated Indebtedness. "Revolving Loan Commitment" means the commitment of a Lender to make Revolving Loans to Company pursuant to subsection 2.1A, and "Revolving Loan Commitments" means such commitments of all Lenders in the aggregate. "Revolving Loan Commitment Termination Date" means December 31, 2002. "Revolving Loan Documents" means this Agreement, the Revolving Notes, the Letters of Credit (and any applications for, or reimbursement agreements or other documents or certificates executed by Company in favor of an Issuing Lender relating to, the Letters of Credit), the Subsidiary Guaranty, the Collateral Documents, any Hedging Agreements with Lenders and the Intercreditor Agreement. "Revolving Loan Exposure" means, with respect to any Lender as of any date of determination (i) prior to the termination of the Revolving Loan Commitments, that Lender's Revolving Loan Commitment and (ii) after the termination of the Revolving Loan Commitments, the sum of (a) the aggregate outstanding principal amount of the Revolving Loans of that Lender plus (b) in the event that Lender is REVOLVING LOAN CREDIT AGREEMENT EXECUTION 36 44 an Issuing Lender, the aggregate Letter of Credit Usage in respect of all Letters of Credit issued by that Lender (in each case net of any participations purchased by other Lenders in such Letters of Credit or any unreimbursed drawings thereunder) plus (c) the aggregate amount of all participations purchased by that Lender in any outstanding Letters of Credit or any unreimbursed drawings under any Letters of Credit. "Revolving Loans" means the loans made by Lenders to Company pursuant to subsection 2.1A. "Revolving Notes" means (i) the promissory notes of Company issued pursuant to subsection 2.1E on the Closing Date and (ii) any promissory notes issued by Company pursuant to the last sentence of subsection 10.1B(i) in connection with assignments of the Revolving Loan Commitments and Revolving Loans of any Lenders, in each case substantially in the form of Exhibit V annexed hereto, as they may be amended, supplemented or otherwise modified from time to time. "Seasonal/Promotional Accounts" means (i) Accounts relating to sales of merchandise which Accounts are categorized as seasonal by the Company consistent with past practices and (ii) Accounts which are categorized as promotional consistent with past practices of the Company because such Accounts are with new Account Debtors (including, without limitation, new stores for existing Account Debtors) or relate to new products. "Secured Parties" has the meaning assigned to that term in the introduction to this Agreement. "Securities" means any stock, shares, partnership interests, voting trust certificates, certificates of interest or participation in any profit-sharing agreement or arrangement, options, warrants, bonds, debentures, notes, or other evidences of indebtedness, secured or unsecured, convertible, subordinated or otherwise, or in general any instruments commonly known as "securities" or any certificates of interest, shares or participations in temporary or interim certificates for the purchase or acquisition of, or any right to subscribe to, purchase or acquire, any of the foregoing provided that "Securities" shall not include any earnout agreement or obligation or any employee bonus or other incentive compensation plan or agreement. "Securities Act" means the Securities Act of 1933, as amended from time to time, and any successor statute. "Senior Subordinated Note Indenture" means the indenture pursuant to which the Senior Subordinated Notes are issued, as such indenture may be amended from time to time to the extent permitted under subsection 7.15B. REVOLVING LOAN CREDIT AGREEMENT EXECUTION 37 45 "Senior Subordinated Notes" means the $110,000,000 in aggregate principal amount of 9,875% Senior Subordinated Notes due 2007 of Company issued pursuant to the Senior Subordinated Note Indenture. "Solvent" means, with respect to any Person, that as of the date of determination both (A) (i) the then fair saleable value of the property of such Person is (y) greater than the total amount of liabilities (including contingent liabilities) of such Person and (z) not less than the amount that will be required to pay the probable liabilities on such Person's then existing debts as they become absolute and matured considering all financing alternatives and potential asset sales reasonably available to such Person; (ii) such Person's capital is not unreasonably small in relation to its business or any contemplated or undertaken transaction; and (iii) such Person does not intend to incur, or believe (nor should it reasonably believe) that it will incur, debts beyond its ability to pay such debts as they become due; and (B) such Person is "solvent" within the meaning given that term and similar terms under applicable laws relating to fraudulent transfers and conveyances. For purposes of this definition, the amount of any contingent liability at any time shall be computed as the amount that, in light of all of the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability. "Standby Letter of Credit" means any standby letter of credit or similar instrument issued for the purpose of supporting (i) Indebtedness of Company or any of its Subsidiaries in respect of industrial revenue or development bonds or financings, (ii) workers' compensation liabilities of Company or any of its Subsidiaries, (iii) the obligations of third party insurers of Company or any of its Subsidiaries arising by virtue of the laws of any jurisdiction requiring third party insurers, (iv) obligations with respect to Capital Leases or Operating Leases of Company or any of its Subsidiaries, and (v) performance, payment, deposit or surety obligations of Company or any of its Subsidiaries, in any case if required by law or governmental rule or regulation or in accordance with custom and practice in the industry; provided that Standby Letters of Credit may not be issued for the purpose of supporting (a) trade payables or (b) any Indebtedness constituting "antecedent debt" (as that term is used in Section 547 of the Bankruptcy Code). "Stockholders Agreement" means the Stockholders Agreement dated as of December 19, 1997 by and among Company, GSII, the Estate of John A. Svenningsen and certain other individuals and as such agreement may be amended from time to time thereafter to the extent permitted under subsection 7.14A. "Subordinated Indebtedness" means (i) the Indebtedness of Company evidenced by the Senior Subordinated Notes and (ii) any other Indebtedness of Company subordinated in right of payment to the Obligations pursuant to documentation containing maturities, amortization schedules, covenants, defaults, remedies, REVOLVING LOAN CREDIT AGREEMENT EXECUTION 38 46 subordination provisions and other material terms in form and substance satisfactory to Administrative Agent and Requisite Lenders. "Subsidiary" means, with respect to any Person, any corporation, partnership, limited liability company, association, joint venture or other business entity of which more than 50% of the total voting power of shares of stock or other ownership interests entitled (without regard to the occurrence of any contingency) to vote in the election of the Person or Persons (whether directors, managers, trustees or other Persons performing similar functions) having the power to direct or cause the direction of the management and policies thereof 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. "Subsidiary Guarantor" means any Subsidiary of Company that executes and delivers a counterpart of the Subsidiary Guaranty on the Closing Date or from time to time thereafter pursuant to subsection 6.8. "Subsidiary Guaranty" means the Subsidiary Guaranty executed and delivered by existing Domestic Subsidiaries of Company on the Closing Date and to be executed and delivered by additional Domestic Subsidiaries of Company from time to time thereafter in accordance with subsection 6.8, substantially in the form of Exhibit XIV annexed hereto, as such Subsidiary Guaranty may hereafter be amended, supplemented or otherwise modified from time to time. "Subsidiary Pledge Agreement" means each Subsidiary Pledge Agreement executed and delivered by an existing Subsidiary Guarantor on the Closing Date or executed and delivered by any additional Subsidiary Guarantor from time to time thereafter in accordance with subsection 6.8, in each case substantially in the form of Exhibit XV annexed hereto, as such Subsidiary Pledge Agreement may be amended, supplemented or otherwise modified from time to time, and "Subsidiary Pledge Agreements" means all such Subsidiary Pledge Agreements, collectively. "Subsidiary Security Agreement" means each Subsidiary Security Agreement executed and delivered by an existing Subsidiary Guarantor on the Closing Date or executed and delivered by any additional Subsidiary Guarantor from time to time thereafter in accordance with subsection 6.8, in each case substantially in the form of Exhibit XVI annexed hereto, as such Subsidiary Security Agreement may be amended, supplemented or otherwise modified from time to time, and "Subsidiary Security Agreements" means all such Subsidiary Security Agreements, collectively. "Supplemental Collateral Agent" has the meaning assigned to that term in subsection 9.1D. REVOLVING LOAN CREDIT AGREEMENT EXECUTION 39 47 "Syndication Agent" has the meaning assigned to that term in the introduction to this Agreement. "Tax" or "Taxes" means any present or future tax, levy, impost, duty, charge, fee, deduction or withholding of any nature and whatever called, by whomsoever, on whomsoever and wherever imposed, levied, collected, withheld or assessed; provided that "Tax on the overall net income" of a Person shall be construed as a reference to a tax imposed by the jurisdiction in which that Person is organized or in which that Person's principal office (and/or, in the case of a Lender, its lending office) is located or in which that Person (and/or, in the case of a Lender, its lending office) is deemed to be doing business on all or part of the net income, profits or gains (whether worldwide, or only insofar as such income, profits or gains are considered to arise in or to relate to a particular jurisdiction, or otherwise) of that Person (and/or, in the case of a Lender, its lending office). "Tax Indemnification Agreement" means the Tax Indemnification Agreement dated as of August 10, 1997 by and between Company, Christine Svenningsen and the Estate of John A. Svenningsen and as such agreement may be amended from time to time thereafter to the extent permitted under subsection 7.14A. "Terminated Lender" has the meaning assigned to that term in subsection 2.10. "Title Company" means, collectively one or more title insurance companies that are members of ALTA and are reasonably satisfactory to Arranger and Administrative Agent. "Total Utilization of Revolving Loan Commitments" means, as at any date of determination, the sum of (i) the aggregate principal amount of all outstanding Revolving Loans (other than Revolving Loans made for the purpose of reimbursing the applicable Issuing Lender for any amount drawn under any Letter of Credit but not yet so applied) plus (ii) the Letter of Credit Usage. "Transaction Costs" means the fees, costs and expenses payable by Company in connection with the transactions contemplated by the Loan Documents and the Related Agreements. "UCC" means the Uniform Commercial Code (or any similar or equivalent legislation) as in effect in any applicable jurisdiction. "Unreinvested Asset Sale Proceeds" means that portion, if any, of any Net Asset Sale Proceeds that shall not have been reinvested by Company and its Subsidiaries in the business of Company and its Subsidiaries within six months after the date of receipt by Company or any of its Subsidiaries of such Net Asset Sale REVOLVING LOAN CREDIT AGREEMENT EXECUTION 40 48 Proceeds or, in the case of Net Asset Sale Proceeds from the sale of the Chester, New York, Montreal, Quebec or Melbourne, Australia properties, (i) that portion of Net Asset Sale Proceeds that is not subject to a binding agreement with a third party to reinvest such Net Asset Sale Proceeds entered into within six months after the date of receipt of such Net Asset Sale Proceeds or (ii) if subject to such a binding agreement, that portion of such Net Asset Sale Proceeds that shall not have been reinvested within nine months of such binding agreement, such reinvestment to be evidenced by an Officers' Certificate, satisfactory in form and substance to Administrative Agent, delivered by Company to Administrative Agent prior to the expiration of such six-month period and demonstrating in reasonable detail the reinvestment of such Net Asset Sale Proceeds as aforesaid. "Voting Agreement" means the Voting Agreement dated as of August 10, 1997 by and between Newco and the Estate of John A. Svenningsen and Christine Svenningsen and as such agreement may be amended from time to time thereafter to the extent permitted under subsection 7.14A. 1.2 Accounting Terms; Utilization of GAAP for Purposes of Calculations Under Agreement. Except as otherwise expressly provided in this Agreement, all accounting terms not otherwise defined herein shall have the meanings assigned to them in conformity with GAAP. Financial statements and other information required to be delivered by Company to Lenders pursuant to clauses (i), (ii), (iii) and (xiii) of subsection 6.1 shall be prepared in accordance with GAAP as in effect at the time of such preparation (and delivered together with the reconciliation statements provided for in subsection 6.1(v)). Calculations in connection with the definitions, covenants and other provisions of this Agreement shall utilize accounting principles and policies in conformity with those used to prepare the financial statements referred to in subsection 5.3. 1.3 Other Definitional Provisions and Rules of Construction. A. Any of the terms defined herein may, unless the context otherwise requires, be used in the singular or the plural, depending on the reference. B. References to "Sections" and "subsections" shall be to Sections and subsections, respectively, of this Agreement unless otherwise specifically provided. C. The use herein of the word "include" or "including", when following any general statement, term or matter, shall not be construed to limit such statement, term or matter to the specific items or matters set forth immediately following such word or to similar items or matters, whether or not nonlimiting language (such as "without limitation" or "but not limited to" or words of similar import) is used with reference thereto, but rather REVOLVING LOAN CREDIT AGREEMENT EXECUTION 41 49 shall be deemed to refer to all other items or matters that fall within the broadest possible scope of such general statement, term or matter. SECTION 2. AMOUNTS AND TERMS OF COMMITMENTS AND LOANS 2.1 Commitments; Making of Loans; the Register; Notes. A. Commitments. Subject to the terms and conditions of this Agreement and in reliance upon the representations and warranties of Company herein set forth, each Lender hereby severally agrees, subject to the limitations set forth below with respect to the maximum amount of Revolving Loans permitted to be outstanding from time to time, to lend to Company from time to time during the period from the Closing Date to but excluding the Revolving Loan Commitment Termination Date an aggregate amount not exceeding its Pro Rata Share of the aggregate amount of the Revolving Loan Commitments to be used for the purposes identified in subsection 2.5A. The original amount of each Lender's Revolving Loan Commitment is set forth opposite its name on Schedule 2.1 annexed hereto and the aggregate original amount of the Revolving Loan Commitments is $50,000,000; provided that the Revolving Loan Commitments of Lenders shall be adjusted to give effect to any assignments of the Revolving Loan Commitments pursuant to subsection 10.1B; and provided, further that the amount of the Revolving Loan Commitments shall be reduced from time to time by the amount of any reductions thereto made pursuant to subsections 2.4A(ii) and 2.4A(iii). Each Lender's Revolving Loan Commitment shall expire on the Revolving Loan Commitment Termination Date and all Revolving Loans and all other amounts owed hereunder with respect to the Revolving Loans and the Revolving Loan Commitments shall be paid in full no later than that date; provided that each Lender's Revolving Loan Commitment shall expire immediately and without further action on January 31, 1998 if the AXELs are not funded on or before that date. Amounts borrowed under this subsection 2.1A may be repaid and reborrowed to but excluding the Revolving Loan Commitment Termination Date. Anything contained in this Agreement to the contrary notwithstanding, the Revolving Loans and the Revolving Loan Commitments shall be subject to the following limitations in the amounts and during the periods indicated: (i) in no event shall the Total Utilization of Revolving Loan Commitments at any time exceed either (a) the Revolving Loan Commitments then in effect or (b) the sum of the Borrowing Base then in effect plus all amounts spent through such date on Permitted Business Acquisitions (other than amounts funded through equity issuances or indebtedness other than Revolving Loans); and (ii) for 30 consecutive days during each consecutive twelve-month period, the aggregate outstanding principal amount of all Revolving Loans shall not exceed REVOLVING LOAN CREDIT AGREEMENT EXECUTION 42 50 $10,000,000 plus all amounts spent on Permitted Business Acquisitions (other than amounts funded through equity issuances or indebtedness other than Revolving Loans). B. Borrowing Mechanics. Revolving Loans made on any Funding Date (other than Revolving Loans made pursuant to subsection 3.3B for the purpose of reimbursing any Issuing Lender for the amount of a drawing under a Letter of Credit issued by it) shall be in an aggregate minimum amount of (x) $1,000,000 and integral multiples of $100,000 in excess of that amount in the case of Eurodollar Rate Loans and (y) $100,000 and integral multiples of $100,000 in excess of that amount in the case of Base Rate Loans. Whenever Company desires that Lenders make Revolving Loans it shall deliver to Administrative Agent a Notice of Borrowing no later than 10:00 A.M. (New York City time) at least three Business Days in advance of the proposed Funding Date (in the case of a Eurodollar Rate Loan) or at least one Business Day in advance of the proposed Funding Date (in the case of a Base Rate Loan). The Notice of Borrowing shall specify (i) the proposed Funding Date (which shall be a Business Day), (ii) the amount requested, (iii) whether such Revolving Loans shall be Base Rate Loans or Eurodollar Rate Loans, (iv) in the case of any Revolving Loans requested to be made as Eurodollar Rate Loans, the initial Interest Period requested therefor and (v) that, after giving effect to the requested Revolving Loans, the Total Utilization of Revolving Loan Commitments will not exceed the Revolving Loan Commitment then in effect or the sum of the Borrowing Base then in effect and amounts spent on Permitted Business Acquisitions (other than amounts funded through equity issuances or indebtedness other than Revolving Loans). Revolving Loans may be continued as or converted into Base Rate Loans and Eurodollar Rate Loans in the manner provided in subsection 2.2D. In lieu of delivering the above-described Notice of Borrowing, Company may give Administrative Agent telephonic notice by the required time of any proposed borrowing under this subsection 2.1B; provided that such notice shall be promptly confirmed in writing by delivery of a Notice of Borrowing to Administrative Agent on or before the applicable Funding Date. Neither Administrative Agent nor any Lender shall incur any liability to Company in acting upon any telephonic notice referred to above that Administrative Agent believes in good faith to have been given by a duly authorized officer or other person authorized to borrow on behalf of Company or for otherwise acting in good faith under this subsection 2.1B, and upon funding of Revolving Loans by Lenders in accordance with this Agreement pursuant to any such telephonic notice Company shall have effected Revolving Loans hereunder. Company shall notify Administrative Agent prior to the funding of any Revolving Loans in the event that any of the matters to which Company is required to certify in the applicable Notice of Borrowing is no longer true and correct as of the applicable Funding Date, and the acceptance by Company of the proceeds of any Revolving Loans shall constitute a re-certification by Company, as of the applicable Funding Date, as to the matters to which Company is required to certify in the applicable Notice of Borrowing. REVOLVING LOAN CREDIT AGREEMENT EXECUTION 43 51 Except as otherwise provided in subsections 2.6B, 2.6C and 2.6G, a Notice of Borrowing for a Eurodollar Rate Loan (or telephonic notice in lieu thereof) shall be irrevocable on and after the related Interest Rate Determination Date, and Company shall be bound to make a borrowing in accordance therewith. C. Disbursement of Funds. All Revolving Loans under this Agreement shall be made by Lenders simultaneously and proportionately to their respective Pro Rata Shares, it being understood that no Lender shall be responsible for any default by any other Lender in that other Lender's obligation to make a Revolving Loan requested hereunder nor shall the Revolving Loan Commitment of any Lender be increased or decreased as a result of a default by any other Lender in that other Lender's obligation to make a Revolving Loan requested hereunder. Promptly after receipt by Administrative Agent of a Notice of Borrowing pursuant to subsection 2.1B (or telephonic notice in lieu thereof), Administrative Agent shall notify each Lender of the proposed borrowing. Each Lender shall make the amount of its Revolving Loan available to Administrative Agent not later than 12:00 Noon (New York City time) on the applicable Funding Date, in same day funds in Dollars, at the Funding and Payment Office. Except as provided in subsection 3.3B with respect to Revolving Loans used to reimburse any Issuing Lender for the amount of a drawing under a Letter of Credit issued by it, upon satisfaction or waiver of the conditions precedent specified in subsections 4.1 (in the case of Revolving Loans made on the Closing Date) and 4.2 (in the case of all Revolving Loans), Administrative Agent shall make the proceeds of such Revolving Loans available to Company on the applicable Funding Date by causing an amount of same day funds in Dollars equal to the proceeds of all such Revolving Loans received by Administrative Agent from Lenders to be credited to the account of Company at the Funding and Payment Office. Unless Administrative Agent shall have been notified by any Lender prior to the Funding Date for any Revolving Loans that such Lender does not intend to make available to Administrative Agent the amount of such Lender's Revolving Loan requested on such Funding Date, Administrative Agent may assume that such Lender has made such amount available to Administrative Agent on such Funding Date and Administrative Agent may, in its sole discretion, but shall not be obligated to, make available to Company a corresponding amount on such Funding Date. If such corresponding amount is not in fact made available to Administrative Agent by such Lender, Administrative Agent shall be entitled to recover such corresponding amount on demand from such Lender together with interest thereon, for each day from such Funding Date until the date such amount is paid to Administrative Agent, at the customary rate set by Administrative Agent for the correction of errors among banks for three Business Days and thereafter at the Base Rate. If such Lender does not pay such corresponding amount forthwith upon Administrative Agent's demand therefor, Administrative Agent shall promptly notify Company and Company shall immediately pay such corresponding amount to Administrative Agent together with interest thereon, for each day from such Funding Date until the date such amount is paid to Administrative Agent, at the rate payable under this Agreement for Base Rate Loans. Nothing in this subsection 2.1C shall be deemed to relieve any Lender from its obligation to fulfill its Revolving Loan REVOLVING LOAN CREDIT AGREEMENT EXECUTION 44 52 Commitments hereunder or to prejudice any rights that Company may have against any Lender as a result of any default by such Lender hereunder. D. The Register. (i) Administrative Agent shall maintain, at its address referred to in subsection 10.8, a register for the recordation of the names and addresses of Lenders and the Revolving Loan Commitments and Revolving Loans of each Lender from time to time (the "Register"). The Register shall be available for inspection by Company or any Lender at any reasonable time and from time to time upon reasonable prior notice. (ii) Administrative Agent shall record in the Register the Revolving Loan Commitment and the Revolving Loans from time to time of each Lender and each repayment or prepayment in respect of the principal amount of the Revolving Loans of each Lender. Any such recordation shall be conclusive and binding on Company and each Lender, absent manifest error; provided that failure to make any such recordation, or any error in such recordation, shall not affect any Lender's Revolving Loan Commitments or Company's Obligations in respect of any applicable Revolving Loans. (iii) Each Lender shall record on its internal records (including the Notes held by such Lender) the amount of each Revolving Loan made by it and each payment in respect thereof. Any such recordation shall be conclusive and binding on Company, absent manifest error; provided that failure to make any such recordation, or any error in such recordation, shall not affect any Lender's Revolving Loan Commitments or Company's Obligations in respect of any applicable Revolving Loans; and provided, further that in the event of any inconsistency between the Register and any Lender's records, the recordations in the Register shall govern. (iv) Company, Administrative Agent and Lenders shall deem and treat the Persons listed as Lenders in the Register as the holders and owners of the corresponding Revolving Loan Commitments and Revolving Loans listed therein for all purposes hereof, and no assignment or transfer of any such Revolving Loan Commitment or Revolving Loan shall be effective, in each case unless and until an Assignment Agreement effecting the assignment or transfer thereof shall have been accepted by Administrative Agent and recorded in the Register as provided in subsection 10.1B(ii). Prior to such recordation, all amounts owed with respect to the applicable Revolving Loan Commitment or Revolving Loan shall be owed to the Lender listed in the Register as the owner thereof, and any request, authority or consent of any Person who, at the time of making such request or giving such authority or consent, is listed in the Register as a Lender shall be conclusive and binding on any subsequent holder, assignee or transferee of the corresponding Revolving Loan Commitments or Revolving Loans. REVOLVING LOAN CREDIT AGREEMENT EXECUTION 45 53 (v) Company hereby designates Fleet to serve as Company's agent solely for purposes of maintaining the Register as provided in this subsection 2.1D, and Company hereby agrees that, to the extent Fleet serves in such capacity, Fleet and its officers, directors, employees, agents and affiliates shall constitute Indemnitees for all purposes under subsection 10.3. E. Notes. Company shall execute and deliver on the Closing Date to each Lender (or to Administrative Agent for that Lender) a Revolving Note substantially in the form of Exhibit V annexed hereto to evidence that Lender's Revolving Loans, in the principal amount of that Lender's Revolving Loan Commitment and with other appropriate insertions. 2.2 Interest on the Revolving Loans. A. Rate of Interest. Subject to the provisions of subsections 2.6 and 2.7, each Revolving Loan shall bear interest on the unpaid principal amount thereof from the date made through maturity (whether by acceleration or otherwise) at a rate determined by reference to the Base Rate or the Adjusted Eurodollar Rate. The applicable basis for determining the rate of interest with respect to any Revolving Loan shall be selected by Company initially at the time a Notice of Borrowing is given with respect to such Revolving Loan pursuant to subsection 2.1B. The basis for determining the interest rate with respect to any Revolving Loan may be changed from time to time pursuant to subsection 2.2D. If on any day a Revolving Loan is outstanding with respect to which notice has not been delivered to Administrative Agent in accordance with the terms of this Agreement specifying the applicable basis for determining the rate of interest, then for that day that Revolving Loan shall bear interest determined by reference to the Base Rate. Subject to the provisions of subsections 2.2E and 2.7, the Revolving Loans shall bear interest through maturity as follows: (i) if a Base Rate Loan, then at the sum of the Base Rate plus the Applicable Revolving Base Rate Margin then in effect; or (ii) if a Eurodollar Rate Loan, then at the sum of the Adjusted Eurodollar Rate plus the Applicable Revolving Eurodollar Rate Margin then in effect. B. Interest Periods. In connection with each Eurodollar Rate Loan, Company may, pursuant to the applicable Notice of Borrowing or Notice of Conversion/Continuation, as the case may be, select an interest period (each an "Interest Period") to be applicable to such Revolving Loan, which Interest Period shall be, at Company's option, either a one-, two-, three-or six-month period; provided that: (i) the initial Interest Period for any Eurodollar Rate Loan shall commence on the Funding Date in respect of such Revolving Loan, in the case of a Revolving Loan initially made as a Eurodollar Rate Loan, or on the date specified REVOLVING LOAN CREDIT AGREEMENT EXECUTION 46 54 in the applicable Notice of Conversion/Continuation, in the case of a Revolving Loan converted to a Eurodollar Rate Loan; (ii) in the case of immediately successive Interest Periods applicable to a Eurodollar Rate Loan continued as such pursuant to a Notice of Conversion/Continuation, each successive Interest Period shall commence on the day on which the next preceding Interest Period expires; (iii) if an Interest Period would otherwise expire on a day that is not a Business Day, such Interest Period shall expire on the next succeeding Business Day; provided that, if any Interest Period would otherwise expire on a day that is not a Business Day but is a day of the month after which no further Business Day occurs in such month, such Interest Period shall expire on the next preceding Business Day; (iv) any Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (v) of this subsection 2.2B, end on the last Business Day of a calendar month; (v) no Interest Period with respect to any portion of the Revolving Loans shall extend beyond the Revolving Loan Commitment Termination Date; (vi) there shall be no more than seven (7) Interest Periods outstanding at any time under this Agreement and the AXEL Credit Agreement; and (vii) in the event Company fails to specify an Interest Period for any Eurodollar Rate Loan in the applicable Notice of Borrowing or Notice of Conversion/Continuation, Company shall be deemed to have selected an Interest Period of one month. C. Interest Payments. Subject to the provisions of subsection 2.2E, interest on each Revolving Loan shall be payable in arrears on and to each Interest Payment Date applicable to that Revolving Loan, upon any prepayment of that Revolving Loan (to the extent accrued on the amount being prepaid) and at maturity (including final maturity); provided that in the event any Revolving Loans that are Base Rate Loans are prepaid pursuant to subsection 2.4A(i), interest accrued on such Revolving Loans through the date of such prepayment shall be payable on the next succeeding Interest Payment Date applicable to Base Rate Loans (or, if earlier, at final maturity). D. Conversion or Continuation. Subject to the provisions of subsection 2.6, Company shall have the option (i) to convert at any time all or any part of its outstanding Revolving Loans equal to $1,000,000 and integral multiples of $100,000 in excess of that amount from Base Rate Loans to Eurodollar Rate Loans or (ii) to convert at any time all or any part of its outstanding Revolving Loans equal to $100,000 and integral multiples of REVOLVING LOAN CREDIT AGREEMENT EXECUTION 47 55 $100,000 in excess of that amount from Eurodollar Rate Loans to Base Rate Loans upon the expiration of any Interest Period applicable to a Eurodollar Rate Loan, to continue all or any portion of such Revolving Loan equal to $1,000,000 and integral multiples of $100,000 in excess of that amount as a Eurodollar Rate Loan; provided, however, that a Eurodollar Rate Loan may only be converted into a Base Rate Loan on the expiration date of an Interest Period applicable thereto. Company shall deliver a Notice of Conversion/Continuation to Administrative Agent no later than 10:00 A.M. (New York City time) at least one Business Day in advance of the proposed conversion date (in the case of a conversion to a Base Rate Loan) and at least three Business Days in advance of the proposed conversion/continuation date (in the case of a conversion to, or a continuation of, a Eurodollar Rate Loan). A Notice of Conversion/Continuation shall specify (i) the proposed conversion/continuation date (which shall be a Business Day), (ii) the amount to be converted/continued, (iii) the nature of the proposed conversion/continuation, (iv) in the case of a conversion to, or a continuation of, a Eurodollar Rate Loan, the requested Interest Period, and (v) in the case of a conversion to, or a continuation of, a Eurodollar Rate Loan, that no Potential Event of Default or Event of Default has occurred and is continuing. In lieu of delivering the above-described Notice of Conversion/Continuation, Company may give Administrative Agent telephonic notice by the required time of any proposed conversion/continuation under this subsection 2.2D; provided that such notice shall be promptly confirmed in writing by delivery of a Notice of Conversion/Continuation to Administrative Agent on or before the proposed conversion/continuation date. Upon receipt of written or telephonic notice of any proposed conversion/continuation under this subsection 2.2D, Administrative Agent shall promptly transmit such notice by telefacsimile or telephone to each Lender. Neither Administrative Agent nor any Lender shall incur any liability to Company in acting upon any telephonic notice referred to above that Administrative Agent believes in good faith to have been given by a duly authorized officer or other person authorized to act on behalf of Company or for otherwise acting in good faith under this subsection 2.2D, and upon conversion or continuation of the applicable basis for determining the interest rate with respect to any Revolving Loans in accordance with this Agreement pursuant to any such telephonic notice Company shall have effected a conversion or continuation, as the case may be, hereunder. Except as otherwise provided in subsections 2.6B, 2.6C and 2.6G, a Notice of Conversion/Continuation for conversion to, or continuation of, a Eurodollar Rate Loan (or telephonic notice in lieu thereof) shall be irrevocable on and after the related Interest Rate Determination Date, and Company shall be bound to effect a conversion or continuation in accordance therewith. E. Default Rate. Upon the occurrence and during the continuation of any Event of Default, the outstanding principal amount of all Revolving Loans and, to the extent permitted by applicable law, any interest payments thereon not paid when due and any fees REVOLVING LOAN CREDIT AGREEMENT EXECUTION 48 56 and other amounts then due and payable hereunder, shall thereafter bear interest (including post-petition interest in any proceeding under the Bankruptcy Code or other applicable bankruptcy laws) payable upon demand at a rate that is 2% per annum in excess of the interest rate otherwise payable under this Agreement with respect to the applicable Revolving Loans (or, in the case of any such fees and other amounts, at a rate which is 2% per annum in excess of the interest rate otherwise payable under this Agreement for Base Rate Loans); provided that, in the case of Eurodollar Rate Loans, upon the expiration of the Interest Period in effect at the time any such increase in interest rate is effective such Eurodollar Rate Loans shall thereupon become Base Rate Loans and shall thereafter bear interest payable upon demand at a rate which is 2% per annum in excess of the interest rate otherwise payable under this Agreement for Base Rate Loans. Payment or acceptance of the increased rates of interest provided for in this subsection 2.2E is not a permitted alternative to timely payment and shall not constitute a waiver of any Event of Default or otherwise prejudice or limit any rights or remedies of Administrative Agent or any Lender. F. Computation of Interest. Interest on the Revolving Loans shall be computed on the basis of a 360-day year, in each case for the actual number of days elapsed in the period during which it accrues. In computing interest on any Revolving Loan, the date of the making of such Revolving Loan or the first day of an Interest Period applicable to such Revolving Loan or, with respect to a Base Rate Loan being converted from a Eurodollar Rate Loan, the date of conversion of such Eurodollar Rate Loan to such Base Rate Loan, as the case may be, shall be included, and the date of payment of such Revolving Loan or the expiration date of an Interest Period applicable to such Revolving Loan or, with respect to a Base Rate Loan being converted to a Eurodollar Rate Loan, the date of conversion of such Base Rate Loan to such Eurodollar Rate Loan, as the case may be, shall be excluded; provided that if a Revolving Loan is repaid on the same day on which it is made, one day's interest shall be paid on that Revolving Loan. 2.3 Fees. A. Commitment Fees. Company agrees to pay to Administrative Agent, for distribution to each Lender in proportion to that Lender's Pro Rata Share, commitment fees for the period from and including the Closing Date to and excluding the Revolving Loan Commitment Termination Date equal to the average of the daily excess of the Revolving Loan Commitments over the sum of (i) the aggregate principal amount of outstanding Revolving Loans plus (ii) the Letter of Credit Usage multiplied by the Applicable Commitment Fee Percentage such commitment fees to be calculated on the basis of a 360-day year and the actual number of days elapsed and to be payable quarterly in arrears on March 15, June 15, September 15 and December 15 of each year, commencing on the first such date to occur after the Closing Date, and on the Revolving Loan Commitment Termination Date. REVOLVING LOAN CREDIT AGREEMENT EXECUTION 49 57 B. Other Fees. Company agrees to pay to Arranger and Administrative Agent such other fees in the amounts and at the times separately agreed upon between Company, Arranger and Administrative Agent. 2.4 Prepayments and Reductions in Revolving Loan Commitments; General Provisions Regarding Payments; Application of Proceeds of Collateral and Payments Under Subsidiary Guaranty. A. Prepayments and Unscheduled Reductions in Revolving Loan Commitments. (i) Voluntary Prepayments. Company may, upon not less than one Business Day's prior written or telephonic notice, in the case of Base Rate Loans, and three Business Days' prior written or telephonic notice, in the case of Eurodollar Rate Loans, in each case given to Administrative Agent by 12:00 Noon (New York City time) on the date required and, if given by telephone, promptly confirmed in writing to Administrative Agent (which original written or telephonic notice Administrative Agent will promptly transmit by telefacsimile or telephone to each Lender), at any time and from time to time prepay any Revolving Loans on any Business Day in whole or in part in an aggregate minimum amount of $1,000,000 and integral multiples of $500,000 in excess of that amount. Notice of prepayment having been given as aforesaid, the principal amount of the Revolving Loans specified in such notice shall become due and payable on the prepayment date specified therein. Any such voluntary prepayment shall be applied as specified in subsection 2.4A(iv). (ii) Voluntary Reductions of Revolving Loan Commitments. Company may, upon not less than three Business Days' prior written or telephonic notice confirmed in writing to Administrative Agent (which original written or telephonic notice Administrative Agent will promptly transmit by telefacsimile or telephone to each Lender), at any time and from time to time terminate in whole or permanently reduce in part, without premium or penalty, the Revolving Loan Commitments in an amount up to the amount by which the Revolving Loan Commitments exceed the Total Utilization of Revolving Loan Commitments at the time of such proposed termination or reduction; provided that any such partial reduction of the Revolving Loan Commitments shall be in an aggregate minimum amount of $1,000,000 and integral multiples of $500,000 in excess of that amount. Company's notice to Administrative Agent shall designate the date (which shall be a Business Day) of such termination or reduction and the amount of any partial reduction, and such termination or reduction of the Revolving Loan Commitments shall be effective on the date specified in Company's notice and shall reduce the Revolving Loan Commitment of each Lender proportionately to its Pro Rata Share. Any such voluntary reduction of the Revolving Loan Commitments shall be applied as specified in subsection 2.4A(iv). REVOLVING LOAN CREDIT AGREEMENT EXECUTION 50 58 (iii) Mandatory Prepayments and Mandatory Reductions of Revolving Loan Commitments. The AXELs under the AXEL Credit Agreement and the Revolving Loans shall be prepaid and/or the Revolving Loan Commitments shall be permanently reduced in the amounts and under the circumstances set forth below, all such prepayments and/or reductions to be applied as set forth below or as more specifically provided in subsection 2.4A(iv): (a) Prepayments and Reductions From Unreinvested Asset Sale Proceeds. No later than the first Business Day following the date on which any Net Asset Sale Proceeds become Unreinvested Asset Sale Proceeds, Company shall prepay the AXELs under the AXEL Credit Agreement and the Revolving Loans and/or the Revolving Loan Commitments shall be permanently reduced in an aggregate amount equal to such Unreinvested Asset Sale Proceeds; provided, further that, with respect to an Asset Sale of any asset owned by a Foreign Subsidiary, the Unreinvested Asset Sale Proceeds in respect thereof shall be applied (i) first, to the extent such Unreinvested Net Asset Sale Proceeds may be repatriated to the United States without in the reasonable judgment of the Company resulting in a material tax liability to Company in relation to the amount of proceeds to be repatriated, to prepay the AXELs under the AXEL Credit Agreement and the Revolving Loans and/or permanently reduce the Revolving Loan Commitments as set forth above in this subsection 2.4A(iii)(a), (ii) second, to the extent of any remaining portion of such Unreinvested Asset Sale Proceeds, to finance the general corporate purposes of such Foreign Subsidiary so long as the aggregate of all such amounts so applied by all Foreign Subsidiaries with respect to Asset Sales consummated after the Closing Date does not exceed $5,000,000, and (iii) third, to the extent of any remaining portion of such Unreinvested Asset Sale Proceeds, to prepay the AXELs under the AXEL Credit Agreement and the Revolving Loans and/or reduce the Revolving Loan Commitments as set forth above in this subsection 2.4A(iii)(a). Concurrently with any determination by Company that any portion of any Unreinvested Asset Sale Proceeds of any Foreign Subsidiary will be applied as described in clause (ii) of the immediately preceding proviso, Company shall deliver to Agent an Officers' Certificate (w) certifying that such Unreinvested Asset Sale Proceeds cannot be repatriated to the United States without resulting in a material tax liability to Company and the reasons therefor, (y) specifying the amount of Unreinvested Asset Sale Proceeds to be retained by such Foreign Subsidiary as described in said clause (ii) and the cumulative aggregate amount of all such Unreinvested Asset Sale Proceeds so retained by all Foreign Subsidiaries since the date of this Agreement and (z) demonstrating the derivation of the Unreinvested Asset Sale Proceeds of the correlative Asset Sale from the gross sales price thereof. REVOLVING LOAN CREDIT AGREEMENT EXECUTION 51 59 (b) Prepayments and Reductions from Net Insurance/Condemnation Proceeds. No later than the first Business Day following the date of receipt by Administrative Agent or by Company or any of its Subsidiaries of any Net Insurance/Condemnation Proceeds that are required to be applied to prepay the AXELs under the AXEL Credit Agreement and the Revolving Loans and/or reduce the Revolving Loan Commitments pursuant to the provisions of subsection 6.4C or the Intercreditor Agreement, Company shall prepay the AXELs under the AXEL Credit Agreement and the Revolving Loans and/or the Revolving Loan Commitments shall be permanently reduced in an aggregate amount equal to the amount of such Net Insurance/Condemnation Proceeds. (c) Prepayments and Reductions Due to Issuance of Debt or Equity Securities. On the date of receipt by Company or any of its Subsidiaries of the Cash proceeds (any such proceeds, net of underwriting discounts and commissions and other reasonable costs and expenses associated therewith, including reasonable legal fees and expenses, being "Net Securities Proceeds") from the issuance of any debt (other than debt permitted by Section 7.1) or equity Securities of Company or any of its Subsidiaries to any Person other than Company or any of its Subsidiaries (and excluding any private issuances of Company Common Stock after the Closing Date to the extent such funds would not be required to prepay any other Indebtedness of the Company and its Subsidiaries) after the Closing Date, Company shall prepay the AXELs under the AXEL Credit Agreement and the Revolving Loans and/or the Revolving Loan Commitments shall be permanently reduced in an aggregate amount equal to such Net Securities Proceeds. (d) Prepayments and Reductions from Consolidated Excess Cash Flow. In the event that there shall be Consolidated Excess Cash Flow for any Fiscal Year (commencing with Fiscal Year 1998), Company shall, no later than 90 days after the end of such Fiscal Year, prepay the AXELs under the AXEL Credit Agreement and the Revolving Loans and/or the Revolving Loan Commitments shall be permanently reduced in an aggregate amount equal to 75% of such Consolidated Excess Cash Flow; provided that for any Fiscal Year in which the Consolidated Leverage Ratio as of the end of any such Fiscal Year is less than 3.75:1, such percentage of Consolidated Excess Cash Flow applied to prepay the AXELs under the AXEL Credit Agreement or reduce Revolving Loan Commitments shall be reduced to 50%. (e) Calculations of Net Proceeds Amounts; Additional Prepayments and Reductions Based on Subsequent Calculations. Concurrently with any prepayment of the AXELs under the AXEL Credit Agreement and the Revolving Loans and/or reduction of the Revolving Loan Commitments pursuant to subsections 2.4A(iii)(a)-(d), Company shall deliver to Administra- REVOLVING LOAN CREDIT AGREEMENT EXECUTION 52 60 tive Agent an Officers' Certificate demonstrating the calculation of the amount (the "Net Proceeds Amount") of the applicable Unreinvested Asset Sale Proceeds or Net Insurance/Condemnation Proceeds, the applicable Net Securities Proceeds (as such term is defined in subsection 2.4A(iii)(c)) or the applicable Consolidated Excess Cash Flow, as the case may be, that gave rise to such prepayment and/or reduction. In the event that Company shall subsequently determine that the actual Net Proceeds Amount was greater than the amount set forth in such Officers' Certificate, Company shall promptly make an additional prepayment of the AXELs under the AXEL Credit Agreement and the Revolving Loans (and/or, if applicable, the Revolving Loan Commitments shall be permanently reduced) in an amount equal to the amount of such excess, and Company shall concurrently therewith deliver to Administrative Agent an Officers' Certificate demonstrating the derivation of the additional Net Proceeds Amount resulting in such excess. (f) Prepayments Due to Reductions or Restrictions of Revolving Loan Commitments or Due to Insufficient Borrowing Base. Company shall from time to time prepay the Revolving Loans to the extent necessary to give effect to the limitations set forth in clauses (i) and (ii) of the second paragraph of subsection 2.1A. (iv) Application of Prepayments. (a) Application of Voluntary Prepayments by Type of Loans and Order of Maturity. Any voluntary prepayments pursuant to subsection 2.4A(i) shall be applied as specified by Company in the applicable notice of prepayment. (b) Application of Mandatory Prepayments by Type of Loans. Any amount (the "Applied Amount") required to be applied as a mandatory prepayment of the AXELs under the AXEL Credit Agreement or the Revolving Loans and/or a reduction of the Revolving Loan Commitments pursuant to subsections 2.4A(iii)(a)-(e) shall be applied first to prepay the AXELs under the AXEL Credit Agreement to the full extent thereof, second, to the extent of any remaining portion of the Applied Amount, to prepay the Revolving Loans to the full extent thereof and to further permanently reduce the Revolving Loan Commitments by the amount of such prepayment, and third, to the extent of any remaining portion of the Applied Amount, to further permanently reduce the Revolving Loan Commitments to the full extent thereof and to cash collateralize any Letters of Credit outstanding (with any such amounts held in the Collateral Accounts pursuant to the Intercreditor Agreement). Any prepayments of the Revolving Loans under subsection 2.4A(iii)(f) shall be applied to reduce the Revolving Loans. REVOLVING LOAN CREDIT AGREEMENT EXECUTION 53 61 (c) Application of Prepayments to Base Rate Loans and Eurodollar Rate Loans. Considering Revolving Loans being prepaid, any prepayment thereof shall be applied first to Base Rate Loans, to the full extent thereof before application to Eurodollar Rate Loans, in a manner which minimizes the amount of any payments required to be made by Company pursuant to subsection 2.6D. B. General Provisions Regarding Payments. (i) Manner and Time of Payment. All payments by Company of principal, interest, fees and other Obligations hereunder and under the Revolving Notes shall be made in Dollars in same day funds, without defense, setoff or counterclaim, free of any restriction or condition, and delivered to Administrative Agent not later than 12:00 Noon (New York City time) on the date due at the Funding and Payment Office for the account of Lenders; funds received by Administrative Agent after that time on such due date shall be deemed to have been paid by Company on the next succeeding Business Day. Company hereby authorizes Administrative Agent to charge its accounts with Administrative Agent in order to cause timely payment to be made to Administrative Agent of all principal, interest, fees and expenses due hereunder (subject to sufficient funds being available in its accounts for that purpose). (ii) Application of Payments to Principal and Interest. Except as provided in subsection 2.2C, all payments in respect of the principal amount of any Revolving Loan shall include payment of accrued interest on the principal amount being repaid or prepaid, and all such payments (and, in any event, any payments in respect of any Revolving Loan on a date when interest is due and payable with respect to such Loan) shall be applied to the payment of interest before application to principal. (iii) Apportionment of Payments. Aggregate principal and interest payments shall be apportioned among all outstanding Revolving Loans to which such payments relate, in each case proportionately to Lenders' respective Pro Rata Shares. Administrative Agent shall promptly distribute to each Lender, at its primary address set forth below its name on the appropriate signature page hereof or at such other address as such Lender may request, its Pro Rata Share of all such payments received by Administrative Agent and the commitment fees of such Lender when received by Administrative Agent pursuant to subsection 2.3. Notwithstanding the foregoing provisions of this subsection 2.4C(iii), if, pursuant to the provisions of subsection 2.6B, any Notice of Conversion/Continuation is withdrawn as to any Affected Lender or if any Affected Lender makes Base Rate Loans in lieu of its Pro Rata Share of any Eurodollar Rate Loans, Administrative Agent shall give effect thereto in apportioning payments received thereafter. REVOLVING LOAN CREDIT AGREEMENT EXECUTION 54 62 (iv) Payments on Business Days. Whenever any payment to be made hereunder shall be stated to be due on a day that is not a Business Day, such payment shall be made on the next succeeding Business Day and such extension of time shall be included in the computation of the payment of interest hereunder or of the commitment fees hereunder, as the case may be. (v) Notation of Payment. Each Lender agrees that before disposing of any Note held by it, or any part thereof (other than by granting participations therein), that Lender will make a notation thereon of all Revolving Loans evidenced by that Revolving Note and all principal payments previously made thereon and of the date to which interest thereon has been paid; provided that the failure to make (or any error in the making of) a notation of any Revolving Loan made under such Revolving Note shall not limit or otherwise affect the obligations of Company hereunder or under such Revolving Note with respect to any Revolving Loan or any payments of principal or interest on such Revolving Note. 2.5 Use of Proceeds. A. Revolving Loans. The proceeds of the Revolving Loans shall be applied by Company (i) in an amount up to $1,000,000 to finance the transactions contemplated by the Recapitalization Agreement and (ii) for working capital and general corporate purposes, which may include future Permitted Business Acquisitions (provided that no more than $25,000,000 may be borrowed for Permitted Business Acquisitions) and the making of intercompany loans to any of Company's wholly-owned Subsidiaries, in accordance with subsection 7.1(iv), for their own working capital and general corporate purposes. B. Margin Regulations. No portion of the proceeds of any borrowing under this Agreement shall be used by Company or any of its Subsidiaries in any manner that might cause the borrowing or the application of such proceeds to violate Regulation G, Regulation U, Regulation T or Regulation X of the Board of Governors of the Federal Reserve System or any other regulation of such Board or to violate the Exchange Act, in each case as in effect on the date or dates of such borrowing and such use of proceeds. 2.6 Special Provisions Governing Eurodollar Rate Loans. Notwithstanding any other provision of this Agreement to the contrary, the following provisions shall govern with respect to Eurodollar Rate Loans as to the matters covered: A. Determination of Applicable Interest Rate. As soon as practicable after 10:00 A.M. (New York City time) on each Interest Rate Determination Date, Administrative Agent shall determine (which determination shall, absent manifest error, be final, conclusive and binding upon all parties) the interest rate that shall apply to the Eurodollar Rate Loans for which an interest rate is then being determined for the applicable Interest Period and REVOLVING LOAN CREDIT AGREEMENT EXECUTION 55 63 shall promptly give notice thereof (in writing or by telephone confirmed in writing) to Company and each Lender. B. Inability to Determine Applicable Interest Rate. In the event that Administrative Agent shall have determined (which determination shall be final and conclusive and binding upon all parties hereto), on any Interest Rate Determination Date with respect to any Eurodollar Rate Loans, that by reason of circumstances affecting the Eurodollar market adequate and fair means do not exist for ascertaining the interest rate applicable to such Eurodollar Rate Loans on the basis provided for in the definition of Adjusted Eurodollar Rate, Administrative Agent shall on such date give notice (by telefacsimile or by telephone confirmed in writing) to Company and each Lender of such determination, whereupon (i) no Revolving Loans may be made as, or converted to, Eurodollar Rate Loans until such time as Administrative Agent notifies Company and Lenders that the circumstances giving rise to such notice no longer exist and (ii) any Notice of Borrowing or Notice of Conversion/Continuation given by Company with respect to the Revolving Loans in respect of which such determination was made shall be deemed to be rescinded by Company. C. Illegality or Impracticability of Eurodollar Rate Loans. In the event that on any date any Lender shall have determined (which determination shall be final and conclusive and binding upon all parties hereto but shall be made only after consultation with Company and Administrative Agent) that the making, maintaining or continuation of its Eurodollar Rate Loans (i) has become unlawful as a result of compliance by such Lender in good faith with any law, treaty, governmental rule, regulation, guideline or order (or would conflict with any such treaty, governmental rule, regulation, guideline or order not having the force of law even though the failure to comply therewith would not be unlawful) or (ii) has become impracticable, or would cause such Lender material hardship, as a result of contingencies occurring after the date of this Agreement which materially and adversely affect the Eurodollar market or the position of such Lender in that market, then, and in any such event, such Lender shall be an "Affected Lender" and it shall on that day give notice (by telefacsimile or by telephone confirmed in writing) to Company and Administrative Agent of such determination (which notice Administrative Agent shall promptly transmit to each other Lender). Thereafter (a) the obligation of the Affected Lender to make Revolving Loans as, or to convert Revolving Loans to, Eurodollar Rate Loans shall be suspended until such notice shall be withdrawn by the Affected Lender, (b) to the extent such determination by the Affected Lender relates to a Eurodollar Rate Loan then being requested by Company pursuant to a Notice of Borrowing or a Notice of Conversion/Continuation, the Affected Lender shall make such Revolving Loan as (or convert such Revolving Loan to, as the case may be) a Base Rate Loan, (c) the Affected Lender's obligation to maintain its outstanding Eurodollar Rate Loans (the "Affected Loans") shall be terminated at the earlier to occur of the expiration of the Interest Period then in effect with respect to the Affected Loans or when required by law, and (d) the Affected Loans shall automatically convert into Base Rate Loans on the date of such termination. Notwithstanding the foregoing, to the extent a determination by an Affected Lender as described above relates to a Eurodollar Rate Loan then being requested by Company REVOLVING LOAN CREDIT AGREEMENT EXECUTION 56 64 pursuant to a Notice of Borrowing or a Notice of Conversion/Continuation, Company shall have the option, subject to the provisions of subsection 2.6D, to rescind such Notice of Borrowing or Notice of Conversion/Continuation as to all Lenders by giving notice (by telefacsimile or by telephone confirmed in writing) to Administrative Agent of such rescission on the date on which the Affected Lender gives notice of its determination as described above (which notice of rescission Administrative Agent shall promptly transmit to each other Lender). Except as provided in the immediately preceding sentence, nothing in this subsection 2.6C shall affect the obligation of any Lender other than an Affected Lender to make or maintain Revolving Loans as, or to convert Revolving Loans to, Eurodollar Rate Loans in accordance with the terms of this Agreement. D. Compensation For Breakage or Non-Commencement of Interest Periods. Company shall compensate each Lender, upon written request by that Lender (which request shall set forth the basis for requesting such amounts), for all reasonable losses, expenses and liabilities (including any interest paid by that Lender to lenders of funds borrowed by it to make or carry its Eurodollar Rate Loans and any loss, expense or liability sustained by that Lender in connection with the liquidation or re-employment of such funds) which that Lender may sustain: (i) if for any reason (other than a default by that Lender) a borrowing of any Eurodollar Rate Loan does not occur on a date specified therefor in a Notice of Borrowing or a telephonic request for borrowing, or a conversion to or continuation of any Eurodollar Rate Loan does not occur on a date specified therefor in a Notice of Conversion/Continuation or a telephonic request for conversion or continuation, (ii) if any prepayment (including any prepayment pursuant to subsection 2.4A(i)) or other principal payment or any conversion of any of its Eurodollar Rate Loans occurs on a date prior to the last day of an Interest Period applicable to that Eurodollar Rate Loan, (iii) if any prepayment of any of its Eurodollar Rate Loans is not made on any date specified in a notice of prepayment given by Company, or (iv) as a consequence of any other default by Company in the repayment of its Eurodollar Rate Loans when required by the terms of this Agreement. E. Booking of Eurodollar Rate Loans. Any Lender may make, carry or transfer Eurodollar Rate Loans at, to, or for the account of any of its branch offices or the office of an Affiliate of that Lender. F. Assumptions Concerning Funding of Eurodollar Rate Loans. Calculation of all amounts payable to a Lender under this subsection 2.6 and under subsection 2.7A shall be made as though that Lender had actually funded each of its relevant Eurodollar Rate Loans through the purchase of a Eurodollar deposit bearing interest at the rate obtained pursuant to clause (i) of the definition of Adjusted Eurodollar Rate in an amount equal to the amount of such Eurodollar Rate Loan and having a maturity comparable to the relevant Interest Period and through the transfer of such Eurodollar deposit from an offshore office of that Lender to a domestic office of that Lender in the United States of America; provided, however, that each Lender may fund each of its Eurodollar Rate Loans in any REVOLVING LOAN CREDIT AGREEMENT EXECUTION 57 65 manner it sees fit and the foregoing assumptions shall be utilized only for the purposes of calculating amounts payable under this subsection 2.6 and under subsection 2.7A. G. Eurodollar Rate Loans After Default. After the occurrence of and during the continuation of a Potential Event of Default or an Event of Default, (i) Company may not elect to have a Revolving Loan be made or maintained as, or converted to, a Eurodollar Rate Loan after the expiration of any Interest Period then in effect for that Revolving Loan and (ii) subject to the provisions of subsection 2.6D, any Notice of Borrowing or Notice of Conversion/Continuation given by Company with respect to a requested borrowing or conversion/continuation that has not yet occurred shall be deemed to be rescinded by Company. 2.7 Increased Costs; Taxes; Capital Adequacy. A. Compensation for Increased Costs and Taxes. Subject to the provisions of subsection 2.7B (which shall be controlling with respect to the matters covered thereby and to the extent a Lender is not entitled to payment under the terms of Section 2.7B, it shall not be entitled to such payment pursuant to this subsection 2.7A), in the event that any Lender shall determine (which determination shall, absent manifest error, be final and conclusive and binding upon all parties hereto) that any law, treaty or governmental rule, regulation or order, or any change therein or in the interpretation, administration or application thereof (including the introduction of any new law, treaty or governmental rule, regulation or order), or any determination of a court or governmental authority, in each case that becomes effective after the date hereof, or compliance by such Lender with any guideline, request or directive issued or made after the date hereof by any central bank or other governmental or quasi-governmental authority (whether or not having the force of law): (i) subjects such Lender (or its applicable lending office) to any additional Tax (other than any Tax on the overall net income of such Lender) with respect to this Agreement or any of its obligations hereunder or any payments to such Lender (or its applicable lending office) of principal, interest, fees or any other amount payable hereunder; (ii) imposes, modifies or holds applicable any reserve (including any marginal, emergency, supplemental, special or other reserve), special deposit, compulsory loan, FDIC insurance or similar requirement against assets held by, or deposits or other liabilities in or for the account of, or advances or loans by, or other credit extended by, or any other acquisition of funds by, any office of such Lender (other than any such reserve or other requirements with respect to Eurodollar Rate Loans that are reflected in the definition of Adjusted Eurodollar Rate); or REVOLVING LOAN CREDIT AGREEMENT EXECUTION 58 66 (iii) imposes any other condition (other than with respect to a Tax matter) on or affecting such Lender (or its applicable lending office) or its obligations hereunder or the Eurodollar market; and the result of any of the foregoing is to increase the cost to such Lender of agreeing to make, making or maintaining Revolving Loans hereunder or to reduce any amount received or receivable by such Lender (or its applicable lending office) with respect thereto by an amount considered by the Lender to be material; then, in any such case, Company shall promptly pay to such Lender, upon receipt of the statement referred to in the next sentence, such additional amount or amounts (in the form of an increased rate of, or a different method of calculating, interest or otherwise as such Lender in its sole discretion shall determine) as may be necessary to compensate such Lender for any such increased cost or reduction in amounts received or receivable hereunder. Such Lender shall deliver to Company (with a copy to Administrative Agent) a written statement, setting forth in reasonable detail the basis for calculating the additional amounts owed to such Lender under this subsection 2.7A, which statement shall be conclusive and binding upon all parties hereto absent manifest error. B. Withholding of Taxes. (i) Payments to Be Free and Clear. All sums payable by Company under this Agreement and the other Revolving Loan Documents shall (except to the extent required by law) be paid free and clear of, and without any deduction or withholding on account of, any Tax (other than a Tax on the overall net income of any Lender) imposed, levied, collected, withheld or assessed by or within the United States of America or any political subdivision in or of the United States of America or any other jurisdiction from or to which a payment is made by or on behalf of Company or by any federation or organization of which the United States of America or any such jurisdiction is a member at the time of payment. (ii) Grossing-up of Payments. If Company or any other Person is required by law to make any deduction or withholding on account of any such Tax from any sum paid or payable by Company to Administrative Agent or any Lender under any of the Revolving Loan Documents: (a) Company shall notify Administrative Agent of any such requirement or any change in any such requirement as soon as Company becomes aware of it; (b) Company shall pay any such Tax before the date on which penalties attach thereto, such payment to be made (if the liability to pay is imposed on Company) for its own account or (if that liability is imposed on Administrative Agent or such Lender, as the case may be) on behalf of and in the name of Administrative Agent or such Lender; REVOLVING LOAN CREDIT AGREEMENT EXECUTION 59 67 (c) the sum payable by Company in respect of which the relevant deduction, withholding or payment is required shall be increased to the extent necessary to ensure that, after the making of that deduction, withholding or payment, Administrative Agent or such Lender, as the case may be, receives on the due date a net sum equal to what it would have received had no such deduction, withholding or payment been required or made; and (d) within 30 days after paying any sum from which it is required by law to make any deduction or withholding, and within 30 days after the due date of payment of any Tax which it is required by clause (b) above to pay, Company shall deliver to Administrative Agent evidence satisfactory to the other affected parties of such deduction, withholding or payment and of the remittance thereof to the relevant taxing or other authority; provided that no such additional amount shall be required to be paid to any Lender under clause (c) above except to the extent that any change after the date hereof (in the case of each Lender listed on the signature pages hereof) or after the date of the Assignment Agreement pursuant to which such Lender became a Lender (in the case of each other Lender) in any such requirement for a deduction, withholding or payment as is mentioned therein shall result in an increase in the rate of such deduction, withholding or payment from that in effect at the date of this Agreement or at the date of such Assignment Agreement, as the case may be, in respect of payments to such Lender. (iii) Evidence of Exemption from U.S. Withholding Tax. (a) Each Lender that is organized under the laws of any jurisdiction other than the United States or any state or other political subdivision thereof (for purposes of this subsection 2.7B(iii), a "Non-US Lender") shall deliver to Administrative Agent for transmission to Company, on or prior to the Closing Date (in the case of each Lender listed on the signature pages hereof) or on or prior to the date of the Assignment Agreement pursuant to which it becomes a Lender (in the case of each other Lender), and at such other times as may be necessary in the determination of Company or Administrative Agent (each in the reasonable exercise of its discretion), (1) two original copies of Internal Revenue Service Form 1001 or 4224 (or any successor forms), properly completed and duly executed by such Lender, together with any other certificate or statement of exemption required under the Internal Revenue Code or the regulations issued thereunder to establish that such Lender is not subject to deduction or withholding of United States federal income tax with respect to any payments to such Lender of principal, interest, fees or other amounts payable under any of the Revolving Loan Documents or (2) if such Lender is not a "bank" or other Person described in Section 881(c)(3) of the Internal Revenue Code and cannot deliver either REVOLVING LOAN CREDIT AGREEMENT EXECUTION 60 68 Internal Revenue Service Form 1001 or 4224 pursuant to clause (1) above, a Certificate re Non-Bank Status together with two original copies of Internal Revenue Service Form W-8 (or any successor form), properly completed and duly executed by such Lender, together with any other certificate or statement of exemption required under the Internal Revenue Code or the regulations issued thereunder to establish that such Lender is not subject to deduction or withholding of United States federal income tax with respect to any payments to such Lender of interest payable under any of the Revolving Loan Documents. (b) Each Lender required to deliver any forms, certificates or other evidence with respect to United States federal income tax withholding matters pursuant to subsection 2.7B(iii)(a) hereby agrees, from time to time after the initial delivery by such Lender of such forms, certificates or other evidence, whenever a lapse in time or change in circumstances renders such forms, certificates or other evidence obsolete or inaccurate in any material respect, that such Lender shall promptly (1) deliver to Administrative Agent for new original copies of Internal Revenue Service Form 1001 or 4224, or a Certificate re Non-Bank Status and two original copies of Internal Revenue Service Form W-8, as the case may be, properly completed and duly executed by such Lender, together with any other certificate or statement of exemption required in order to confirm or establish that such Lender is not subject to deduction or withholding of United States federal income tax with respect to payments to such Lender under the Revolving Loan Documents or (2) notify Administrative Agent and Company of its inability to deliver any such forms, certificates or other evidence. (c) Company shall not be required to pay any additional amount to any Non-US Lender under clause (c) of subsection 2.7B(ii) if such Lender shall have failed to satisfy the requirements of clause (a) or (b)(1) of this subsection 2.7B(iii); provided that if such Lender shall have satisfied the requirements of subsection 2.7B(iii)(a) on the Closing Date (in the case of each Lender listed on the signature pages hereof) or on the date of the Assignment Agreement pursuant to which it became a Lender (in the case of each other Lender), nothing in this subsection 2.7B(iii)(c) shall relieve Company of its obligation to pay any additional amounts pursuant to clause (c) of subsection 2.7B(ii) in the event that, as a result of any change in any applicable law, treaty or governmental rule, regulation or order, or any change in the interpretation, administration or application thereof, such Lender is no longer properly entitled to deliver forms, certificates or other evidence at a subsequent date establishing the fact that such Lender is not subject to withholding as described in subsection 2.7B(iii)(a). REVOLVING LOAN CREDIT AGREEMENT EXECUTION 61 69 C. Capital Adequacy Adjustment. If any Lender shall have determined that the adoption, effectiveness, phase-in or applicability after the date hereof of any law, rule or regulation (or any provision thereof) regarding capital adequacy, or any change therein or in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Lender (or its applicable lending office) with any guideline, request or directive regarding capital adequacy (whether or not having the force of law) of any such governmental authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on the capital of such Lender or any corporation controlling such Lender as a consequence of, or with reference to, such Lender's Revolving Loans or Revolving Loan Commitments or Letters of Credit or participations therein or other obligations hereunder with respect to the Revolving Loans or the Letters of Credit to a level below that which such Lender or such controlling corporation could have achieved but for such adoption, effectiveness, phase-in, applicability, change or compliance (taking into consideration the policies of such Lender or such controlling corporation with regard to capital adequacy) by an amount considered by the Lender to be material, then from time to time, within five Business Days after receipt by Company from such Lender of the statement referred to in the next sentence, Company shall pay to such Lender such additional amount or amounts as will compensate such Lender or such controlling corporation on an after-tax basis for such reduction. Such Lender shall deliver to Company (with a copy to Administra- tive Agent) a written statement, setting forth in reasonable detail the basis of the calculation of such additional amounts, which statement shall be conclusive and binding upon all parties hereto absent manifest error. 2.8 Obligation of Lenders and Issuing Lenders to Mitigate. Each Lender and Issuing Lender agrees that, as promptly as practicable after the officer of such Lender or Issuing Lender responsible for administering the Revolving Loans or Letters of Credit of such Lender or Issuing Lender, as the case may be, becomes aware of the occurrence of an event or the existence of a condition that would cause such Lender to become an Affected Lender or that would entitle such Lender or Issuing Lender to receive payments under subsection 2.7 or subsection 3.6, it will, to the extent not inconsistent with the internal policies of such Lender or Issuing Lender and any applicable legal or regulatory restrictions, use reasonable efforts (i) to make, issue, fund or maintain the Revolving Loan Commitments of such Lender or the affected Revolving Loans or Letters of Credit of such Lender or Issuing Lender through another lending or letter of credit office of such Lender or Issuing Lender, or (ii) take such other measures as such Lender or Issuing Lender may deem reasonable, if as a result thereof the circumstances which would cause such Lender to be an Affected Lender would cease to exist or the additional amounts which would otherwise be required to be paid to such Lender or Issuing Lender pursuant to subsection 2.7 or subsection 3.6 would be materially reduced and if, as determined by such Lender or Issuing Lender in its sole discretion, the making, issuing, funding or maintaining of such Revolving Loan Commitments or Revolving Loans or Letters of Credit through such other lending or letter of credit office or in accordance with such other measures, as the REVOLVING LOAN CREDIT AGREEMENT EXECUTION 62 70 case may be, would not otherwise materially adversely affect such Revolving Loan Commitments or Revolving Loans or Letters of Credit or the interests of such Lender or Issuing Lender; provided that such Lender or Issuing Lender will not be obligated to utilize such other lending or letter of credit office pursuant to this subsection 2.8 unless Company agrees to pay all incremental expenses incurred by such Lender or Issuing Lender as a result of utilizing such other lending or letter of credit office as described in clause (i) above. A certificate as to the amount of any such expenses payable by Company pursuant to this subsection 2.8 (setting forth in reasonable detail the basis for requesting such amount) submitted by such Lender or Issuing Lender to Company (with a copy to Administrative Agent) shall be conclusive absent manifest error. 2.9 Defaulting Lenders. Anything contained herein to the contrary notwithstanding, in the event that any Lender (a "Defaulting Lender") defaults (a "Funding Default") in its obligation to fund any Revolving Loan (a "Defaulted Revolving Loan") in accordance with subsection 2.1 as a result of the appointment of a receiver or conservator with respect to such Lender at the direction or request of any regulatory agency or authority, then (i) during any Default Period (as defined below) with respect to such Defaulting Lender, such Defaulting Lender shall be deemed not to be a "Lender" for purposes of voting on any matters (including the granting of any consents or waivers) with respect to any of the Revolving Loan Documents, (ii) to the extent permitted by applicable law, until such time as the Default Excess (as defined below) with respect to such Defaulting Lender shall have been reduced to zero, (a) any voluntary prepayment of the Revolving Loans pursuant to subsection 2.4B(i) shall, if Company so directs at the time of making such voluntary prepayment, be applied to the Revolving Loans of other Lenders as if such Defaulting Lender had no Revolving Loans outstanding and the Revolving Loan Exposure of such Defaulting Lender were zero, and (b) any mandatory prepayment of the Revolving Loans pursuant to subsection 2.4B(iii) shall, if Company so directs at the time of making such mandatory prepayment, be applied to the Revolving Loans of other Lenders (but not to the Revolving Loans of such Defaulting Lender) as if such Defaulting Lender had funded all Defaulted Revolving Loans of such Defaulting Lender, it being understood and agreed that Company shall be entitled to retain any portion of any mandatory prepayment of the Revolving Loans that is not paid to such Defaulting Lender solely as a result of the operation of the provisions of this clause (b), (iii) such Defaulting Lender's Revolving Loan Commitment and outstanding Revolving Loans and such Defaulting Lender's Pro Rata Share of the Letter of Credit Usage shall be excluded for purposes of calculating the commitment fee payable to Lenders pursuant to subsection 2.3A in respect of any day during any Default Period with respect to such Defaulting Lender, and such Defaulting Lender shall not be entitled to receive any commitment fee pursuant to subsection 2.3A with respect to such Defaulting Lender's Revolving Loan Commitment in respect of any Default Period with respect to such Defaulting Lender, and (iv) the Total Utilization of Revolving Loan Commitments as at any date of determination shall be calculated as if such Defaulting Lender had funded all Defaulted Revolving Loans of such Defaulting Lender. REVOLVING LOAN CREDIT AGREEMENT EXECUTION 63 71 For purposes of this Agreement, (I) "Default Period" means, with respect to any Defaulting Lender, the period commencing on the date of the applicable Funding Default and ending on the earliest of the following dates: (A) the date on which all Revolving Loan Commitments are cancelled or terminated and/or the Obligations are declared or become immediately due and payable, (B) the date on which (1) the Default Excess with respect to such Defaulting Lender shall have been reduced to zero (whether by the funding by such Defaulting Lender of any Defaulted Revolving Loans of such Defaulting Lender or by the non-pro rata application of any voluntary or mandatory prepayments of the Revolving Loans in accordance with the terms of this subsection 2.9 or by a combination thereof) and (2) such Defaulting Lender shall have delivered to Company and Administrative Agent a written reaffirmation of its intention to honor its obligations under this Agreement with respect to its Revolving Loan Commitment, and (C) the date on which Company, Administrative Agent and Requisite Lenders waive all Funding Defaults of such Defaulting Lender in writing, and (II) "Default Excess" means, with respect to any Defaulting Lender, the excess, if any, of such Defaulting Lender's Pro Rata Share of the aggregate outstanding principal amount of Revolving Loans of all Lenders (calculated as if all Defaulting Lenders (other than such Defaulting Lender) had funded all of their respective Defaulted Revolving Loans) over the aggregate outstanding principal amount of Revolving Loans of such Defaulting Lender. No Revolving Loan Commitment of any Lender shall be increased or otherwise affected, and, except as otherwise expressly provided in this subsection 2.9, performance by Company of its obligations under this Agreement and the other Revolving Loan Documents shall not be excused or otherwise modified, as a result of any Funding Default or the operation of this subsection 2.9. The rights and remedies against a Defaulting Lender under this subsection 2.9 are in addition to other rights and remedies which Company may have against such Defaulting Lender with respect to any Funding Default and which Administrative Agent or any Lender may have against such Defaulting Lender with respect to any Funding Default. 2.10 Removal or Replacement of a Lender. A. Anything contained in this Agreement to the contrary notwithstanding, in the event that: (i) (a) any Lender (an "Increased-Cost Lender") shall give notice to Company that such Lender is an Affected Lender or that such Lender is entitled to receive payments under subsection 2.7 or subsection 3.6, (b) the circumstances which have caused such Lender to be an Affected Lender or which entitle such Lender to receive such payments shall remain in effect, and (c) such Lender shall fail to withdraw such notice within five Business Days after Company's request for such withdrawal; or REVOLVING LOAN CREDIT AGREEMENT EXECUTION 64 72 (ii) (a) any Lender shall become a Defaulting Lender, (b) the Default Period for such Defaulting Lender shall remain in effect, and (c) such Defaulting Lender shall fail to cure the default as a result of which it has become a Defaulting Lender within five Business Days after Company's request that it cure such default; or (iii) (a) in connection with any proposed amendment, modification, termination, waiver or consent with respect to any of the provisions of this Agreement as contemplated by clauses (i) through (v) of the first proviso to subsection 10.6A, the consent of Requisite Lenders shall have been obtained but the consent of one or more of such other Lenders (each a "Non-Consenting Lender") whose consent is required shall not have been obtained, and (b) the failure to obtain Non-Consenting Lenders' consents does not result solely from the exercise of Non-Consenting Lenders' rights (and the withholding of any required consents by Non-Consenting Lenders) pursuant to the second proviso to subsection 10.6A; then, and in each such case, Company shall have the right, at its option, to remove or replace the applicable Increased-Cost Lender, Defaulting Lender or Non-Consenting Lender (the "Terminated Lender") to the extent permitted by subsection 2.10B. B. Company may, by giving written notice to Administrative Agent and any Terminated Lender of its election to do so: (i) elect to (a) terminate the Revolving Loan Commitment, if any, of such Terminated Lender upon receipt by such Terminated Lender of such notice and (b) prepay on the date of such termination any outstanding Revolving Loans made by such Terminated Lender, together with accrued and unpaid interest thereon and any other amounts payable to such Terminated Lender hereunder pursuant to subsection 2.6, subsection 2.7 or subsection 3.6 or otherwise; provided that, in the event such Terminated Lender has any Revolving Loans outstanding at the time of such termination, the written consent of Administrative Agent and Requisite Lenders (which consent shall not be unreasonably withheld or delayed) shall be required in order for Company to make the election set forth in this clause (i); or (ii) elect to cause such Terminated Lender (and such Terminated Lender hereby irrevocably agrees) to assign its outstanding Revolving Loans and its Revolving Loan Commitment, if any, in full at par to one or more Eligible Assignees (each a "Replacement Lender") in accordance with the provisions of subsection 10.1B; provided that (a) on the date of such assignment, Company shall pay any amounts payable to such Terminated Lender pursuant to subsection 2.6, subsection 2.7 or subsection 3.6 or otherwise as if it were a prepayment and (b) in the event such Terminated Lender is a Non-Consenting Lender, each Replacement Lender shall consent, at the time of such assignment, to each matter in respect of which such Terminated Lender was a Non-Consenting Lender; REVOLVING LOAN CREDIT AGREEMENT EXECUTION 65 73 provided that (X) Company may not make either of the elections set forth in clauses (i) or (ii) above with respect to any Non-Consenting Lender unless Company also makes one of such elections with respect to each other Terminated Lender which is a Non-Consenting Lender and (Y) Company may not make either of such elections with respect to any Terminated Lender that is an Issuing Lender unless, prior to the effectiveness of such election, Company shall have caused each outstanding Letter of Credit issued by such Issuing Lender to be cancelled. C. Upon the prepayment of all amounts owing to any Terminated Lender and the termination of such Terminated Lender's Revolving Loan Commitment, if any, pursuant to clause (i) of subsection 2.10B, (i) Schedule 2.1 shall be deemed modified to reflect any corresponding changes in the Revolving Loan Commitments and (ii) such Terminated Lender shall no longer constitute a "Lender" for purposes of this Agreement; provided that any rights of such Terminated Lender to indemnification under this Agreement (including under subsections 2.6D, 2.7, 3.6, 10.2 and 10.3) shall survive as to such Terminated Lender. SECTION 3. LETTERS OF CREDIT 3.1 Issuance of Letters of Credit and Lenders' Purchase of Participations Therein. A. Letters of Credit. In addition to Company requesting that Lenders make Revolving Loans pursuant to subsection 2.1A, Company may request, in accordance with the provisions of this subsection 3.1, from time to time during the period from the Closing Date to but excluding the Revolving Loan Commitment Termination Date, that one or more Lenders issue Letters of Credit for the account of Company for the purposes specified in the definitions of Commercial Letters of Credit and Standby Letters of Credit. Subject to the terms and conditions of this Agreement and in reliance upon the representations and warranties of Company herein set forth, any one or more Lenders may, but (except as provided in subsection 3.1B(ii)) shall not be obligated to, issue such Letters of Credit in accordance with the provisions of this subsection 3.1; provided that Company shall not request that any Lender issue (and no Lender shall issue): (i) any Letter of Credit if, after giving effect to such issuance, the Total Utilization of Revolving Loan Commitments would exceed the Revolving Loan Commitments then in effect or the Borrowing Base then in effect; (ii) any Letter of Credit if, after giving effect to such issuance, the Letter of Credit Usage would exceed $15,000,000; (iii) any Standby Letter of Credit having an expiration date later than the earlier of (a) the date which is 30 days prior to the Revolving Loan Commitment Termination Date and (b) the date which is not more than 365 days from the date REVOLVING LOAN CREDIT AGREEMENT EXECUTION 66 74 of issuance of such Standby Letter of Credit; provided that the immediately preceding clause (b) shall not prevent any Issuing Lender from agreeing that a Standby Letter of Credit will automatically be extended for one or more successive periods not to exceed one year each unless such Issuing Lender elects not to extend for any such additional period; and provided, further that such Issuing Lender shall elect not to extend such Standby Letter of Credit if it has knowledge that an Event of Default has occurred and is continuing (and has not been waived in accordance with subsection 10.6) at the time such Issuing Lender must elect whether or not to allow such extension; or (iv) any Commercial Letter of Credit having an expiration date (a) later than the earlier of (X) the date which is 30 days prior to the Revolving Loan Commitment Termination Date and (Y) the date which is 180 days from the date of issuance of such Commercial Letter of Credit or (b) that is otherwise unacceptable to the applicable Issuing Lender in its reasonable discretion. B. Mechanics of Issuance. (i) Notice of Issuance. Whenever Company desires the issuance of a Letter of Credit, it shall deliver to Administrative Agent a Notice of Issuance of Letter of Credit substantially in the form of Exhibit III annexed hereto no later than 12:00 Noon (New York City time) at least three Business Days (in the case of Standby Letters of Credit) or five Business Days (in the case of Commercial Letters of Credit), or in each case such shorter period as may be agreed to by the Issuing Lender in any particular instance, in advance of the proposed date of issuance. The Notice of Issuance of Letter of Credit shall specify (a) the proposed date of issuance (which shall be a Business Day), (b) whether the Letter of Credit is to be a Standby Letter of Credit or a Commercial Letter of Credit, (c) the face amount of the Letter of Credit, (d) in the case of a Letter of Credit which Company requests to be denominated in a currency other than Dollars, the currency in which Company requests such Letter of Credit to be issued, (e) the expiration date of the Letter of Credit, (f) the name and address of the beneficiary, (g) either the verbatim text of the proposed Letter of Credit or the proposed terms and conditions thereof, including a precise description of any documents to be presented by the beneficiary which, if presented by the beneficiary prior to the expiration date of the Letter of Credit, would require the Issuing Lender to make payment under the Letter of Credit, and (h) that, after giving effect to the issuance of the Letter of Credit, the Total Utilization of Revolving Loan Commitments will not exceed the Revolving Loan Commitments then in effect or the Borrowing Base then in effect; provided that the Issuing Lender, in its reasonable discretion, may require changes in the text of the proposed Letter of Credit or any such documents; and provided, further that no Letter of Credit shall require payment against a conforming draft to be made thereunder on the same business day (under the laws of the jurisdiction in which the office of the Issuing Lender to which such draft is required to be presented is REVOLVING LOAN CREDIT AGREEMENT EXECUTION 67 75 located) that such draft is presented if such presentation is made after 10:00 A.M. (in the time zone of such office of the Issuing Lender) on such business day. Company shall notify the applicable Issuing Lender (and Administrative Agent, if Administrative Agent is not such Issuing Lender) prior to the issuance of any Letter of Credit in the event that any of the matters to which Company is required to certify in the applicable Notice of Issuance of Letter of Credit is no longer true and correct as of the proposed date of issuance of such Letter of Credit, and upon the issuance of any Letter of Credit Company shall be deemed to have re-certified, as of the date of such issuance, as to the matters to which Company is required to certify in the applicable Notice of Issuance of Letter of Credit. (ii) Determination of Issuing Lender. Upon receipt by Administrative Agent of a Notice of Issuance of Letter of Credit pursuant to subsection 3.1B(i) requesting the issuance of a Letter of Credit, in the event Administrative Agent elects to issue such Letter of Credit, Administrative Agent shall promptly so notify Company, and Administrative Agent shall be the Issuing Lender with respect thereto. In the event that Administrative Agent, in its sole discretion, elects not to issue such Letter of Credit, Administrative Agent shall promptly so notify Company, whereupon Company may request any other Lender to issue such Letter of Credit by delivering to such Lender a copy of the applicable Notice of Issuance of Letter of Credit. Any Lender so requested to issue such Letter of Credit shall promptly notify Company and Administrative Agent whether or not, in its sole discretion, it has elected to issue such Letter of Credit, and any such Lender which so elects to issue such Letter of Credit shall be the Issuing Lender with respect thereto. In the event that all other Lenders shall have declined to issue such Letter of Credit, notwithstanding the prior election of Administrative Agent not to issue such Letter of Credit, Administrative Agent shall be obligated to issue such Letter of Credit and shall be the Issuing Lender with respect thereto, notwithstanding the fact that the Letter of Credit Usage with respect to such Letter of Credit and with respect to all other Letters of Credit issued by Administrative Agent, when aggregated with Administrative Agent's outstanding Revolving Loans, may exceed Administrative Agent's Revolving Loan Commitment then in effect; provided that Administrative Agent shall not be obligated to issue any Letter of Credit denominated in a foreign currency which in the judgment of Administrative Agent is not readily and freely available. (iii) Issuance of Letter of Credit. Upon satisfaction or waiver (in accordance with subsection 10.6) of the conditions set forth in subsection 4.3, the Issuing Lender shall issue the requested Letter of Credit in accordance with the Issuing Lender's standard operating procedures. (iv) Notification to Lenders. Upon the issuance of any Letter of Credit the applicable Issuing Lender shall promptly notify Administrative Agent and each other Lender of such issuance, which notice shall be accompanied by a copy of such Letter REVOLVING LOAN CREDIT AGREEMENT EXECUTION 68 76 of Credit. Promptly after receipt of such notice (or, if Administrative Agent is the Issuing Lender, together with such notice), Administrative Agent shall notify each Lender of the amount of such Lender's respective participation in such Letter of Credit, determined in accordance with subsection 3.1C. (v) Reports to Lenders. Within 15 days after the end of each month ending after the Closing Date, so long as any Letter of Credit shall have been outstanding during such month, each Issuing Lender shall deliver to each other Lender a report setting forth for such month the daily aggregate amount available to be drawn under the Letters of Credit issued by such Issuing Lender that were outstanding during such month. C. Lenders' Purchase of Participations in Letters of Credit. Immediately upon the issuance of each Letter of Credit, each Lender shall be deemed to, and hereby agrees to, have irrevocably purchased from the Issuing Lender a participation in such Letter of Credit and any drawings honored thereunder in an amount equal to such Lender's Pro Rata Share of the maximum amount which is or at any time may become available to be drawn thereunder. 3.2 Letter of Credit Fees. Company agrees to pay the following amounts with respect to Letters of Credit issued hereunder: (i) with respect to each Standby Letter of Credit, (a) a fronting fee, payable directly to the applicable Issuing Lender for its own account, equal to 0.25% per annum of the daily amount available to be drawn under such Standby Letter of Credit and (b) a letter of credit fee, payable to Administrative Agent for the account of Lenders, equal to the Applicable Revolving Eurodollar Rate Margin in effect with respect to Eurodollar Rate Loans from time to time multiplied by the daily amount available to be drawn under such Standby Letter of Credit, each such fronting fee or letter of credit fee to be payable in arrears on and to (but excluding) each March 15, June 15, September 15 and December 15 of each year and computed on the basis of a 360-day year for the actual number of days elapsed; (ii) with respect to each Commercial Letter of Credit, (a) a fronting fee, payable directly to the applicable Issuing Lender for its own account, equal to 0.25% per annum of the daily amount available to be drawn under such Commercial Letter of Credit and (b) a letter of credit fee, payable to Administrative Agent for the account of Lenders, equal to the Applicable Revolving Eurodollar Rate Margin in effect with respect to Eurodollar Rate Loans from time to time multiplied by the daily amount available to be drawn under such Commercial Letter of Credit, each such fronting fee or letter of credit fee to be payable in arrears on and to (but REVOLVING LOAN CREDIT AGREEMENT EXECUTION 69 77 excluding) each March 15, June 15, September 15 and December 15 of each year and computed on the basis of a 360-day year for the actual number of days elapsed; and (iii) with respect to the issuance, amendment or transfer of each Letter of Credit and each payment of a drawing made thereunder (without duplication of the fees payable under clauses (i) and (ii) above), documentary and processing charges payable directly to the applicable Issuing Lender for its own account in accordance with such Issuing Lender's standard schedule for such charges in effect at the time of such issuance, amendment, transfer or payment, as the case may be. For purposes of calculating any fees payable under clauses (i) and (ii) of this subsection 3.2, the daily amount available to be drawn under any Letter of Credit shall be determined as of the close of business on any date of determination. Promptly upon receipt by Administrative Agent of any amount described in clause (i)(b) or (ii)(b) of this subsection 3.2, Administrative Agent shall distribute to each Lender its Pro Rata Share of such amount. 3.3 Drawings and Reimbursement of Amounts Paid Under Letters of Credit. A. Responsibility of Issuing Lender With Respect to Drawings. In determining whether to honor any drawing under any Letter of Credit by the beneficiary thereof, the Issuing Lender shall be responsible only to examine the documents delivered under such Letter of Credit with reasonable care so as to ascertain whether they appear on their face to be in accordance with the terms and conditions of such Letter of Credit. B. Reimbursement by Company of Amounts Paid Under Letters of Credit. In the event an Issuing Lender has determined to honor a drawing under a Letter of Credit issued by it, such Issuing Lender shall immediately notify Company and Administrative Agent, and Company shall reimburse such Issuing Lender on or before the Business Day immediately following the date on which such drawing is honored (the "Reimbursement Date") in an amount in Dollars (which amount, in the case of a drawing under a Letter of Credit which is denominated in a currency other than Dollars, shall be calculated by reference to the applicable Exchange Rate) and in same day funds equal to the amount of such honored drawing; provided that, anything contained in this Agreement to the contrary notwithstanding, (i) unless Company shall have notified Administrative Agent and such Issuing Lender prior to 10:00 A.M. (New York City time) on the date such drawing is honored that Company intends to reimburse such Issuing Lender for the amount of such honored drawing with funds other than the proceeds of Revolving Loans, Company shall be deemed to have given a timely Notice of Borrowing to Administrative Agent requesting Lenders to make Revolving Loans that are Base Rate Loans on the Reimbursement Date in an amount in Dollars (which amount, in the case of a drawing under a Letter of Credit which is denominated in a currency other than Dollars, shall be calculated by reference to the applicable Exchange Rate) equal to the amount of such honored drawing and (ii) subject to satisfaction or waiver of the conditions specified in subsection 4.2B, Lenders shall, on the Reimbursement Date, make Revolving Loans that are Base Rate Loans in the amount of REVOLVING LOAN CREDIT AGREEMENT EXECUTION 70 78 such honored drawing, the proceeds of which shall be applied directly by Administrative Agent to reimburse such Issuing Lender for the amount of such honored drawing; and provided, further that if for any reason proceeds of Revolving Loans are not received by such Issuing Lender on the Reimbursement Date in an amount equal to the amount of such honored drawing, Company shall reimburse such Issuing Lender, on demand, in an amount in same day funds equal to the excess of the amount of such honored drawing over the aggregate amount of such Revolving Loans, if any, which are so received. Nothing in this subsection 3.3B shall be deemed to relieve any Lender from its obligation to make Revolving Loans on the terms and conditions set forth in this Agreement, and Company shall retain any and all rights it may have against any Lender resulting from the failure of such Lender ato make such Revolving Loans under this subsection 3.3B. C. Payment by Lenders of Unreimbursed Amounts Paid Under Letters of Credit. (1) Payment by Lenders. In the event that Company shall fail for any reason to reimburse any Issuing Lender as provided in subsection 3.3B in an amount (calculated, in the case of a drawing under a Letter of Credit denominated in a currency other than Dollars, by reference to the applicable Exchange Rate) equal to the amount of any drawing honored by such Issuing Lender under a Letter of Credit issued by it, such Issuing Lender shall promptly notify each other Lender of the unreimbursed amount of such honored drawing and of such other Lender's respective participation therein based on such Lender's Pro Rata Share. Each Lender shall make available tob such Issuing Lender an amount equal to its respective participation, in Dollars and in same day funds, at the office of such Issuing Lender specified in such notice, not later than 12:00 Noon (BNew York City time) on the first business day (under the laws of the jurisdiction in which such office of such Issuing Lender is located) after the date notified by such Issuing Lender. In the event that any Lender fails to make available to such Issuing Lender on such business day the amount of such Lender's participation in such Letter of Credit as provided in this subsection 3.3C, such Issuing Lender shall be entitled to recover such amount on demand from such Lender together with interest thereon at the rate customarily used by such Issuing Lender for the correction of ettors among banks for three Business Days and thereafter at the Base Rate. Nothing in this subsection 3.3C shall be deemed to prejudice the right of any Lender to recover from any Issuing Lender any amounts made available by such Lender to such Issuing Lender pursuant to this subsection 3.3C in the event that it is determined by the final judgment of a court of competent jurisdiction that the payment with respect to a Letter of Credit by such Issuing Lender in respect of which payment was made by such Lender constituted gross negligence or willful misconduct on the part of such Issuing Lender. (ii) Distribution to Lenders of Reimbursements Received From Company. In the event any Issuing Lender shall have been reimbursed by other Lenders pursuant to subsection 3.3C(i) for all or any portion of any drawing honored by such Issuing Lender under a Letter of Credit issued by it, such Issuing Lender shall REVOLVING LOAN CREDIT AGREEMENT EXECUTION 71 79 distribute to each other Lender which has paid all amounts payable by it under subsection 3.3C(i) with respect to such honored drawing such other Lender's Pro Rata Share of all payments subsequently received by such Issuing Lender from Company in reimbursement of such honored drawing when such payments are received. Any such distribution shall be made to a Lender at its primary address set forth below its name on the appropriate signature page hereof or at such other address as such Lender may request. D. Interest on Amounts Paid Under Letters of Credit. (i) Payment of Interest by Company. Company agrees to pay to each Issuing Lender, with respect to drawings honored under any Letters of Credit issued by it, interest on the amount paid by such Issuing Lender in respect of each such honored drawing from the date such drawing is honored to but excluding the date such amount is reimbursed by Company (including any such reimbursement out of the proceeds of Revolving Loans pursuant to subsection 3.3B) at a rate equal to (a) for the period from the date such drawing is honored to but excluding the Reimbursement Date, the rate then in effect under this Agreement with respect to Revolving Loans that are Base Rate Loans and (b) thereafter, a rate which is 2% per annum in excess of the rate of interest otherwise payable under this Agreement with respect to Revolving Loans that are Base Rate Loans. Interest payable pursuant to this subsection 3.3D(i) shall be computed on the basis of a 360-day year for the actual number of days elapsed in the period during which it accrues and shall be payable on demand or, if no demand is made, on the date on which the related drawing under a Letter of Credit is reimbursed in full. (ii) Distribution of Interest Payments by Issuing Lender. Promptly upon receipt by any Issuing Lender of any payment of interest pursuant to subsection 3.3D(i) with respect to a drawing honored under a Letter of Credit issued by it, (a) such Issuing Lender shall distribute to each other Lender, out of the interest received by such Issuing Lender in respect of the period from the date such drawing is honored to but excluding the date on which such Issuing Lender is reimbursed for the amount of such drawing (including any such reimbursement out of the proceeds of Revolving Loans pursuant to subsection 3.3B), the amount that such other Lender would have been entitled to receive in respect of the letter of credit fee that would have been payable in respect of such Letter of Credit for such period pursuant to subsection 3.2 if no drawing had been honored under such Letter of Credit, and (b) in the event such Issuing Lender shall have been reimbursed by other Lenders pursuant to subsection 3.3C(i) for all or any portion of such honored drawing, such Issuing Lender shall distribute to each other Lender which has paid all amounts payable by it under subsection 3.3C(i) with respect to such honored drawing such other Lender's Pro Rata Share of any interest received by such Issuing Lender in respect of that portion of such honored drawing so reimbursed by other Lenders for the period from the date on which such Issuing Lender was so reimbursed by other REVOLVING LOAN CREDIT AGREEMENT EXECUTION 72 80 Lenders to but excluding the date on which such portion of such honored drawing is reimbursed by Company. Any such distribution shall be made to a Lender at its primary address set forth below its name on the appropriate signature page hereof or at such other address as such Lender may request. 3.4 Obligations Absolute. The obligation of Company to reimburse each Issuing Lender for drawings honored under the Letters of Credit issued by it and to repay any Revolving Loans made by Lenders pursuant to subsection 3.3B and the obligations of Lenders under subsection 3.3C(i) shall be unconditional and irrevocable and shall be paid strictly in accordance with the terms of this Agreement under all circumstances including any of the following circumstances: (i) any lack of validity or enforceability of any Letter of Credit; (ii) the existence of any claim, set-off, defense or other right which Company or any Lender may have at any time against a beneficiary or any transferee of any Letter of Credit (or any Persons for whom any such transferee may be acting), any Issuing Lender or other Lender or any other Person or, in the case of a Lender, against Company, whether in connection with this Agreement, the transactions contemplated herein or any unrelated transaction (including any underlying transaction between Company or one of its Subsidiaries and the beneficiary for which any Letter of Credit was procured); (iii) any draft or other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (iv) payment by the applicable Issuing Lender under any Letter of Credit against presentation of a draft or other document which does not substantially comply with the terms of such Letter of Credit; (v) any adverse change in the business, operations, properties, assets, condition (financial or otherwise) or prospects of Company or any of its Subsidiaries; (vi) any breach of this Agreement or any other Loan Document by any party thereto; (vii) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing; or (viii) the fact that an Event of Default or a Potential Event of Default shall have occurred and be continuing; REVOLVING LOAN CREDIT AGREEMENT EXECUTION 73 81 provided, in each case, that payment by the applicable Issuing Lender under the applicable Letter of Credit shall not have constituted gross negligence or willful misconduct of such Issuing Lender under the circumstances in question (as determined by a final judgment of a court of competent jurisdiction). 3.5 Indemnification; Nature of Issuing Lenders' Duties. A. Indemnification. In addition to amounts payable as provided in subsection 3.6, Company hereby agrees to protect, indemnify, pay and save harmless each Issuing Lender from and against any and all claims, demands, liabilities, damages, losses, costs, charges and expenses (including reasonable fees, expenses and disbursements of counsel and allocated costs of internal counsel) which such Issuing Lender may incur or be subject to as a consequence, direct or indirect, of (i) the issuance of any Letter of Credit by such Issuing Lender, other than as a result of (a) the gross negligence or willful misconduct of such Issuing Lender as determined by a final judgment of a court of competent jurisdiction or (b) subject to the following clause (ii), the wrongful dishonor by such Issuing Lender of a proper demand for payment made under any Letter of Credit issued by it or (ii) the failure of such Issuing Lender to honor a drawing under any such Letter of Credit as a result of any act or omission, whether rightful or wrongful, of any present or future de jure or de facto government or governmental authority (all such acts or omissions herein called "Governmental Acts"). B. Nature of Issuing Lenders' Duties. As between Company and any Issuing Lender, Company assumes all risks of the acts and omissions of, or misuse of the Letters of Credit issued by such Issuing Lender by, the respective beneficiaries of such Letters of Credit. In furtherance and not in limitation of the foregoing, such Issuing Lender shall not be responsible for: (i) the form, validity, sufficiency, accuracy, genuineness or legal effect of any document submitted by any party in connection with the application for and issuance of any such Letter of Credit, even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged; (ii) the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign any such Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason; (iii) failure of the beneficiary of any such Letter of Credit to comply fully with any conditions required in order to draw upon such Letter of Credit; (iv) errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise, whether or not they be in cipher; (v) errors in interpretation of technical terms; (vi) any loss or delay in the transmission or otherwise of any document required in order to make a drawing under any such Letter of Credit or of the proceeds thereof; (vii) the misapplication by the beneficiary of any such Letter of Credit of the proceeds of any drawing under such Letter of Credit; or (viii) any consequences arising from causes beyond the control of such Issuing Lender, including any Governmental Acts, and none of the above shall affect or impair, or prevent the vesting of, any of such Issuing Lender's rights or powers hereunder. REVOLVING LOAN CREDIT AGREEMENT EXECUTION 74 82 In furtherance and extension and not in limitation of the specific provisions set forth in the first paragraph of this subsection 3.5B, any action taken or omitted by any Issuing Lender under or in connection with the Letters of Credit issued by it or any documents and certificates delivered thereunder, if taken or omitted in good faith, shall not put such Issuing Lender under any resulting liability to Company. Notwithstanding anything to the contrary contained in this subsection 3.5, Company shall retain any and all rights it may have against any Issuing Lender for any liability arising solely out of the gross negligence or willful misconduct of such Issuing Lender, as determined by a final judgment of a court of competent jurisdiction. 3.6 Increased Costs and Taxes Relating to Letters of Credit. Subject to the provisions of subsection 2.7B (which shall be controlling with respect to the matters covered thereby and to the extent a Lender is not entitled to payment under the terms of Section 2.7B, it shall not be entitled to payment pursuant to this section), in the event that any Issuing Lender or Lender shall determine (which determination shall, absent manifest error, be final and conclusive and binding upon all parties hereto) that any law, treaty or governmental rule, regulation or order, or any change therein or in the interpretation, administration or application thereof (including the introduction of any new law, treaty or governmental rule, regulation or order), or any determination of a court or governmental authority, in each case that becomes effective after the date hereof, or compliance by any Issuing Lender or Lender with any guideline, request or directive issued or made after the date hereof by any central bank or other governmental or quasi-governmental authority (whether or not having the force of law): (i) subjects such Issuing Lender or Lender (or its applicable lending or letter of credit office) to any additional Tax (other than any Tax on the overall net income of such Issuing Lender or Lender) with respect to the issuing or maintaining of any Letters of Credit or the purchasing or maintaining of any participations therein or any other obligations under this Section 3, whether directly or by such being imposed on or suffered by any particular Issuing Lender; (ii) imposes, modifies or holds applicable any reserve (including any marginal, emergency, supplemental, special or other reserve), special deposit, compulsory loan, FDIC insurance or similar requirement in respect of any Letters of Credit issued by any Issuing Lender or participations therein purchased by any Lender; or (iii) imposes any other condition (other than with respect to a Tax matter) on or affecting such Issuing Lender or Lender (or its applicable lending or letter of credit office) regarding this Section 3 or any Letter of Credit or any participation therein; REVOLVING LOAN CREDIT AGREEMENT EXECUTION 75 83 and the result of any of the foregoing is to increase the cost to such Issuing Lender or Lender of agreeing to issue, issuing or maintaining any Letter of Credit or agreeing to purchase, purchasing or maintaining any participation therein or to reduce any amount received or receivable by such Issuing Lender or Lender (or its applicable lending or letter of credit office) with respect thereto by an amount considered by such Issuing Lender or Lender to be material; then, in any case, Company shall promptly pay to such Issuing Lender or Lender, upon receipt of the statement referred to in the next sentence, such additional amount or amounts as may be necessary to compensate such Issuing Lender or Lender for any such increased cost or reduction in amounts received or receivable hereunder. Such Issuing Lender or Lender shall deliver to Company a written statement, setting forth in reasonable detail the basis for calculating the additional amounts owed to such Issuing Lender or Lender under this subsection 3.6, which statement shall be conclusive and binding upon all parties hereto absent manifest error. SECTION 4. CONDITIONS TO LOANS AND LETTERS OF CREDIT The obligations of Lenders to make Revolving Loans and the issuance of Letters of Credit hereunder are subject to the satisfaction of the following conditions. 4.1 Conditions to Initial Revolving Loans. The obligations of Lenders to make any Revolving Loans to be made on the Closing Date are, in addition to the conditions precedent specified in subsection 4.2, subject to prior or concurrent satisfaction of the following conditions: A. Loan Party Documents. On or before the Closing Date, Company shall, and shall cause each other Loan Party to, deliver to Lenders (or to Administrative Agent for Lenders with sufficient originally executed copies, where appropriate, for each Lender and its counsel) the following with respect to Company or such Loan Party, as the case may be, each, unless otherwise noted, dated the Closing Date: (i) Certified copies of the Certificate or Articles of Incorporation of such Person, together with a good standing certificate from the Secretary of State of its jurisdiction of incorporation and each other state in which such Person is qualified as a foreign corporation to do business and, to the extent generally available, a certificate or other evidence of good standing as to payment of any applicable franchise or similar taxes from the appropriate taxing authority of each of such jurisdictions, each dated a recent date prior to the Closing Date; (ii) Copies of the Bylaws of such Person, certified as of the Closing Date by such Person's corporate secretary or an assistant secretary; REVOLVING LOAN CREDIT AGREEMENT EXECUTION 76 84 (iii) Resolutions of the Board of Directors of such Person approving and authorizing the execution, delivery and performance of the Revolving Loan Documents and Related Agreements to which it is a party, certified as of the Closing Date by the corporate secretary or an assistant secretary of such Person as being in full force and effect without modification or amendment; (iv) Signature and incumbency certificates of the officers of such Person executing the Revolving Loan Documents to which it is a party; (v) Executed originals of the Revolving Loan Documents to which such Person is a party; and (vi) Such other documents as Arranger or Administrative Agent may reasonably request. B. No Material Adverse Effect. Since December 31, 1996, no Material Adverse Effect (in the opinions of Arranger and Administrative Agent) shall have occurred. C. Corporate and Capital Structure, Ownership, Management, Etc. (i) Corporate Structure. The corporate organizational structure of Company and its Subsidiaries, both before and after giving effect to the Merger, shall be as set forth on Schedule 4.1C annexed hereto. (ii) Capital Structure and Ownership. The capital structure and ownership of Company, both before and after giving effect to the Merger, shall be as set forth on Schedule 4.1C annexed hereto. (iii) Management; Employment Agreements. The management structure of Company after giving effect to the Merger shall be as set forth on Schedule 4.1C annexed hereto. Arranger and Administrative Agent shall have received duly executed copies of, and shall be satisfied with the form and substance of, the Employment Agreements as set forth on Schedule 4.1C annexed hereto. D. Proceeds of Debt and Equity Capitalization of Newco and Company. (i) Debt and Equity Capitalization of Company. On or before the Closing Date, Newco and Company shall have consummated the transactions contemplated under the Recapitalization Agreement, and in connection with such transactions, Company will have, following the Merger of Newco with and into Company, not less than $75,000,000 of equity financing, consisting of (i) approximately $7,500,000 in shares of Company retained by current shareholders, (ii) approximately $750,000 in cash common equity contributions by certain Management Investors (which contributions will be financed by Company and will be made following consummation REVOLVING LOAN CREDIT AGREEMENT EXECUTION 77 85 of the Merger) and (iii) approximately $67,500,000 in equity financing from Newco, which equity financing shall have been contributed to Newco immediately prior to the Merger as follows: (x) an amount not less than $61,875,000 in cash by GSII, (y) approximately $4,500,000 of Old Management Shares (valued at the highest cash price offered to public shareholders in the Acquisition) contributed by a certain Management Investor in exchange for common stock of Newco which will be converted in the Merger into shares of Company Common Stock and (z) approximately $1,125,000 of restricted shares of common stock of Newco granted to a certain Management Investor which will be converted in the Merger into shares of Company Common Stock. On or before the Closing Date, Company shall have issued and sold not less than $110,000,000 in aggregate principal amount of Senior Subordinated Notes. (ii) Use of Proceeds by Company. Company shall have provided evidence satisfactory to Arranger and Administrative Agent that the proceeds of the debt and equity capitalization of Company described in the immediately preceding clause (i) have been contributed or irrevocably committed, prior to the application of the proceeds of any Revolving Loans made on the Closing Date, to the payment of a portion of the Recapitalization Financing Requirements. E. Related Agreements. (i) Form of Senior Subordinated Note Indenture. The Senior Subordinated Note Indenture shall be in the form that has been approved by Arranger and Administrative Agent or that would otherwise have been permitted to be made pursuant to subsection 7.14B if the Senior Subordinated Notes were issued and outstanding at the time of any such change. (ii) Approval of Certain Related Agreements. The Recapitalization Agreement, the Certificate of Merger, the Stockholders Agreement, the Voting Agreement, the Employment Agreements and the Tax Indemnification Agreement shall each be satisfactory in form and substance to Arranger and Administrative Agent. (iii) Related Agreements in Full Force and Effect. Arranger and Administrative Agent shall each have received a fully executed or conformed copy of each Related Agreement (including all schedules and exhibits thereto) and any material documents executed in connection therewith, and each Related Agreement shall be in full force and effect and no provision thereof shall have been modified or waived in any respect determined by Arranger or Administrative Agent to be material, in each case without the consent of Arranger and Administrative Agent. REVOLVING LOAN CREDIT AGREEMENT EXECUTION 78 86 F. Matters Relating to Existing Indebtedness of Company and its Subsidiaries. (i) Termination of Existing Credit Agreements and Related Liens; Existing Letters of Credit. On the Closing Date, Company and its Subsidiaries shall have (a) repaid in full all Indebtedness outstanding under the Existing Credit Agreements as set forth on Schedule 4.1F (the aggregate principal amount of which Indebtedness shall not exceed $48,000,000), (b) terminated any commitments to lend or make other extensions of credit thereunder, (c) delivered to Arranger and Administrative Agent all documents or instruments necessary to release all Liens securing Indebtedness or other obligations of Company and its Subsidiaries thereunder, and (d) made arrangements satisfactory to Arranger and Administrative Agent with respect to the cancellation of any letters of credit outstanding thereunder or the issuance of Letters of Credit to support the obligations of Company and its Subsidiaries with respect thereto. (ii) Existing Indebtedness to Remain Outstanding. Arranger and Administrative Agent shall have received an Officers' Certificate of Company stating that, after giving effect to the transactions described in this subsection 4.1F, the Indebtedness of Loan Parties (other than Indebtedness under the Loan Documents and the Senior Subordinated Notes) shall consist of (a) approximately $6,379,156 in aggregate principal amount of outstanding Indebtedness described in Part I of Schedule 7.1 annexed hereto and (b) Indebtedness in an aggregate amount not to exceed $4,643,679 in respect of Capital Leases described in Part II of Schedule 7.1 annexed hereto. The terms and conditions of all such Indebtedness shall be in form and in substance satisfactory to Arranger, Administrative Agent and Requisite Lenders. G. Necessary Governmental Authorizations and Consents; Expiration of Waiting Periods, Etc. Company shall have obtained all Governmental Authorizations and all consents of other Persons, in each case that are necessary or advisable in connection with the Merger, the other transactions contemplated by the Loan Documents and the Related Agreements, and the continued operation of the business conducted by Company and its Subsidiaries in substantially the same manner as conducted prior to the consummation of the Merger, and each of the foregoing shall be in full force and effect, in each case other than those the failure to obtain or maintain which, either individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect. All applicable waiting periods shall have expired without any action being taken or threatened by any competent authority which would restrain, prevent or otherwise impose adverse conditions on the Merger or the financing thereof. No action, request for stay, petition for review or rehearing, reconsideration, or appeal with respect to any of the foregoing shall be pending, and the time for any applicable agency to take action to set aside its consent on its own motion shall have expired. REVOLVING LOAN CREDIT AGREEMENT EXECUTION 79 87 H. Consummation of Merger. (i) All conditions to the Merger set forth in the Recapitalization Agreement shall have been satisfied or the fulfillment of any such conditions shall have been waived with the consent of Arranger, Administrative Agent and Requisite Lenders; (ii) the Merger shall have become effective in accordance with the terms of the Recapitalization Agreement, the Certificate of Merger and the laws of the State of Delaware; (iii) Transaction Costs shall not exceed an amount previously agreed to by Arranger, and Arranger shall have received evidence to its satisfaction to such effect; and (iv) Arranger and Administrative Agent shall have received an Officers' Certificate of Company to the effect set forth in clauses (i)-(iii) above. I. Security Interests in Personal and Mixed Property. Collateral Agent shall have received evidence satisfactory to it that Company and Subsidiary Guarantors shall have taken or caused to be taken all such actions, executed and delivered or caused to be executed and delivered all such agreements, documents and instruments, and made or caused to be made all such filings and recordings (other than the filing or recording of items described in clauses (iii), (iv) and (v) below) that may be necessary or, in the opinion of Collateral Agent, desirable in order to create in favor of Collateral Agent, for the benefit of Secured Parties, a valid and (upon such filing and recording) perfected First Priority security interest in the entire personal and mixed property Collateral. Such actions shall include the following: (i) Schedules to Collateral Documents. Delivery to Collateral Agent of accurate and complete schedules to all of the applicable Collateral Documents. (ii) Stock Certificates and Instruments. Delivery to Collateral Agent of (a) certificates (which certificates shall be accompanied by irrevocable undated stock powers, duly endorsed in blank and otherwise satisfactory in form and substance to Collateral Agent) representing all capital stock pledged pursuant to the Company Pledge Agreement and the Subsidiary Pledge Agreements and (b) all promissory notes or other instruments (duly endorsed, where appropriate, in a manner satisfactory to Collateral Agent) evidencing any Collateral; (iii) Lien Searches and UCC Termination Statements. Delivery to Arranger and Administrative Agent of (a) the results of a recent search, by a Person satisfactory to Arranger and Administrative Agent, of all effective UCC financing statements and fixture filings and all judgment and tax lien filings which may have REVOLVING LOAN CREDIT AGREEMENT EXECUTION 80 88 been made with respect to any personal or mixed property of any Loan Party, together with copies of all such filings disclosed by such search, and (b) UCC termination statements duly executed by all applicable Persons for filing in all applicable jurisdictions as may be necessary to terminate any effective UCC financing statements or fixture filings disclosed in such search (other than any such financing statements or fixture filings in respect of Liens permitted to remain outstanding pursuant to the terms of this Agreement). (iv) UCC Financing Statements and Fixture Filings. Delivery to Collateral Agent of UCC financing statements and, where appropriate, fixture filings, duly executed by each applicable Loan Party with respect to all personal and mixed property Collateral of such Loan Party, for filing in all jurisdictions as may be necessary or, in the reasonable opinion of Collateral Agent, desirable to perfect the security interests created in such Collateral pursuant to the Collateral Documents; (v) Auxiliary Pledge Agreements. Execution and delivery to Collateral Agent of Auxiliary Pledge Agreements with respect to the stock of all Foreign Subsidiaries organized under the laws of all jurisdictions with respect to which Collateral Agent deems an Auxiliary Pledge Agreement necessary or advisable to perfect or otherwise protect the First Priority Liens granted to Collateral Agent on behalf of Secured Parties in such stock, and the taking of all such other actions under the laws of such jurisdictions as Collateral Agent may deem necessary or advisable to perfect or otherwise protect such Liens; and (vi) Opinions of Local Counsel. Delivery to Arranger and Administrative Agent of (a) an opinion of counsel (which counsel shall be reasonably satisfactory to Arranger and Administrative Agent) under the laws of each state in the United States in which any personal or mixed property Collateral with an aggregate value in excess of $500,000 is located with respect to the creation and perfection of the security interests in favor of Collateral Agent in such Collateral and such other matters governed by the laws of such jurisdiction regarding such security interests as Arranger and Administrative Agent may reasonably request and (b) an opinion of counsel (which counsel shall be reasonably satisfactory to Arranger and Administrative Agent) under the laws of Quebec, Canada and England as to the perfection of the pledge of stock of Foreign Subsidiaries organized in those jurisdictions, in each case in form and substance reasonably satisfactory to Arranger and Administrative Agent. J. Environmental Reports. Arranger and Administrative Agent shall have received such reports and other information, in form, scope and substance satisfactory to Arranger and Administrative Agent, as Arranger and Administrative Agent may reasonably require regarding environmental matters relating to Company and its Subsidiaries and the Facilities, which reports shall include (i) that certain Environmental Assessment dated October 7, 1997, prepared by Pilko & Associates, Inc. for Confetti Acquisitions, Inc. REVOLVING LOAN CREDIT AGREEMENT EXECUTION 81 89 \covering the Facilities located at Anaheim, California, Chester, New York, East Providence, Rhode Island, Harriman, New York, Louisville, Kentucky, Montreal (Kirkland), Quebec, Canada and Newburgh, New York, (the "Environmental Assessment Report"), and (ii) a letter from Pilko & Associates, Inc. in form and substance reasonably satisfactory to Administrative Agent allowing Arranger, Administrative Agent, Collateral Agent and the Lenders to rely on the Environmental Assessment Report to the same extent that Newco and Company may rely thereon. K. Financial Statements; Pro Forma Balance Sheet. On or before the Closing Date, Lenders shall have received from Company (i) audited financial statements of Company and its Subsidiaries for Fiscal Years ended December 31, 1994, 1995 and 1996, consisting of balance sheets and the related consolidated statements of income, stockholders' equity and cash flows for such Fiscal Years, (ii) unaudited financial statements of Company and its Subsidiaries as at September 30, 1997, consisting of a balance sheet and the related consolidated statements of income, stockholders' equity and cash flows for the nine-month period ending on such date, all in reasonable detail and certified by the chief financial officer of Company that they fairly present the financial condition of Company and its Subsidiaries as at the dates indicated and the results of their operations and their cash flows for the periods indicated, subject to changes resulting from audit and normal year-end adjustments, (iii) pro forma consolidated balance sheets of Company and its Subsidiaries as of November 30, 1997, prepared in accordance with GAAP and reflecting the consummation of the Merger, the related financings and the other transactions contemplated by the Loan Documents and the Related Agreements, which pro forma financial statements shall be in form and substance satisfactory to Lenders and (iv) pro forma financial statements (including consolidated balance sheets, statements of operations, stockholders' equity and cash flows) of Company and its Subsidiaries for the 10-year period commencing on the Closing Date, which pro forma financial statements shall be in form and substance satisfactory to Lenders. L. Solvency Assurances. On the Closing Date, Arranger, Administrative Agent and Lenders shall have received (i) a letter from Houlihan, Lokey, Howard & Zukin, dated the Closing Date and addressed to Arranger, Administrative Agent and Lenders, in form and substance satisfactory to Arranger and Administrative Agent and with appropriate attachments, and (ii) a Financial Condition Certificate dated the Closing Date, substantially in the form of Exhibit XI annexed hereto and with appropriate attachments, in each case demonstrating that, after giving effect to the consummation of the Merger, the related financings and the other transactions contemplated by the Loan Documents and the Related Agreements, Company will be Solvent. M. Evidence of Insurance. Collateral Agent shall have received a certificate from Company's insurance broker or other evidence satisfactory to it that all insurance required to be maintained pursuant to subsection 6.4 is in full force and effect and that Collateral Agent on behalf of Secured Parties has been named as additional insured and/or loss payee thereunder to the extent required under subsection 6.4. REVOLVING LOAN CREDIT AGREEMENT EXECUTION 82 90 N. Opinions of Counsel to Loan Parties. Lenders and their respective counsel shall have received (i) originally executed copies of one or more favorable written opinions of (a) Wachtell, Lipton, Rosen & Katz, special counsel for Loan Parties, in form and substance reasonably satisfactory to Administrative Agent and Arranger and its counsel, dated as of the Closing Date and setting forth substantially the matters in the opinions designated in Exhibit VII-A annexed hereto and as to such other matters as Administrative Agent or Arranger and acting on behalf of Lenders may reasonably request and (b) Kurzman & Eisenberg counsel for Loan Parties, in form and substance reasonably satisfactory to Administrative Agent and Arranger and its counsel, dated as of the Closing Date and setting forth substantially the matters in the opinions designated in Exhibit VII-B annexed hereto and as to such other matters as Administrative Agent or Arranger and acting on behalf of Lenders may reasonably request, and (ii) evidence satisfactory to Arranger and Administrative Agent that Company has requested such counsel to deliver such opinions to Lenders. O. Opinions of Arranger and Administrative Agent's Counsel. Lenders shall have received originally executed copies of one or more favorable written opinions of O'Melveny & Myers LLP, counsel to Arranger and Administrative Agent, dated as of the Closing Date, substantially in the form of Exhibit VIII annexed hereto and as to such other matters as Arranger and Administrative Agent may reasonably request. P. Fees. Company shall have paid to Arranger and Administrative Agent, for distribution (as appropriate) to Arranger, Administrative Agent and Lenders, the fees payable on the Closing Date referred to in subsection 2.3. Q. Representations and Warranties; Performance of Agreements. Company shall have delivered to Arranger and Administrative Agent an Officers' Certificate, in form and substance satisfactory to Arranger and Administrative Agent, to the effect that the representations and warranties in Section 5 hereof are true, correct and complete in all material respects on and as of the Closing Date to the same extent as though made on and as of that date (or, to the extent such representations and warranties specifically relate to an earlier date, that such representations and warranties were true, correct and complete in all material respects on and as of such earlier date) and that Company shall have performed in all material respects all agreements and satisfied all conditions which this Agreement provides shall be performed or satisfied by it on or before the Closing Date except as otherwise disclosed to and agreed to in writing by Arranger, Administrative Agent and Requisite Lenders. R. Completion of Proceedings. All corporate and other proceedings taken or to be taken in connection with the transactions contemplated hereby and all documents incidental thereto not previously found acceptable by Administrative Agent, acting on behalf of Lenders, or Arranger and its counsel shall be satisfactory in form and substance to Administrative Agent and Arranger and such counsel, and Administrative Agent, Arranger REVOLVING LOAN CREDIT AGREEMENT EXECUTION 83 91 and such counsel shall have received all such counterpart originals or certified copies of such documents as Administrative Agent or Arranger may reasonably request. S. Borrowing Base Certificate. Administrative Agent shall have received a Borrowing Base Certificate dated as of November 30, 1997, in form, scope and substance satisfactory to Arranger and Administrative Agent. T. Cash Management System. Administrative Agent shall have received evidence satisfactory to it that Company and its Subsidiaries have established and maintain a cash management system in form and substance reasonably satisfactory to the Administrative Agent and in accordance with subsection 6.11. U. Collateral Access Agreements. Company and each applicable Subsidiary Guarantor shall have used its reasonable good faith efforts to obtain, in the case of any Leasehold Property or any real property in which Company or any of its Subsidiaries owns or holds a fee interest and which is subject to a mortgage held by a third-party mortgagee holding inventory or equipment with an aggregate fair market value exceeding $500,000, a Collateral Access Agreement with respect thereto, in each case in form and substance reasonably satisfactory to Arranger and Administrative Agent. V. AXEL Credit Agreement. Arranger and Administrative Agent shall each have received a fully executed or conformed copy of the AXEL Credit Agreement satisfactory in form and substance to Arranger and Administrative Agent. The AXEL Credit Agreement shall be in full force and effect and the conditions to advances of the AXELs thereunder shall have been satisfied or waived by the AXEL Lenders. 4.2 Conditions to All Revolving Loans. The obligations of Lenders to make Revolving Loans on each Funding Date are subject to the following further conditions precedent: A. Administrative Agent shall have received before that Funding Date, in accordance with the provisions of subsection 2.1B, an originally executed Notice of Borrowing, in each case signed by the chief executive officer, the chief financial officer or the treasurer or corporate controller of Company or by any executive officer of Company designated by any of the above-described officers on behalf of Company in a writing delivered to Administrative Agent. B. As of that Funding Date: (i) The representations and warranties contained herein and in the other Revolving Loan Documents shall be true, correct and complete in all material respects on and as of that Funding Date to the same extent as though made on and as of that date, except to the extent such representations and warranties specifically REVOLVING LOAN CREDIT AGREEMENT EXECUTION 84 92 relate to an earlier date, in which case such representations and warranties shall have been true, correct and complete in all material respects on and as of such earlier date; (ii) No event shall have occurred and be continuing or would result from the consummation of the borrowing contemplated by such Notice of Borrowing that would constitute an Event of Default or a Potential Event of Default; (iii) Each Loan Party shall have performed in all material respects all agreements and satisfied all conditions which this Agreement provides shall be performed or satisfied by it on or before that Funding Date; (iv) No order, judgment or decree of any court, arbitrator or governmental authority shall purport to enjoin or restrain any Lender from making the Revolving Loans to be made by it on that Funding Date; (v) The making of the Revolving Loans requested on such Funding Date shall not violate any law including Regulation G, Regulation T, Regulation U or Regulation X of the Board of Governors of the Federal Reserve System; and (vi) There shall not be pending or, to the knowledge of Company, threatened, any action, suit, proceeding, governmental investigation or arbitration against or affecting Company or any of its Subsidiaries or any property of Company or any of its Subsidiaries that has not been disclosed by Company in writing pursuant to subsection 5.6 or 6.1(x) prior to the making of the last preceding Revolving Loans (or, in the case of the initial Revolving Loans, prior to the execution of this Agreement), and there shall have occurred no development not so disclosed in any such action, suit, proceeding, governmental investigation or arbitration so disclosed, that, in either event, in the opinion of Administrative Agent or of Requisite Lenders, would be expected to have a Material Adverse Effect; and no injunction or other restraining order shall have been issued and no hearing to cause an injunction or other restraining order to be issued shall be pending or noticed with respect to any action, suit or proceeding seeking to enjoin or otherwise prevent the consummation of, or to recover any damages or obtain relief as a result of, the transactions contemplated by this Agreement or the making of Revolving Loans hereunder. 4.3 Conditions to Letters of Credit. The issuance of any Letter of Credit hereunder (whether or not the applicable Issuing Lender is obligated to issue such Letter of Credit) is subject to the following conditions precedent: A. On or before the date of issuance of the initial Letter of Credit pursuant to this Agreement, the initial Revolving Loans shall have been made. REVOLVING LOAN CREDIT AGREEMENT EXECUTION 85 93 B. On or before the date of issuance of such Letter of Credit, Administrative Agent shall have received, in accordance with the provisions of subsection 3.1B(i), an originally executed Notice of Issuance of Letter of Credit, in each case signed by the chief executive officer, the chief financial officer or the treasurer or corporate controller of Company or by any executive officer of Company designated by any of the above-described officers on behalf of Company in a writing delivered to Administrative Agent, together with all other information specified in subsection 3.1B(i) and such other documents or information as the applicable Issuing Lender may reasonably require in connection with the issuance of such Letter of Credit. C. On the date of issuance of such Letter of Credit, all conditions precedent described in subsection 4.2B shall be satisfied to the same extent as if the issuance of such Letter of Credit were the making of a Revolving Loan and the date of issuance of such Letter of Credit were a Funding Date. SECTION 5. COMPANY'S REPRESENTATIONS AND WARRANTIES In order to induce Lenders to enter into this Agreement and to make the Revolving Loans, to induce Issuing Lenders to issue Letters of Credit and to induce other Lenders to purchase participations therein, Company represents and warrants to each Lender, on the date of this Agreement, on each Funding Date and on the date of issuance of each Letter of Credit, that the following statements are true, correct and complete: 5.1 Organization, Powers, Qualification, Good Standing, Business and Subsidiaries. A. Organization and Powers. Each Loan Party is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation as specified in Schedule 5.1 annexed hereto as it may be supplemented pursuant to subsection 6.1(xvi). Each Loan Party has all requisite corporate power and authority to own and operate its properties, to carry on its business as now conducted and as proposed to be conducted, to enter into the Revolving Loan Documents and Related Agreements to which it is a party and to carry out the transactions contemplated thereby. B. Qualification and Good Standing. Each Loan Party is qualified to do business and in good standing in every jurisdiction where its assets are located and wherever necessary to carry out its business and operations, except in jurisdictions where the failure to be so qualified or in good standing has not had and could not reasonably be expected to have a Material Adverse Effect. C. Conduct of Business. Company and its Subsidiaries are engaged only in the businesses permitted to be engaged in pursuant to subsection 7.14. REVOLVING LOAN CREDIT AGREEMENT EXECUTION 86 94 D. Subsidiaries. All of the Subsidiaries of Company as of the Closing Date are identified in Schedule 5.1 annexed hereto, as said Schedule 5.1 may be supplemented from time to time pursuant to the provisions of subsection 6.1(xvi). The capital stock of each of the Subsidiaries of Company identified in Schedule 5.1 annexed hereto (as so supplemented) is duly authorized, validly issued, fully paid and nonassessable and none of such capital stock constitutes Margin Stock. Each of the Subsidiaries of Company identified in Schedule 5.1 annexed hereto (as so supplemented) is a corporation duly organized, validly existing and in good standing under the laws of its respective jurisdiction of incorporation set forth therein, has all requisite corporate power and authority to own and operate its properties and to carry on its business as now conducted and as proposed to be conducted, and is qualified to do business and in good standing in every jurisdiction where its assets are located and wherever necessary to carry out its business and operations, in each case except where failure to be so qualified or in good standing or a lack of such corporate power and authority has not had and could not reasonably be expected to have a Material Adverse Effect. Schedule 5.1 annexed hereto (as so supplemented) correctly sets forth, as of the Closing Date, the ownership interest of Company and each of its Subsidiaries in each of the Subsidiaries of Company identified therein. 5.2 Authorization of Borrowing, etc. A. Authorization of Borrowing. The execution, delivery and performance of the Revolving Loan Documents and the Related Agreements have been duly authorized by all necessary corporate action on the part of each Loan Party that is a party thereto. B. No Conflict. The execution, delivery and performance by Loan Parties of the Revolving Loan Documents and the Related Agreements to which they are parties and the consummation of the transactions contemplated by the Revolving Loan Documents and such Related Agreements do not and will not (i) violate any provision of any law or any governmental rule or regulation applicable to Company or any of its Subsidiaries, the Certificate or Articles of Incorporation or Bylaws of Company or any of its Subsidiaries or any order, judgment or decree of any court or other agency of government binding on Company or any of its Subsidiaries, (ii) conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under any Contractual Obligation of Company or any of its Subsidiaries, except for any breach or default which could not reasonably be expected to have a Material Adverse Effect, (iii) result in or require the creation or imposition of any Lien upon any of the properties or assets of Company or any of its Subsidiaries (other than any Liens created under any of the Revolving Loan Documents in favor of Administrative Agent on behalf of Lenders), or (iv) require any approval of stockholders or any approval or consent of any Person under any Contractual Obligation of Company or any of its Subsidiaries, except for such approvals or consents which will be obtained on or before the Closing Date and disclosed in writing to Lenders and such consents the failure of which to receive could not reasonably be expected to have a Material Adverse Effect. REVOLVING LOAN CREDIT AGREEMENT EXECUTION 87 95 C. Governmental Consents. The execution, delivery and performance by Loan Parties of the Revolving Loan Documents and the Related Agreements to which they are parties and the consummation of the transactions contemplated by the Revolving Loan Documents and such Related Agreements do not and will not require any registration with, consent or approval of, or notice to, or other action to, with or by, any federal, state or other governmental authority or regulatory body the failure of which to receive could not reasonably be expected to cause a Material Adverse Effect. D. Binding Obligation. Each of the Revolving Loan Documents and Related Agreements has been duly executed and delivered by each Loan Party that is a party thereto and is the legally valid and binding obligation of such Loan Party, enforceable against such Loan Party in accordance with its respective terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditors' rights generally or by equitable principles relating to enforceability. E. Valid Issuance of Company Common Stock and Senior Subordinated Notes. (i) Company Common Stock. The Company Common Stock to be issued in the Merger on or before the Closing Date, when issued and delivered, will be duly and validly issued, fully paid and nonassessable. No stockholder of Company has or will have any preemptive rights to subscribe for any additional equity Securities of Company. The issuance and sale of such Company Common Stock, upon such issuance and sale, will either (a) have been registered or qualified under applicable federal and state securities laws or (b) be exempt therefrom. (ii) Senior Subordinated Notes. Company has the corporate power and authority to issue the Senior Subordinated Notes. The Senior Subordinated Notes, when issued and paid for, will be the legally valid and binding obligations of Company, enforceable against Company in accordance with their respective terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditors' rights generally or by equitable principles relating to enforceability. The subordination provisions of the Senior Subordinated Notes will be enforceable against the holders thereof and the Revolving Loans and all other monetary Obligations hereunder are and will be within the definition of "Senior Debt" and "Designated Senior Debt" included in such provisions. The Senior Subordinated Notes, when issued and sold, will either (a) have been registered or qualified under applicable federal and state securities laws or (b) be exempt therefrom. 5.3 Financial Condition. Company has heretofore delivered to Lenders, at Lenders' request, the following financial statements and information: (i) the audited consolidated balance sheets of Company and its Subsidiaries as at December 31, 1996 and the related consolidated REVOLVING LOAN CREDIT AGREEMENT EXECUTION 88 96 statements of income, stockholders' equity and cash flows of Company and its Subsidiaries for the Fiscal Year then ended and (ii) the unaudited consolidated balance sheets of Company and its Subsidiaries as at September 30, 1997 and the related unaudited consolidated statements of income, stockholders' equity and cash flows of Company and its Subsidiaries for the nine-months then ended. All such statements were prepared in conformity with GAAP and fairly present, in all material respects, the financial position (on a consolidated basis) of the entities described in such financial statements as at the respective dates thereof and the results of operations and cash flows (on a consolidated basis) of the entities described therein for each of the periods then ended, subject, in the case of any such unaudited financial statements, to changes resulting from audit and normal year-end adjustments. Company does not (and will not following the funding of the initial Revolving Loans) have any Contingent Obligation, contingent liability or liability for taxes, long-term lease or unusual forward or long-term commitment that is not reflected in the foregoing financial statements or the notes thereto and which in any such case is material in relation to the business, operations, properties, assets, condition (financial or otherwise) or prospects of Company or any of its Subsidiaries. 5.4 No Material Adverse Change; No Restricted Junior Payments. Since December 31, 1996, no event or change has occurred that has caused or evidences, either in any case or in the aggregate, a Material Adverse Effect. Other than with respect to the Recapitalization Consideration and the repayment of debt outstanding prior to the effectiveness of the Merger, neither Company nor any of its Subsidiaries has directly or indirectly declared, ordered, or set apart any sum or property which has not yet been paid for, any Restricted Junior Payment or agreed to do so except as permitted by subsection 7.5. 5.5 Title to Properties; Liens; Real Property. A. Title to Properties; Liens. Except for Permitted Encumbrances and Liens, Company and its Subsidiaries have (i) good, sufficient and legal title to (in the case of fee interests in real property), (ii) valid leasehold interests in (in the case of leasehold interests in real or personal property), or (iii) good title to (in the case of all other personal property), all of their respective properties and assets reflected in the financial statements referred to in subsection 5.3 or in the most recent financial statements delivered pursuant to subsection 6.1, in each case except for assets disposed of since the date of such financial statements in the ordinary course of business or as otherwise permitted under subsection 7.7. All such properties and assets are free and clear of Liens other than Permitted Encumbrances and other Liens permitted under this Agreement. B. Real Property. As of the Closing Date, Schedule 5.5 annexed hereto contains a true, accurate and complete list of (i) all Fee Properties and (ii) all leases, subleases or assignments of leases (together with all amendments, modifications, supplements, renewals or extensions of any thereof) affecting each Real Property Asset of any Loan Party, REVOLVING LOAN CREDIT AGREEMENT EXECUTION 89 97 regardless of whether such Loan Party is the landlord or tenant (whether directly or as an assignee or successor in interest) under such lease, sublease or assignment. As of the Closing Date, except as specified in Schedule 5.5 annexed hereto, each agreement listed in clause (ii) of the immediately preceding sentence is in full force and effect and Company does not have knowledge of any material default that has occurred and is continuing thereunder, and each such agreement constitutes the legally valid and binding obligation of each applicable Loan Party, enforceable against such Loan Party in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditors' rights generally or by equitable principles. 5.6 Litigation; Adverse Facts. Except as set forth in Schedule 5.6 annexed hereto, there are no actions, suits, proceedings, arbitrations or governmental investigations (whether or not purportedly on behalf of Company or any of its Subsidiaries) at law or in equity, or before or by any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign (including any Environmental Claims) that are pending or, to the knowledge of Company, threatened against or affecting Company or any of its Subsidiaries or any property of Company or any of its Subsidiaries and that, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect. Neither Company nor any of its Subsidiaries (i) is in violation of any applicable laws (including Environmental Laws) that, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect, or (ii) is subject to or in default with respect to any final judgments, writs, injunctions, decrees, rules or regulations of any court or any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, that, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect. 5.7 Payment of Taxes. Except to the extent permitted by subsection 6.3, all material tax returns and reports of Company and its Subsidiaries required to be filed by any of them have been timely filed, and all taxes shown on such tax returns to be due and payable and all assessments, fees and other governmental charges upon Company and its Subsidiaries and upon their respective properties, assets, income, businesses and franchises which are due and payable have been paid when due and payable. Company knows of no proposed material tax assessment against Company or any of its Subsidiaries which is not being actively contested by Company or such Subsidiary in good faith and by appropriate proceedings; provided that such reserves or other appropriate provisions, if any, as shall be required in conformity with GAAP shall have been made or provided therefor. REVOLVING LOAN CREDIT AGREEMENT EXECUTION 90 98 5.8 Performance of Agreements; Materially Adverse Agreements; Material Contracts. A. Neither Company nor any of its Subsidiaries is in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any of its Contractual Obligations, and no condition exists that, with the giving of notice or the lapse of time or both, would constitute such a default, except where the consequences, direct or indirect, of such default or defaults, if any, would not have a Material Adverse Effect. B. Neither Company nor any of its Subsidiaries is a party to or is otherwise subject to any agreements or instruments or any charter or other internal restrictions which, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect. C. Schedule 5.8 contains a true, correct and complete list of all the Material Contracts in effect on the Closing Date. Except as described on Schedule 5.8, all such Material Contracts are in full force and effect and no defaults currently exist thereunder other than any such defaults or failure to be in force and effect which could not reasonably be expected to result in a Material Adverse Effect. 5.9 Governmental Regulation. Neither Company nor any of its Subsidiaries is subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act, the Interstate Commerce Act or the Investment Company Act of 1940 or under any other federal or state statute or regulation which may limit its ability to incur Indebtedness or which may otherwise render all or any portion of the Obligations unenforceable. 5.10 Securities Activities. A. Neither Company nor any of its Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying any Margin Stock. B. Following application of the proceeds of each AXEL under the AXEL Credit Agreement and the Revolving Loan, not more than 25% of the value of the assets (either of Company only or of Company and its Subsidiaries on a consolidated basis) subject to the provisions of subsection 7.2 or 7.7 or subject to any restriction contained in any agreement or instrument, between Company and any Lender or any Affiliate of any Lender, relating to Indebtedness and within the scope of subsection 8.2, will be Margin Stock. 5.11 Employee Benefit Plans. A. Company, each of its Subsidiaries and each of their respective ERISA Affiliates are in compliance with all applicable provisions and requirements of ERISA and REVOLVING LOAN CREDIT AGREEMENT EXECUTION 91 99 the regulations and published interpretations thereunder with respect to each Employee Benefit Plan, and have performed all their obligations under each Employee Benefit Plan. Each Employee Benefit Plan which is intended to qualify under Section 401(a) of the Internal Revenue Code is so qualified. B. No ERISA Events have occurred or are reasonably expected to occur which could reasonably be expected to result in liabilities to the Company or any of its Subsidiaries in excess of $1,000,000 in the aggregate. C. As of the most recent valuation date for any Pension Plan, the excess of (1) the actuarial present value (determined on the basis of reasonable assumptions employed by the independent actuary for each Pension Plan for purposes of Section 412 of the Internal Revenue Code or Section 302 of ERISA) of benefit liabilities (as defined in Section 4001(a)(16) of ERISA) over (2) the fair market value of the assets of such Pension Plan, individually or in the aggregate for all Pension Plans (excluding for purposes of such computation any Pension Plans with respect to which assets exceed benefit liabilities), does not exceed $5,000,000. D. As of the most recent valuation date for each Multiemployer Plan for which the actuarial report is available, the potential liability of Company, its Subsidiaries and their respective ERISA Affiliates for a complete withdrawal from such Multiemployer Plan (within the meaning of Section 4203 of ERISA), when aggregated with such potential liability for a complete withdrawal from all Multiemployer Plans, based on information available pursuant to Section 4221(e) of ERISA, does not exceed $5,000,000. 5.12 Certain Fees. Except as described in the Confidential Information Memorandum, no broker's or finder's fee or commission will be payable with respect to this Agreement or any of the transactions contemplated hereby, and Company hereby indemnifies Lenders against, and agrees that it will hold Lenders harmless from, any claim, demand or liability for any such broker's or finder's fees alleged to have been incurred in connection herewith or therewith and any expenses (including reasonable fees, expenses and disbursements of counsel) arising in connection with any such claim, demand or liability. 5.13 Environmental Protection. Except as set forth in Schedule 5.13 annexed hereto: (i) neither Company nor any of its Subsidiaries nor any of their respective Facilities or operations are subject to any outstanding written order, consent decree or settlement agreement with any Person relating to (a) any Environmental Law, (b) any Environmental Claim, or (c) any Hazardous Materials Activity; REVOLVING LOAN CREDIT AGREEMENT EXECUTION 92 100 (ii) neither Company nor any of its Subsidiaries has received any letter or request for information under Section 104 of the Comprehensive Environmental Response, Compensation, and Liability Act (42 U.S.C. ss. 9604) or any comparable state law; (iii) there are and, to Company's knowledge, have been no conditions, occurrences, or Hazardous Materials Activities which could reasonably be expected to form the basis of an Environmental Claim against Company or any of its Subsidiaries; (iv) neither Company nor any of its Subsidiaries nor, to Company's knowledge, any predecessor of Company or any of its Subsidiaries has filed any notice under any Environmental Law indicating past or present treatment of Hazardous Materials at any Facility, and none of Company's or any of its Subsidiaries' operations involves the generation, transportation, treatment, storage or disposal of hazardous waste, as defined under 40 C.F.R. Parts 260-270 or any state equivalent; (v) compliance with all current or reasonably foreseeable future requirements pursuant to or under Environmental Laws will not, individually or in the aggregate, have a reasonable possibility of giving rise to a Material Adverse Effect. Notwithstanding anything in this subsection 5.13 to the contrary, no event or condition has occurred or is occurring with respect to Company or any of its Subsidiaries relating to any Environmental Law, any Release of Hazardous Materials, or any Hazardous Materials Activity, including any matter disclosed on Schedule 5.13 annexed hereto, which individually or in the aggregate has had or could reasonably be expected to have a Material Adverse Effect. 5.14 Employee Matters. There is no strike or work stoppage in existence or threatened involving Company or any of its Subsidiaries that could reasonably be expected to have a Material Adverse Effect. 5.15 Solvency. Each Loan Party is and, upon the incurrence of any Obligations by such Loan Party on any date on which this representation is made, will be, Solvent. 5.16 Matters Relating to Collateral. A. Creation, Perfection and Priority of Liens. The execution and delivery of the Collateral Documents by Loan Parties, together with (i) the actions taken on or prior to the REVOLVING LOAN CREDIT AGREEMENT EXECUTION 93 101 date hereof pursuant to subsections 4.1I, 6.8 and 6.9 and (ii) the delivery to Collateral Agent of any Pledged Collateral not delivered to Collateral Agent at the time of execution and delivery of the applicable Collateral Document (all of which Pledged Collateral has been so delivered) are effective to create in favor of Collateral Agent for the benefit of Secured Parties, as security for the respective Secured Obligations (as defined in the applicable Collateral Document in respect of any Collateral), a valid and perfected First Priority Lien on all of the Collateral, and all filings and other actions necessary or desirable to perfect and maintain the perfection and First Priority status of such Liens have been duly made or taken and remain in full force and effect, other than the filing of any UCC financing statements delivered to Collateral Agent for filing (but not yet filed) and the periodic filing of UCC continuation statements in respect of UCC financing statements filed by or on behalf of Collateral Agent. B. Governmental Authorizations. No authorization, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for either (i) the pledge or grant by any Loan Party of the Liens purported to be created in favor of Collateral Agent pursuant to any of the Collateral Documents or (ii) the exercise by Collateral Agent of any rights or remedies in respect of any Collateral (whether specifically granted or created pursuant to any of the Collateral Documents or created or provided for by applicable law), except for filings or recordings contemplated by subsection 5.16A and except as may be required, in connection with the disposition of any Pledged Collateral, by laws generally affecting the offering and sale of securities. C. Absence of Third-Party Filings. Except such as may have been filed in favor of Collateral Agent as contemplated by subsection 5.16A, no effective UCC financing statement, fixture filing or other instrument similar in effect covering all or any part of the Collateral is on file in any filing or recording office. D. Margin Regulations. The pledge of the Pledged Collateral pursuant to the Collateral Documents does not violate Regulation G, T, U or X of the Board of Governors of the Federal Reserve System. E. Information Regarding Collateral. All information supplied to Collateral Agent by or on behalf of any Loan Party with respect to any of the Collateral (in each case taken as a whole with respect to any particular Collateral) is accurate and complete in all material respects. 5.17 Related Agreements. A. Delivery of Related Agreements. Company has delivered to Lenders complete and correct copies of each Related Agreement and of all exhibits and schedules thereto. B. Warranties of Company. Except to the extent otherwise set forth herein or in the schedules hereto, each of the representations and warranties given by Company in the REVOLVING LOAN CREDIT AGREEMENT EXECUTION 94 102 Recapitalization Agreement is true and correct in all material respects as of the date hereof (or as of any earlier date to which such representation and warranty specifically relates) and will be true and correct in all material respects as of the Closing Date (or as of such earlier date, as the case may be), in each case subject to the qualifications set forth in the schedules to the Recapitalization Agreement. C. Survival. Notwithstanding anything in the Recapitalization Agreement to the contrary, the representations and warranties of Company set forth in subsection 5.17B shall, solely for purposes of this Agreement, survive the Closing Date for the benefit of Lenders. 5.18 Disclosure. No representation or warranty of Company or any of its Subsidiaries contained in the Confidential Information Memorandum or in any Loan Document or in any other document, certificate or written statement furnished to Lenders by or on behalf of Company or any of its Subsidiaries for use in connection with the transactions contemplated by this Agreement contains any untrue statement of a material fact or omits to state a material fact (known to Company, in the case of any document not furnished by it) necessary in order to make the statements contained herein or therein not misleading in light of the circumstances in which the same were made. Any projections and pro forma financial information contained in such materials are based upon good faith estimates and assumptions believed by Company to be reasonable at the time made, it being recognized by Lenders that such projections as to future events are not to be viewed as facts and that actual results during the period or periods covered by any such projections may differ from the projected results. There are no facts known (or which should upon the reasonable exercise of diligence be known) to Company (other than matters of a general economic nature) that, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect and that have not been disclosed herein or in such other documents, certificates and statements furnished to Lenders for use in connection with the transactions contemplated hereby. 5.19 AXEL Credit Agreement. A. Delivery of AXEL Credit Agreement. Company has delivered to Lenders complete and correct copies of the AXEL Credit Agreement and of all exhibits and schedules thereto. B. Warranties of Company. Except to the extent otherwise set forth herein or in the schedule hereto, each of the representations and warranties given by Company in the AXEL Credit Agreement is true and correct in all material respects as of the date hereof (or as of any earlier date to which such representation and warranty specifically relates) and will be true and correct in all material respects as of the Closing Date (or as of such earlier date, as the case may be), in each case subject to the qualifications set forth in the schedules to the AXEL Credit Agreement. REVOLVING LOAN CREDIT AGREEMENT EXECUTION 95 103 SECTION 6. COMPANY'S AFFIRMATIVE COVENANTS Company covenants and agrees that, so long as any of the Revolving Loan Commitments hereunder shall remain in effect and until payment in full of all of the Revolving Loans and other Obligations and the cancellation or expiration of all Letters of Credit, unless Requisite Lenders shall otherwise give prior written consent, Company shall perform, and shall cause each of its Subsidiaries to perform, all covenants in this Section 6. 6.1 Financial Statements and Other Reports. Company will maintain, and cause each of its Subsidiaries to maintain, a system of accounting established and administered in accordance with sound business practices to permit preparation of financial statements in conformity with GAAP. Company will deliver to Administrative Agent and Lenders: (i) Monthly Financials: as soon as available and in any event within 30 days after the end of each month ending after the Closing Date (or within 45 days after the end of each month which ends a Fiscal Quarter), the consolidated balance sheets of Company and its Subsidiaries as at the end of such month and the related consolidated statements of income, stockholders' equity and cash flows of Company and its Subsidiaries for such month and for the period from the beginning of the then current Fiscal Year to the end of such month, setting forth in each case in comparative form the corresponding figures for the corresponding periods of the previous Fiscal Year and the corresponding figures from the Financial Plan for the current Fiscal Year, to the extent prepared on a monthly basis, all in reasonable detail and certified by the chief financial officer of Company that they fairly present, in all material respects, the financial condition of Company and its Subsidiaries as at the dates indicated and the results of their operations and their cash flows for the periods indicated, subject to changes resulting from audit and normal year-end adjustments, for such month and for the period from the beginning of the then current Fiscal Year to the end of such month; (ii) Quarterly Financials: as soon as available and in any event within 45 days after the end of each of first three Fiscal Quarters of each year, (a) the consolidated balance sheets of Company and its Subsidiaries as at the end of such Fiscal Quarter and the related consolidated statements of income, stockholders' equity and cash flows of Company and its Subsidiaries for such Fiscal Quarter and for the period from the beginning of the then current Fiscal Year to the end of such Fiscal Quarter, setting forth in each case in comparative form the corresponding figures for the corresponding periods of the previous Fiscal Year and the corresponding figures from the Financial Plan for the current Fiscal Year, all in reasonable detail and certified by the chief financial officer of Company that they fairly present, in all material respects, the financial condition of Company and its REVOLVING LOAN CREDIT AGREEMENT EXECUTION 96 104 Subsidiaries as at the dates indicated and the results of their operations and their cash flows for the periods indicated, subject to changes resulting from audit and normal year-end adjustments, and (b) a narrative report describing the operations of Company and its Subsidiaries in the form of the MD&A, which is prepared by the Company for public filing for such Fiscal Quarter and for the period from the beginning of the then current Fiscal Year to the end of such Fiscal Quarter; (iii) Year-End Financials: as soon as available and in any event within 90 days after the end of each Fiscal Year, (a) the consolidated balance sheets of Company and its Subsidiaries as at the end of such Fiscal Year and the related consolidated statements of income, stockholders' equity and cash flows of Company and its Subsidiaries for such Fiscal Year, setting forth in each case in comparative form the corresponding figures for the previous Fiscal Year and the corresponding figures from the Financial Plan for the Fiscal Year covered by such financial statements, all in reasonable detail and certified by the chief financial officer of Company that they fairly present, in all material respects, the financial condition of Company and its Subsidiaries as at the dates indicated and the results of their operations and their cash flows for the periods indicated, (b) a narrative report describing the operations of Company and its Subsidiaries in the form prepared for presentation to senior management for such Fiscal Year, and (c) a report thereon of independent certified public accountants of recognized national standing selected by Company and satisfactory to Administrative Agent, which report shall be unqualified, shall express no doubts about the ability of Company and its Subsidiaries to continue as a going concern, and shall state that such consolidated financial statements fairly present, in all material respects, the consolidated financial position of Company and its Subsidiaries as at the dates indicated and the results of their operations and their cash flows for the periods indicated in conformity with GAAP applied on a basis consistent with prior years (except as otherwise disclosed in such financial statements) and that the examination by such accountants in connection with such consolidated financial statements has been made in accordance with generally accepted auditing standards; (iv) Officers' and Compliance Certificates: together with each delivery of financial statements of Company and its Subsidiaries pursuant to subdivisions (ii) and (iii) above, (a) an Officers' Certificate of Company stating that the signers have reviewed the terms of this Agreement and have made, or caused to be made under their supervision, a review in reasonable detail of the transactions and condition of Company and its Subsidiaries during the accounting period covered by such financial statements and that such review has not disclosed the existence during or at the end of such accounting period, and that the signers do not have knowledge of the existence as at the date of such Officers' Certificate, of any condition or event that constitutes an Event of Default or Potential Event of Default, or, if any such condition or event existed or exists, specifying the nature and period of existence thereof and what action Company has taken, is taking and proposes to take with respect REVOLVING LOAN CREDIT AGREEMENT EXECUTION 97 105 thereto; and (b) a Compliance Certificate demonstrating in reasonable detail (1) compliance during and at the end of the applicable accounting periods with the restrictions contained in Section 7, in each case to the extent compliance with such restrictions is required to be tested at the end of the applicable accounting period and (2) with respect to any Net Asset Sale Proceeds received by Company or any of its Subsidiaries during the second Fiscal Quarter immediately preceding the Fiscal Quarter in which the applicable accounting period ends, whether or not all or any portion of such Net Asset Sale Proceeds shall have become Unreinvested Asset Sale Proceeds; (v) Reconciliation Statements: if, as a result of any change in accounting principles and policies from those used in the preparation of the audited financial statements referred to in subsection 5.3, the consolidated financial statements of Company and its Subsidiaries delivered pursuant to subdivisions (ii), (iii) or (xiii) of this subsection 6.1 will differ in any material respect from the consolidated financial statements that would have been delivered pursuant to such subdivisions had no such change in accounting principles and policies been made, then (a) together with the first delivery of financial statements pursuant to subdivision (ii), (iii) or (xiii) of this subsection 6.1 following such change, consolidated financial statements of Company and its Subsidiaries for (y) the current Fiscal Year to the effective date of such change and (z) the two full Fiscal Years immediately preceding the Fiscal Year in which such change is made, in each case prepared on a pro forma basis as if such change had been in effect during such periods, and (b) together with each delivery of financial statements pursuant to subdivision (ii), (iii) or (xiii) of this subsection 6.1 following such change, a written statement of the chief accounting officer or chief financial officer of Company setting forth the differences (including any differences that would affect any calculations relating to the financial covenants set forth in subsection 7.6) which would have resulted if such financial statements had been prepared without giving effect to such change; (vi) Accountants' Certification: together with each delivery of consolidated financial statements of Company and its Subsidiaries pursuant to subdivision (iii) above, a written statement by the independent certified public accountants giving the report thereon (a) stating that their audit examination has included a review of the terms of this Agreement and the other Revolving Loan Documents as they relate to accounting matters, (b) stating whether, in connection with their audit examination, any condition or event that constitutes an Event of Default or Potential Event of Default has come to their attention and, if such a condition or event has come to their attention, specifying the nature and period of existence thereof; provided that such accountants shall not be liable by reason of any failure to obtain knowledge of any such Event of Default or Potential Event of Default that would not be disclosed in the course of their audit examination, and (c) stating that based on their audit examination nothing has come to their attention that causes them to believe either or both that the information contained in the certificates delivered therewith REVOLVING LOAN CREDIT AGREEMENT EXECUTION 98 106 pursuant to subdivision (iv) above is not correct or that the matters set forth in the Compliance Certificates delivered therewith pursuant to clause (b) of subdivision (iv) above for the applicable Fiscal Year are not stated in accordance with the terms of this Agreement; (vii) Accountants' Reports: promptly upon receipt thereof (unless restricted by applicable professional standards), copies of all reports submitted to Company by independent certified public accountants in connection with each annual, interim or special audit of the financial statements of Company and its Subsidiaries made by such accountants, including any comment letter submitted by such accountants to management in connection with their annual audit; (viii) SEC Filings and Press Releases: promptly upon their becoming available, copies of (a) all financial statements, reports, notices and proxy statements sent or made available generally by Company to its security holders or by any Subsidiary of Company to its security holders other than Company or another Subsidiary of Company, (b) all regular and periodic reports and all registration statements (other than on Form S-8 or a similar form) and prospectuses, if any, filed by Company or any of its Subsidiaries with any securities exchange or with the Securities and Exchange Commission or any governmental or private regulatory authority, and (c) all press releases and other statements made available generally by Company or any of its Subsidiaries to the public concerning material developments in the business of Company or any of its Subsidiaries; (ix) Events of Default, etc.: promptly upon any officer of Company obtaining knowledge (a) of any condition or event that constitutes an Event of Default or Potential Event of Default, or becoming aware that any Lender has given any notice (other than to Administrative Agent) or taken any other action with respect to a claimed Event of Default or Potential Event of Default, (b) that any Person has given any notice to Company or any of its Subsidiaries or taken any other action with respect to a claimed default or event or condition of the type referred to in subsection 8.2, (c) of any condition or event that would be required to be disclosed in a current report filed by Company with the Securities and Exchange Commission on Form 8-K (Items 1, 2, 4, 5 and 6 of such Form as in effect on the date hereof) if Company were required to file such reports under the Exchange Act, or (d) of the occurrence of any event or change that has caused or evidences, either in any case or in the aggregate, a Material Adverse Effect, an Officers' Certificate specifying the nature and period of existence of such condition, event or change, or specifying the notice given or action taken by any such Person and the nature of such claimed Event of Default, Potential Event of Default, default, event or condition, and what action Company has taken, is taking and proposes to take with respect thereto; (x) Litigation or Other Proceedings: (a) promptly upon any officer of Company obtaining knowledge of (X) the institution of, or non-frivolous threat of, REVOLVING LOAN CREDIT AGREEMENT EXECUTION 99 107 any action, suit, proceeding (whether administrative, judicial or otherwise), governmental investigation or arbitration against or affecting Company or any of its Subsidiaries or any property of Company or any of its Subsidiaries (collectively, "Proceedings") not previously disclosed in writing by Company to Lenders or (Y) any material development in any Proceeding that, in any case: (1) if adversely determined, has a reasonable possibility of giving rise to a Material Adverse Effect; or (2) seeks to enjoin or otherwise prevent the consummation of, or to recover any damages or obtain relief as a result of, the transactions contemplated hereby; written notice thereof together with such other information as may be reasonably available to Company to enable Lenders and their counsel to evaluate such matters; and (b) within twenty days after the end of each Fiscal Quarter, a schedule of all Proceedings involving an alleged liability of, or claims against or affecting, Company or any of its Subsidiaries equal to or greater than $500,000, and promptly after request by Administrative Agent such other information as may be reasonably requested by Administrative Agent to enable Administrative Agent and its counsel to evaluate any of such Proceedings; (xi) ERISA Events: promptly upon becoming aware of the occurrence of or forthcoming occurrence of any ERISA Event, a written notice specifying the nature thereof, what action Company, any of its Subsidiaries or any of their respective ERISA Affiliates has taken, is taking or proposes to take with respect thereto and, when known, any action taken or threatened by the Internal Revenue Service, the Department of Labor or the PBGC with respect thereto; (xii) ERISA Notices: with reasonable promptness, copies of (a) each Schedule B (Actuarial Information) to the annual report (Form 5500 Series) filed by Company, any of its Subsidiaries or any of their respective ERISA Affiliates with the Internal Revenue Service with respect to each Pension Plan; (b) all notices received by Company or any of its Subsidiaries from a Multiemployer Plan sponsor concerning an ERISA Event; and (c) copies of such other documents or governmental reports or filings relating to any Employee Benefit Plan as Administrative Agent shall reasonably request; (xiii) Financial Plans: as soon as practicable and in any event no later than 30 days prior to the beginning of each Fiscal Year, a consolidated plan and financial forecast for such Fiscal Year and each succeeding Fiscal Year through the Revolving Loan Commitment Termination Date (the "Financial Plan" for such Fiscal Years), including (a) forecasted consolidated balance sheets and forecasted consolidated statements of income and cash flows of Company and its Subsidiaries for each such REVOLVING LOAN CREDIT AGREEMENT EXECUTION 100 108 Fiscal Year, together with pro forma Compliance Certificates for each such Fiscal Year and an explanation of the assumptions on which such forecasts are based, (b) forecasted consolidated statements of income and cash flows of Company and its Subsidiaries for each month of the first such Fiscal Year, together with an explanation of the assumptions on which such forecasts are based, and (c) such other information and projections as any Lender may reasonably request; (xiv) Insurance: as soon as practicable and in any event by the last day of each Fiscal Year, a report in form and substance satisfactory to Administrative Agent outlining all material insurance coverage maintained as of the date of such report by Company and its Subsidiaries and all material insurance coverage planned to be maintained by Company and its Subsidiaries in the immediately succeeding Fiscal Year; (xv) Board of Directors: with reasonable promptness, written notice of any change in the Board of Directors of Company; (xvi) New Subsidiaries: promptly upon any Person becoming a Subsidiary of Company, a written notice setting forth with respect to such Person (a) the date on which such Person became a Subsidiary of Company and (b) all of the data required to be set forth in Schedule 5.1 annexed hereto with respect to all Subsidiaries of Company (it being understood that such written notice shall be deemed to supplement Schedule 5.1 annexed hereto for all purposes of this Agreement); (xvii) Material Contracts: promptly, and in any event within ten Business Days after any Material Contract of Company or any of its Subsidiaries is terminated or amended in a manner that is materially adverse to Company or such Subsidiary, as the case may be, or any new Material Contract is entered into, a written statement describing such event with copies of such material amendments or new contracts, and an explanation of any actions being taken with respect thereto; (xviii) Borrowing Base Certificate: As soon as available and in any event within ten Business Days after the last Business Day of each month ending after the Closing Date, a Borrowing Base Certificate dated as of the last Business Day of such month, together with any additional schedules and other information that Administrative Agent may reasonably request (it being understood that (a) Company, in addition to such monthly Borrowing Base Certificates, may from time to time deliver to Administrative Agent and Lenders, on any Business Day after the Closing Date, a Borrowing Base Certificate dated as of a recent day, together with any additional schedules and other information that Administrative Agent may reasonably request, and (b) the most recent Borrowing Base Certificate described in this subdivision (xix) that is delivered to Administrative Agent shall be used in calculating the Borrowing Base as of any date of determination); and REVOLVING LOAN CREDIT AGREEMENT EXECUTION 101 109 (xix) Other Information: with reasonable promptness, such other information and data with respect to Company or any of its Subsidiaries as from time to time may be reasonably requested by any Lender. 6.2 Corporate Existence, etc. Except as permitted under subsection 7.7, Company will, and will cause each of its Subsidiaries to, at all times preserve and keep in full force and effect its corporate existence and all rights and franchises material to its business; provided, however that neither Company nor any of its Subsidiaries shall be required to preserve any such right or franchise if the Board of Directors of Company or such Subsidiary shall determine that the preservation thereof is no longer desirable in the conduct of the business of Company or such Subsidiary, as the case may be, and that the loss thereof is not disadvantageous in any material respect to Company, such Subsidiary or Lenders. 6.3 Payment of Taxes and Claims; Tax Consolidation. A. Company will, and will cause each of its Subsidiaries to, pay all material taxes, assessments and other governmental charges imposed upon it or any of its properties or assets or in respect of any of its income, businesses or franchises before any penalty accrues thereon, and all claims (including claims for labor, services, materials and supplies) for sums that have become due and payable and that by law have or may become a Lien upon any of its properties or assets, prior to the time when any penalty or fine shall be incurred with respect thereto; provided that no such charge or claim need be paid if it is being contested in good faith by appropriate proceedings promptly instituted and diligently conducted, so long as (1) such reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made therefor and (2) in the case of a charge or claim which has or may become a Lien against any of the Collateral, such contest proceedings conclusively operate to stay the sale of any portion of the Collateral to satisfy such charge or claim. B. Company will not, nor will it permit any of its Subsidiaries to, file or consent to the filing of any consolidated income tax return with any Person (other than Company or any of its Subsidiaries). 6.4 Maintenance of Properties; Insurance; Application of Net Insurance/Condemnation Proceeds. A. Maintenance of Properties. Company will, and will cause each of its Subsidiaries to, maintain or cause to be maintained in good repair, working order and condition, ordinary wear and tear excepted, all material properties used or useful in the business of Company and its Subsidiaries (including all Intellectual Property) and from time to time will make or cause to be made all appropriate repairs, renewals and replacements REVOLVING LOAN CREDIT AGREEMENT EXECUTION 102 110 thereof except where the failure to maintain such properties could not reasonably be expected in any individual case or in the aggregate to have a Material Adverse Effect. B. Insurance. Company will maintain or cause to be maintained, with financially sound and reputable insurers, such public liability insurance, third party property damage insurance, business interruption insurance and casualty insurance with respect to liabilities, losses or damage in respect of the assets, properties and businesses of Company and its Subsidiaries as may customarily be carried or maintained under similar circumstances by corporations of established reputation engaged in similar businesses, in each case in such amounts (giving effect to self-insurance), with such deductibles, covering such risks and otherwise on such terms and conditions as shall be customary for corporations similarly situated in the industry. Without limiting the generality of the foregoing, Company will maintain or cause to be maintained (i) flood insurance with respect to each Flood Hazard Property that is located in a community that participates in the National Flood Insurance Program, in each case in compliance with any applicable regulations of the Board of Governors of the Federal Reserve System, and (ii) replacement value casualty insurance on the Collateral under such policies of insurance, with such insurance companies, in such amounts, with such deductibles, and covering such risks as are at all times satisfactory to Administrative Agent in its commercially reasonable judgment. Each such policy of insurance shall (a) name Collateral Agent for the benefit of Secured Parties as an additional insured thereunder as its interests may appear and (b) in the case of each business interruption and casualty insurance policy, contain a loss payable clause or endorsement, satisfactory in form and substance to Collateral Agent, that names Collateral Agent for the benefit of Secured Parties as the loss payee thereunder for any covered loss in excess of $1,500,000 and provides for at least 30 days prior written notice to Administrative Agent of any modification or cancellation of such policy. C. Application of Net Insurance/Condemnation Proceeds. (i) Business Interruption Insurance. Upon receipt by Company or any of its Subsidiaries of any business interruption insurance proceeds constituting Net Insurance/Condemnation Proceeds, (a) so long as no Event of Default shall have occurred and be continuing, Company or such Subsidiary may retain and apply such Net Insurance/Condemnation Proceeds for working capital purposes, and (b) if an Event of Default shall have occurred and be continuing, Company shall apply an amount equal to such Net Insurance/Condemnation Proceeds to prepay AXELs under the AXEL Credit Agreement and the Revolving Loans (and/or the Revolving Loan Commitments shall be reduced) as provided in subsection 2.4A(iii)(b); (ii) Casualty Insurance/Condemnation Proceeds. Upon receipt by Company or any of its Subsidiaries of any Net Insurance/Condemnation Proceeds other than from business interruption insurance, (a) so long as no Event of Default shall have occurred and be continuing, Company shall, or shall cause one or more of its Subsidiaries to, (1) subject to clause (iv) below, promptly and diligently and in REVOLVING LOAN CREDIT AGREEMENT EXECUTION 103 111 any event within six months of receipt apply such Net Insurance/Condemnation Proceeds to pay or reimburse the costs of repairing, restoring or replacing the assets in respect of which such Net Insurance/Condemnation Proceeds were received or (2) to the extent not so applied or applied pursuant to clause (iv) below within six months of receipt by Company or any of its Subsidiaries, to prepay the AXELs under the AXEL Credit Agreement and the Revolving Loans (and/or the Revolving Loan Commitments shall be reduced) as provided in subsection 2.4A(iii)(b), and (b) if an Event of Default shall have occurred and be continuing, Company shall apply an amount equal to such Net Insurance/Condemnation Proceeds to prepay the AXELs under the AXEL Credit Agreement and the Revolving Loans (and/or the Revolving Loan Commitments shall be reduced) as provided in subsection 2.4A(iii)(b). (iii) Net Insurance/Condemnation Proceeds Received by Collateral Agent. Upon receipt by Collateral Agent of any Net Insurance/Condemnation Proceeds as loss payee, such loss proceeds shall be held and applied in accordance with the terms of the Intercreditor Agreement. (iv) Reinvestment of Insurance Proceeds. So long as no Event of Default or Potential Event of Default shall have occurred and be continuing, Company and its Subsidiaries may reinvest in the business of Company and its Subsidiaries up to $1,000,000 per year of Net Insurance/Condemnation Proceeds recovered by Company or any of its Subsidiaries provided that such funds are reinvested within six months of receipt by Company or any of its Subsidiaries. 6.5 Inspection Rights; Audits of Inventory and Accounts Receivable; Lender Meeting. A. Inspection Rights. Company shall, and shall cause each of its Subsidiaries to, permit any authorized representatives designated by any Lender to visit and inspect any of the properties of Company or of any of its Subsidiaries, to inspect, copy and take extracts from its and their financial and accounting records, and to discuss its and their affairs, finances and accounts with its and their officers and independent public accountants (provided that Company may, if it so chooses, be present at or participate in any such discussion), all upon reasonable notice and at such reasonable times during normal business hours and as often as may reasonably be requested. B. Audits of Inventory and Accounts Receivable. Company shall, and shall cause each of its Subsidiaries to, permit any authorized representatives designated by Administrative Agent to conduct audits of all Inventory and accounts receivable of Loan Parties at any time and from time to time after the Closing Date, such audit to be in form and substance reasonably acceptable to Administrative Agent, all upon reasonable notice and at such reasonable times during normal business hours as may reasonably be requested, provided that so long as no Event of Default shall exist and be continuing Administrative Agent may not conduct more than one such audit in any twelve month period. REVOLVING LOAN CREDIT AGREEMENT EXECUTION 104 112 C. Lender Meeting. Company will, upon the request of Arranger, Administrative Agent or Requisite Lenders, participate in a meeting of Administrative Agent and Lenders once during each Fiscal Year to be held at Company's corporate offices (or at such other location as may be agreed to by Company and Administrative Agent) at such time as may be agreed to by Company and Administrative Agent. 6.6 Compliance with Laws, etc. Company shall comply, and shall cause each of its Subsidiaries and all other Persons on or occupying any Facilities to comply, with the requirements of all applicable laws, rules, regulations and orders of any governmental authority (including all Environmental Laws), noncompliance with which could reasonably be expected to cause, individually or in the aggregate, a Material Adverse Effect. 6.7 Environmental Review and Investigation, Disclosure, Etc.; Company's Actions Regarding Hazardous Materials Activities, Environmental Claims and Violations of Environmental Laws. A. Environmental Review and Investigation. Company agrees that Administrative Agent may, from time to time and in its reasonable discretion, (i) retain, at Company's expense, an independent professional consultant to review any environmental audits, investigations, analyses and reports relating to Hazardous Materials prepared by or for Company and (ii) conduct its own investigation of any Facility; provided that, in the case of any Facility no longer owned, leased, operated or used by Company or any of its Subsidiaries, Company shall only be obligated to use its good faith and reasonable efforts to obtain permission for Administrative Agent's professional consultant to conduct an investigation of such Facility. For purposes of conducting such a review and/or investigation, Company hereby grants to Administrative Agent and its agents, employees, consultants and contractors the right to enter into or onto any Facilities currently owned, leased, operated or used by Company or any of its Subsidiaries and to perform such tests on such property (including taking samples of soil, groundwater and suspected asbestos-containing materials) as are reasonably necessary in connection therewith. Any such investigation of any Facility shall be conducted, unless otherwise agreed to by Company and Administrative Agent, during normal business hours and, to the extent reasonably practicable, shall be conducted so as not to interfere with the ongoing operations at such Facility or to cause any damage or loss to any property at such Facility. Company and Administrative Agent hereby acknowledge and agree that any report of any investigation conducted at the request of Administrative Agent pursuant to this subsection 6.7A will be obtained and shall be used by Administrative Agent and Lenders for the purposes of Lenders' internal credit decisions, to monitor and police the Revolving Loans and to protect Lenders' security interests, if any, created by the Revolving Loan Documents. Administrative Agent agrees to deliver a copy of any such report to Company with the understanding that Company acknowledges and agrees that (x) it will indemnify and hold harmless Administrative Agent and each Lender from any costs, losses or liabilities relating to REVOLVING LOAN CREDIT AGREEMENT EXECUTION 105 113 Company's use of or reliance on such report, (y) neither Administrative Agent nor any Lender makes any representation or warranty with respect to such report, and (z) by delivering such report to Company, neither Administrative Agent nor any Lender is requiring or recommending the implementation of any suggestions or recommendations contained in such report. B. Environmental Disclosure. Company will deliver to Administrative Agent and Lenders: (i) Environmental Audits and Reports. As soon as practicable following receipt thereof, copies of all environmental audits, investigations, analyses and reports of any kind or character, whether prepared by personnel of Company or any of its Subsidiaries or by independent consultants, governmental authorities or any other Persons, with respect to significant environmental matters at any Facility or with respect to any Environmental Claims; (ii) Notice of Certain Releases, Remedial Actions, Etc. Promptly upon the occurrence thereof, written notice describing in reasonable detail (a) any Release required to be reported by Company or any of its Subsidiaries to any federal, state or local governmental or regulatory agency under any applicable Environmental Laws, (b) any remedial action taken by Company or any of its Subsidiaries or any other Person of which Company has knowledge in response to (1) any Hazardous Materials Activities the existence of which has a reasonable possibility of resulting in one or more Environmental Claims having, individually or in the aggregate, a Material Adverse Effect, or (2) any Environmental Claims that, individually or in the aggregate, have a reasonable possibility of resulting in a Material Adverse Effect, and (c) Company's discovery of any occurrence or condition on any real property adjoining or in the vicinity of any Facility that reasonably could be expected to cause such Facility or any part thereof to be subject to any material restrictions on the ownership, occupancy, transferability or use thereof under any Environmental Laws. (iii) Written Communications Regarding Environmental Claims, Releases, Etc. As soon as practicable following the sending or receipt thereof,by Company or any of its Subsidiaries, a copy of any and all written communications with respect to (a) any Environmental Claims that, individually or in the aggregate, are reasonably expected to have a Material Adverse Effect, (b) any Release required to be reported by Company or any of its Subsidiaries to any federal, state or local governmental or regulatory agency, and (c) any request made to Company or any of its Subsidiaries for information from any governmental agency that suggests such agency is investigating whether Company or any of its Subsidiaries may be potentially responsible for any Hazardous Materials Activity. (iv) Notice of Certain Proposed Actions Having Environmental Impact. Prompt written notice describing in reasonable detail (a) any proposed acquisition REVOLVING LOAN CREDIT AGREEMENT EXECUTION 106 114 of stock, assets, or property by Company or any of its Subsidiaries that could reasonably be expected to (1) expose Company or any of its Subsidiaries to, or result in, Environmental Claims that would have, individually or in the aggregate, a Material Adverse Effect or (2) result in Company or any of its Subsidiaries failing to maintain in full force and effect all material Governmental Authorizations required under any Environmental Laws for their respective operations and (b) any proposed action to be taken by Company or any of its Subsidiaries to modify current operations in a manner that could reasonably be expected to subject Company or any of its Subsidiaries to any additional obligations or requirements under any Environmental Laws. (v) Other Information. With reasonable promptness, such other documents and information as from time to time may be reasonably requested by Administrative Agent in relation to any matters disclosed pursuant to this subsection 6.7. C. Company's Actions Regarding Hazardous Materials Activities, Environmental Claims and Violations of Environmental Laws. (i) Remedial Actions Relating to Hazardous Materials Activities. Company shall promptly undertake, and shall cause each of its Subsidiaries promptly to undertake, any and all investigations, studies, sampling, testing, abatement, cleanup, removal, remediation or other response actions necessary to remove, remediate, clean up or abate any Hazardous Materials Activity on, under or about any Facility that is in violation of any Environmental Laws or that presents a material risk of giving rise to an Environmental Claim. In the event Company or any of its Subsidiaries undertakes any such action with respect to any Hazardous Materials, Company or such Subsidiary shall conduct and complete such action in compliance with all applicable Environmental Laws and in accordance with the policies, orders and directives of all federal, state and local governmental authorities except when, and only to the extent that, Company's or such Subsidiary's liability with respect to such Hazardous Materials Activity is being contested in good faith by Company or such Subsidiary. (ii) Actions with Respect to Environmental Claims and Violations of Environmental Laws. Company shall promptly take, and shall cause each of its Subsidiaries promptly to take, any and all actions necessary to (i) cure any violation of applicable Environmental Laws by Company or its Subsidiaries and (ii) make an appropriate response to any Environmental Claim against Company or any of its Subsidiaries and discharge any obligations it may have to any Person thereunder. REVOLVING LOAN CREDIT AGREEMENT EXECUTION 107 115 6.8 Execution of Subsidiary Guaranty and Personal Property Collateral Documents by Certain Subsidiaries and Future Subsidiaries. A. Execution of Subsidiary Guaranty and Personal Property Collateral Documents. In the event that any Domestic Subsidiary existing on the Closing Date that has not previously executed the Subsidiary Guaranty hereafter owns or acquires assets with an aggregate fair market value (without netting such fair market value against any liability of such Subsidiary) exceeding $500,000, or in the event that any Person becomes a Material Domestic Subsidiary after the date hereof, Company will promptly notify Collateral Agent of that fact and cause such Subsidiary to execute and deliver to Collateral Agent a counterpart of the Subsidiary Guaranty and a Subsidiary Pledge Agreement and a Subsidiary Security Agreement and to take all such further actions and execute all such further documents and instruments (including actions, documents and instruments comparable to those described in subsection 4.1I) as may be necessary or, in the opinion of Collateral Agent, desirable to create in favor of Collateral Agent, for the benefit of Secured Parties, a valid and perfected First Priority Lien on all of the personal and mixed property assets of such Subsidiary described in the applicable forms of Collateral Documents. B. Subsidiary Charter Documents, Legal Opinions, Etc. Company shall deliver to Collateral Agent, together with such Revolving Loan Documents, (i) certified copies of such Subsidiary's Certificate or Articles of Incorporation, together with a good standing certificate from the Secretary of State of the jurisdiction of its incorporation and each other state in which such Person is qualified as a foreign corporation to do business and, to the extent generally available, a certificate or other evidence of good standing as to payment of any applicable franchise or similar taxes from the appropriate taxing authority of each of such jurisdictions, each to be dated a recent date prior to their delivery to Collateral Agent, (ii) a copy of such Subsidiary's Bylaws, certified by its corporate secretary or an assistant secretary as of a recent date prior to their delivery to Collateral Agent, (iii) a certificate executed by the secretary or an assistant secretary of such Subsidiary as to (a) the fact that the attached resolutions of the Board of Directors of such Subsidiary approving and authorizing the execution, delivery and performance of such Revolving Loan Documents are in full force and effect and have not been modified or amended and (b) the incumbency and signatures of the officers of such Subsidiary executing such Revolving Loan Documents, and (iv) a favorable opinion of counsel to such Subsidiary, in form and substance satisfactory to Collateral Agent and its counsel, as to (a) the due organization and good standing of such Subsidiary, (b) the due authorization, execution and delivery by such Subsidiary of such Revolving Loan Documents, (c) the enforceability of such Revolving Loan Documents against such Subsidiary, (d) such other matters (including matters relating to the creation and perfection of Liens in any Collateral pursuant to such Revolving Loan Documents) as Collateral Agent may reasonably request, all of the foregoing to be satisfactory in form and substance to Administrative Agent and its counsel. C. Foreign Subsidiary Loan Documents. In the event that any Foreign Subsidiary existing on the Closing Date whose shares have not been pledged pursuant to an REVOLVING LOAN CREDIT AGREEMENT EXECUTION 108 116 Auxiliary Pledge Agreement owns or acquires assets with an aggregate fair market value (without netting such fair market value against any liability of such Subsidiary) exceeding $1,500,000, or in the event that any person becomes a Foreign Subsidiary which owns assets with an aggregate fair market value (without netting such fair market value against any liability of such Subsidiary) exceeding $1,500,000, Company will promptly notify Collateral Agent of that fact and shall or cause the applicable subsidiary which owns equity in such Foreign Subsidiary to execute and deliver to Collateral Agent an Auxiliary Pledge Agreement in form and substance satisfactory to Collateral Agent; to take all such further actions and execute such further documents and instruments as may be necessary or, in the opinion of Collateral Agent reasonably desirable, to perfect a Lien on the equity interests of such Foreign Subsidiary for the benefit of Secured Parties and to deliver to Collateral Agent an opinion of counsel (which counsel shall be reasonably acceptable to Collateral Agent) as to the enforceability of the Auxiliary Pledge Agreement under the laws of such Foreign Subsidiary's jurisdiction of organization and such other matters as Collateral Agent may reasonably request (including as to the perfection of liens on such equity interests). D. If at any time JCS Realty acquires any personal property assets with an aggregate fair market value (without netting such fair market value against any liability of JCS Realty) in excess of $500,000, Company will promptly notify Collateral Agent of that fact and cause JCS Realty to execute and deliver all documents and to take all such further actions as may be necessary or, in the opinion of Collateral Agent, desirable to create in favor of Collateral Agent, for the benefit of Secured Parties, a valid and perfected First Priority Lien on such property in all relevant jurisdictions. 6.9 Conforming Leasehold Interests; Matters Relating to Real Property Collateral. A. Conforming Leasehold Interests. If Company or any of its Subsidiaries acquires any Leasehold Property, Company shall, or shall cause such Subsidiary to, use its reasonable and good faith efforts (without requiring Company or such Subsidiary to relinquish any material rights or incur any material obligations or to expend more than a nominal amount of money over and above the reimbursement, if required, of the Landlord's reasonable out-of-pocket costs, including attorneys' fees) to cause such Leasehold Property to be a Conforming Leasehold Interest. B. Mortgages, Etc. From and after the Closing Date, in the event that (i) Company or any Subsidiary Guarantor acquires any fee interest in real property or any Material Leasehold Property, (ii) with respect to any Material Leasehold Property or any real property in which Company has a fee interest in on or prior to the Closing Date, any first priority mortgage existing on or prior to the Closing Date on such property is removed or (iii) at the time any Person becomes a Subsidiary Guarantor, such Person owns or holds any fee interest in real property or any Material Leasehold Property, in all cases excluding any such Real Property Asset the encumbrancing of which requires the consent of any applicable lessor or (in the case of clause (iii) above) then-existing senior lienholder, where Company and its Subsidiaries are unable to obtain such lessor's or senior lienholder's REVOLVING LOAN CREDIT AGREEMENT EXECUTION 109 117 consent (any such non-excluded Real Property Asset described in the foregoing clause (i), (ii) or (iii) being a "Mortgaged Property"), Company or such Subsidiary Guarantor shall promptly notify Collateral Agent, and shall deliver upon Collateral Agent's written request, as soon as practicable after such Person acquires such Mortgaged Property or becomes a Subsidiary Guarantor, as the case may be, the following: (i) Mortgage. A fully executed and notarized Mortgage duly recorded in all appropriate places in all applicable jurisdictions, encumbering the interest of such Loan Party in such Mortgaged Property; (ii) Opinions of Counsel. (a) A favorable opinion of counsel to such Loan Party, in form and substance satisfactory to Collateral Agent and its counsel, as to the due authorization, execution and delivery by such Loan Party of such Mortgage and such other matters as Collateral Agent may reasonably request, and (b) if required by Collateral Agent, an opinion of counsel (which counsel shall be reasonably satisfactory to Collateral Agent) in the state in which such Mortgaged Property is located with respect to the enforceability of such Mortgage and such other matters (including any matters governed by the laws of such state regarding personal property security interests in respect of any Collateral) as Collateral Agent may reasonably request, in each case in form and substance reasonably satisfactory to Collateral Agent; (iii) Landlord Consent and Estoppel; Recorded Leasehold Interest. In the case of a Mortgaged Property consisting of a Leasehold Property, (a) if such Leasehold Property is holding or will hold inventory or equipment with an aggregate fair market value exceeding $500,000, a Landlord Consent and Estoppel provided that Company shall only be required to use reasonable and good faith efforts to obtain such Landlord Consent and Estoppel and in no event shall Company be obligated to pay any fee, charge or other consideration to any landlord in order to obtain such Landlord Consent and Estoppel, other than, if required, the landlord's reasonable out-of-pocket costs, including attorneys' fees and (b) if such Leasehold Property is a Recorded Leasehold Interest, evidence to that effect (iv) Title Insurance. (a) If reasonably requested by Collateral Agent, an ALTA mortgagee title insurance policy or an unconditional commitment therefor (a "Mortgage Policy") issued by the Title Company with respect to such Mortgaged Property, in an amount satisfactory to Collateral Agent, insuring fee simple title to, or a valid leasehold interest in, such Mortgaged Property vested in such Loan Party and assuring Collateral Agent that such Mortgage creates a valid and enforceable First Priority mortgage Lien on such Mortgaged Property, subject only to, if available in the state in which such Mortgaged Property is located, a standard survey exception and to Permitted Encumbrances, which Mortgage Policy (1) shall include, if available in the state in which such Mortgaged Property is located, an endorsement for mechanics' liens, for future advances under this Agreement and for any other matters REVOLVING LOAN CREDIT AGREEMENT EXECUTION 110 118 reasonably requested by Collateral Agent and (2) shall provide for such affirmative insurance and such reinsurance as Collateral Agent may reasonably request, all of the foregoing in form and substance reasonably satisfactory to Collateral Agent; and (b) evidence satisfactory to Collateral Agent that such Loan Party has (i) delivered to the Title Company all certificates and affidavits customarily required by the Title Company in connection with the issuance of the Mortgage Policy and (ii) paid to the Title Company or to the appropriate governmental authorities all expenses and premiums of the Title Company in connection with the issuance of the Mortgage Policy and all recording and stamp taxes (including mortgage recording and intangible taxes) payable in connection with recording the Mortgage in the appropriate real estate records; provided however, that Administrative Agent shall allow for such reasonable revisions to the applicable mortgage and shall otherwise take such steps as are reasonable and customary to minimize recording, mortgage recording, stamp, documentary and intangible taxes, at Company's cost; (v) Title Report. If no Mortgage Policy is required with respect to such Mortgaged Property, a title report issued by the Title Company with respect thereto, dated not more than 30 days prior to the date such Mortgage is to be recorded and satisfactory in form and substance to Collateral Agent; (vi) Copies of Documents Relating to Title Exceptions. Copies of all recorded documents listed as exceptions to title or otherwise referred to in the Mortgage Policy or title report delivered pursuant to clause (iv) or (v) above; (vii) Matters Relating to Flood Hazard Properties. (a) Evidence, which may be in the form of a letter from an insurance broker or a municipal engineer, as to (1) whether such Mortgaged Property is a Flood Hazard Property and (2) if so, whether the community in which such Flood Hazard Property is located is participating in the National Flood Insurance Program, (b) if such Mortgaged Property is a Flood Hazard Property, such Loan Party's written acknowledgement of receipt of written notification from Collateral Agent (1) that such Mortgaged Property is a Flood Hazard Property and (2) as to whether the community in which such Flood Hazard Property is located is participating in the National Flood Insurance Program, and (c) in the event such Mortgaged Property is a Flood Hazard Property that is located in a community that participates in the National Flood Insurance Program, evidence that Company has obtained flood insurance in respect of such Flood Hazard Property to the extent required under the applicable regulations of the Board of Governors of the Federal Reserve System; and (viii) Environmental Audit. If required by Collateral Agent, reports and other information, in form, scope and substance satisfactory to Collateral Agent and prepared by environmental consultants satisfactory to Collateral Agent, concerning any environmental hazards or liabilities to which Company or any of its Subsidiaries may be subject with respect to such Mortgaged Property. REVOLVING LOAN CREDIT AGREEMENT EXECUTION 111 119 C. Real Estate Appraisals. Company shall, and shall cause each of its Subsidiaries to, permit an independent real estate appraiser satisfactory to Collateral Agent, upon reasonable notice, to visit and inspect any Additional Mortgaged Property for the purpose of preparing an appraisal of such Mortgaged Property satisfying the requirements of any applicable laws and regulations (in each case to the extent required under such laws and regulations as determined by Collateral Agent in its discretion). 6.10 Interest Rate Protection. At all times after the date which is 45 days after the Closing Date, Company shall maintain in effect one or more Interest Rate Agreements with respect to the AXELs and the Revolving Loans, each such Interest Rate Agreement to be for a term of not less than three years from the Closing Date and in form and substance reasonably satisfactory to Administrative Agent, which Interest Rate Agreements shall effectively limit the Unadjusted Eurodollar Rate Component (as hereinafter defined) of the interest costs to Company (i) with respect to an aggregate notional principal amount of not less than 25% of the aggregate principal amount of the AXELs outstanding on the Closing Date (based on the assumption that such notional principal amount was a Eurodollar Rate Loan (as defined under the AXEL Credit Agreement) with an Interest Period (as defined under the AXEL Credit Agreement) of three months) to a rate equal to not more than 9% per annum and (ii) with respect to an aggregate notional principal amount of not less than 25% of the aggregate principal amount of the AXELs outstanding on the Closing Date (based on the assumption that such notional principal amount was a Eurodollar Rate Loan (as defined under the AXEL Credit Agreement) with an Interest Period (as defined under the AXEL Credit Agreement) of three months) to a rate equal to not more than 10% per annum. For purposes of this subsection 6.10, the term "Unadjusted Eurodollar Rate Component" means that component of the interest costs to Company under the AXEL Credit Agreement in respect of a Eurodollar Rate Loan that is based upon the rate obtained pursuant to the definition of Adjusted Eurodollar Rate under the AXEL Credit Agreement without giving effect to the last paragraph thereof. 6.11 Cash Management Systems. Company shall establish and thereafter maintain a cash management system for the Loan Parties in form and substance reasonably satisfactory to the Arranger and the Administrative Agent. The terms and conditions of such cash management system shall be as set forth in Schedule 6.11 annexed hereto. 6.12 Trademarks and Patents. If Company or any of its Subsidiaries acquires any material patents, trademarks or copyrights, Company shall promptly notify the Collateral Agent of that fact and, if requested by Administrative Agent, Company shall, or cause the applicable Subsidiary to, execute and deliver to Collateral Agent supplemental security agreements and take such other actions REVOLVING LOAN CREDIT AGREEMENT EXECUTION 112 120 as the Collateral Agent may reasonably request to create in favor of Collateral Agent, for the benefit of Secured Parties, a valid and perfected First Priority Lien on such patents, trademarks or copyrights. SECTION 7. COMPANY'S NEGATIVE COVENANTS Company covenants and agrees that, so long as any of the Revolving Loan Commitments hereunder shall remain in effect and until payment in full of all of the Revolving Loans and other Obligations and the cancellation or expiration of all Letters of Credit, unless Requisite Lenders shall otherwise give prior written consent, Company shall perform, and shall cause each of its Subsidiaries to perform, all covenants in this Section 7. 7.1 Indebtedness. Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, create, incur, assume or guaranty, or otherwise become or remain directly or indirectly liable with respect to, any Indebtedness, except: (i) Company may become and remain liable with respect to the Obligations; (ii) Company and its Subsidiaries may become and remain liable with respect to Contingent Obligations permitted by subsection 7.4 and, upon any matured obligations actually arising pursuant thereto, the Indebtedness corresponding to the Contingent Obligations so extinguished; (iii) Company may become and remain liable with respect to Indebtedness to any of its wholly-owned Subsidiaries, and any wholly-owned Subsidiary of Company may become and remain liable with respect to Indebtedness to Company or any other wholly-owned Subsidiary of Company; provided that (a) all such intercompany Indebtedness shall be evidenced by promissory notes subject to a first priority perfected pledge in favor of Lenders, (b) all such intercompany Indebtedness owed by Company to any of its Subsidiaries shall be subordinated in right of payment to the payment in full of the Obligations pursuant to the terms of the applicable promissory notes or an intercompany subordination agreement, (c) any payment by any Subsidiary of Company under any guaranty of the Obligations shall result in a pro tanto reduction of the amount of any intercompany Indebtedness owed by such Subsidiary to Company or to any of its Subsidiaries for whose benefit such payment is made, and (d) the aggregate principal amount of all Indebtedness of all Foreign Subsidiaries to Company and its Domestic Subsidiaries shall not exceed $2,000,000 at any time outstanding; REVOLVING LOAN CREDIT AGREEMENT EXECUTION 113 121 (iv) Company and its Subsidiaries, as applicable, may remain liable with respect to Indebtedness described in Schedule 7.1 annexed hereto; (v) Company may become and remain liable with respect to Indebtedness evidenced by the Senior Subordinated Notes in an amount not to exceed $110,000,000; (vi) Company and its Subsidiaries may become and remain liable with respect to Indebtedness in an aggregate amount not to exceed $5,000,000 at any time outstanding in respect of (i) purchase money Indebtedness incurred to finance the purchase price of specific assets and Capital Leases so long as, upon default, the holder of such Indebtedness may seek recourse or payment against Company and its Subsidiaries only through the return or sale of the assets financed thereby and (ii) Indebtedness of a person which becomes a Subsidiary, provided such Indebtedness is recourse only to such Subsidiary, and neither Company nor any of its other Subsidiaries have any obligations in respect thereof; (vii) Company's Foreign Subsidiaries may become and remain liable with respect to Indebtedness in an aggregate amount not to exceed $2,000,000 outstanding at any time under any overdraft facility with a foreign bank used to fund working capital obligations of such Foreign Subsidiary; (viii) Company may become and remain liable for additional unsecured subordinated Indebtedness with substantially the same terms as the Subordinated Notes the net proceeds of which are used solely to fund Permitted Business Acquisitions provided that (a) no Event of Default or Potential Event of Default shall exist and be continuing at the time of the incurrence thereof, (b) the aggregate amount of such Indebtedness shall not exceed $40,000,000 at any time, (c) each dollar of Indebtedness incurred under this clause (viii) is matched with proceeds of additional Common Stock of Company either issued in a private issuance after the Closing Date or transferred to the seller as a portion of the consideration for such sale, which are invested substantially concurrently in such Permitted Business Acquisition, at a ratio of not more than 1.33:1 (additional Indebtedness to additional equity without giving effect to any equity counted under clause (x)(b)(3) of this subsection 7.1), (d) after giving effect to the Permitted Business Acquisition being financed with such Indebtedness (and the incurrence of such Indebtedness), the Consolidated Leverage Ratio on a Pro Forma Basis for the four (4) Fiscal Quarters most recently completed prior to the date of such incurrence shall not exceed 5.5 to 1.0 (or such lesser ratio in effect as of the end of the most recently ended Fiscal Quarter under subsection 7.6C), and (e) Company shall deliver to Administrative Agent at least 10 days prior to such incurrence an Officer's Certificate certifying the matters set forth in clauses (a)-(d) above. REVOLVING LOAN CREDIT AGREEMENT EXECUTION 114 122 \ (ix) Company and its Subsidiaries may become and remain liable for any Indebtedness replacing or refinancing any Indebtedness permitted under clauses (iv), (vi), (vii) or (xi) of this subsection 7.1 provided that (a) the principal amount of such Indebtedness does not exceed the principal amount of the Indebtedness being refinanced or replaced, (b) such Indebtedness has a final maturity on or later than the final maturity of the Indebtedness being refinanced or replaced and a weighted average life to maturity equal to or greater than the weighted average life to maturity of the Indebtedness being refinanced or replaced, (c) the interest rate (or, where applicable, interest rate margin) and fees applicable to such Indebtedness is not higher than those applicable to the Indebtedness being refinanced or replaced, (d) the covenants, defaults and prepayment provisions, taken as a whole, are not more burdensome or restrictive on the Company and its Subsidiaries than those applicable to the Indebtedness being refinanced or replaced, (e) such Indebtedness is secured only by Liens permitted under Section 7.2 for the Indebtedness being refinanced or replaced; (f) such Indebtedness is incurred by Company or the Restricted Subsidiary who is the obligor on the Indebtedness being refinanced or replaced and (g) if the Indebtedness being refinanced or replaced is subordinated to the Obligations, such Indebtedness is subordinated to the Obligations on terms not less favorable to the Lenders than those applicable to the Indebtedness being refinanced or replaced; (x) Company may become and remain liable for (a) AXELs under the AXEL Credit Agreement in an aggregate principal amount not to exceed $117,000,000 at any time (reduced by any principal payments actually made thereon) and (b) additional AXELs under the AXEL Credit Agreement in an aggregate principal amount not to exceed $10,000,000, provided in the case of this clause (b) that (1) no Event of Default or Potential Event of Default shall exist and be continuing at the time of the incurrence of such AXELs, (2) the net proceeds of such AXELs are used solely to fund Permitted Business Acquisitions, (3) each dollar of Indebtedness incurred under this clause (x)(b) is matched with proceeds of additional Common Stock of Company either issued in a private issuance after the Closing Date or transferred to the seller as a portion of the consideration for such sale, which are invested substantially concurrently in such Permitted Business Acquisition, at a ratio of not less than 3.5:1 (additional equity to additional AXELs without giving effect to any equity counted under clause (viii)(c) of this subsection 7.1), (4) after giving effect to the Permitted Business Acquisition being financed with such Indebtedness (and the incurrence of such Indebtedness), the Consolidated Leverage Ratio on a Pro Forma Basis for the four (4) Fiscal Quarters most recently completed prior to the date of such incurrence shall not exceed 5.5 to 1.0 (or such lesser ratio in effect as of the end of the most recently ended Fiscal Quarter under subsection 7.6C), and (5) Company shall deliver to Administrative Agent at least 10 days prior to such incurrence an Officer's Certificate certifying the matters set forth in clauses (1)-(4) above; and REVOLVING LOAN CREDIT AGREEMENT EXECUTION 115 123 (xi) Company and its Subsidiaries may become and remain liable with respect to other Indebtedness in an aggregate principal amount not to exceed $5,000,000 at any time outstanding. 7.2 Liens and Related Matters. A. Prohibition on Liens. Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, create, incur, assume or permit to exist any Lien on or with respect to any property or asset of any kind (including any document or instrument in respect of goods or accounts receivable) of Company or any of its Subsidiaries, whether now owned or hereafter acquired, or any income or profits therefrom, or file or permit the filing of, or permit to remain in effect, any financing statement or other similar notice of any Lien with respect to any such property, asset, income or profits under the Uniform Commercial Code of any State or under any similar recording or notice statute, except: (i) Permitted Encumbrances; (ii) Liens granted pursuant to the Collateral Documents securing the Obligations and obligations of Company and its Subsidiaries under the AXEL Loan Documents; (iii) Liens described in Schedule 7.2 annexed hereto; (iv) Indebtedness incurred under subsection 7.1(vi) may be secured by Liens on assets acquired or financed through the incurrence of such Indebtedness or on the assets of the newly acquired Subsidiary, provided that such Indebtedness was not created in contemplation of the acquisition of such Subsidiary by Company or one of its Subsidiaries; (v) Other Liens securing Indebtedness in an aggregate amount not to exceed $5,000,000 at any time outstanding. B. Equitable Lien in Favor of Lenders. If Company or any of its Subsidiaries shall create or assume any Lien upon any of its properties or assets, whether now owned or hereafter acquired, other than Liens excepted by the provisions of subsection 7.2A, it shall make or cause to be made effective provision whereby the Obligations will be secured by such Lien equally and ratably with any and all other Indebtedness secured thereby as long as any such Indebtedness shall be so secured; provided that, notwithstanding the foregoing, this covenant shall not be construed as a consent by Requisite Lenders to the creation or assumption of any such Lien not permitted by the provisions of subsection 7.2A. C. No Further Negative Pledges. Except with respect to specific property encumbered to secure payment of particular Indebtedness or to be sold pursuant to an executed agreement with respect to an Asset Sale, neither Company nor any of its Subsidiaries shall REVOLVING LOAN CREDIT AGREEMENT EXECUTION 116 124 enter into any agreement (other than the Senior Subordinated Note Indenture or any other agreement prohibiting only the creation of Liens securing Subordinated Indebtedness and the AXEL Credit Agreement) prohibiting the creation or assumption of any Lien upon any of its properties or assets, whether now owned or hereafter acquired. D. No Restrictions on Subsidiary Distributions to Company or Other Subsidiaries. Except as provided herein or in the AXEL Credit Agreement, Company will not, and will not permit any of its Subsidiaries to, create or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction of any kind on the ability of any such Subsidiary to (i) pay dividends or make any other distributions on any of such Subsidiary's capital stock owned by Company or any other Subsidiary of Company, (ii) repay or prepay any Indebtedness owed by such Subsidiary to Company or any other Subsidiary of Company, (iii) make loans or advances to Company or any other Subsidiary of Company, or (iv) transfer any of its property or assets to Company or any other Subsidiary of Company. 7.3 Investments; Joint Ventures. Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, make or own any Investment in any Person, including any Joint Venture, except: (i) Company and its Subsidiaries may make and own Investments in Cash Equivalents; (ii) Company and its Subsidiaries may make intercompany loans to the extent permitted under subsection 7.1(iii); (iii) Company and its Subsidiaries may make Consolidated Capital Expenditures permitted by subsection 7.8; (iv) Company and its Subsidiaries may continue to own the Investments owned by them and described in Schedule 7.3 annexed hereto; (v) Company and its wholly owned Domestic Subsidiaries may make and own investments in other wholly owned Domestic Subsidiaries; (vi) Company and its wholly owned Domestic Subsidiaries may make and own Investments in Persons that, as a result of such Investments, become additional wholly-owned Domestic Subsidiaries, to the extent such Investments are permitted under subsection 7.7(vi); provided that Company shall, and shall cause its Subsidiaries to, comply with the requirements of subsections 6.8 and 6.9 with respect to each such additional Domestic Subsidiaries; REVOLVING LOAN CREDIT AGREEMENT EXECUTION 117 125 (vii) Company and its wholly owned Domestic Subsidiaries may make additional Investments in their respective Foreign Subsidiaries; provided that (a) the amount of all such Investments constituting equity Investments does not exceed $3,500,000 in the aggregate for all such Investments since the Closing Date and (b) the amount of all such Investments constituting loans or advances does not exceed the amount permitted under subsection 7.1(iii); (viii) Company and its Subsidiaries may make and own other Investments in an aggregate amount not to exceed at any time $7,000,000. Notwithstanding the foregoing, so long as no Event of Default or Potential Event of Default shall exist and be continuing, Company and its Subsidiaries may make and hold investments funded solely with the proceeds of any issuance of Company Common Stock in a private issuance after the Closing Date. 7.4 Contingent Obligations. Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, create or become or remain liable with respect to any Contingent Obligation, except: (i) Subsidiaries of Company may become and remain liable with respect to Contingent Obligations in respect of the Subsidiary Guaranty; (ii) Company and its Subsidiaries may become and remain liable in respect of obligations under any Hedge Agreements; (iii) Company may become and remain liable with respect to Contingent Obligations in respect of Letters of Credit; Company and its Domestic Subsidiaries may become and remain liable with respect to Contingent Obligations in respect of other Commercial Letters of Credit in an aggregate amount not to exceed at any time $3,000,000 and Contingent Obligations in respect of other Standby Letters of Credit in an aggregate amount not to exceed at any time $2,000,000; and Foreign Subsidiaries may become and remain liable with respect to Contingent Obligations in respect of other Commercial Letters of Credit obtained in the ordinary course of business in an aggregate amount not to exceed at any time $2,000,000; (iv) Company and its Subsidiaries may become and remain liable with respect to Contingent Obligations in respect of customary indemnification, purchase price adjustment and contingent earnout obligations incurred in connection with Asset Sales or other sales or purchases of assets, provided that the aggregate amount of all obligations of Company and its Subsidiaries in respect of purchase price adjustments and contingent earnouts may not exceed $5,000,000 at any time; REVOLVING LOAN CREDIT AGREEMENT EXECUTION 118 126 (v) Company and its Subsidiaries may become and remain liable with respect to Contingent Obligations under guarantees in the ordinary course of business of the obligations of suppliers, customers, franchisees and licensees of Company and its Subsidiaries in an aggregate amount not to exceed at any time $1,000,000; (vi) Company and its Subsidiaries may become and remain liable with respect to Contingent Obligations in respect of any Indebtedness of Company or any of its Subsidiaries permitted by subsection 7.1; (vii) Company and its Subsidiaries, as applicable, may remain liable with respect to Contingent Obligations described in Schedule 7.4 annexed hereto; and (viii) Company and its Subsidiaries may become and remain liable with respect to other Contingent Obligations; provided that the maximum aggregate liability, contingent or otherwise, of Company and its Subsidiaries in respect of all such Contingent Obligations shall at no time exceed $5,000,000. 7.5 Restricted Junior Payments. Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, declare, order, pay, make or set apart any sum for any Restricted Junior Payment; provided that so long as no Event of Default or Potential Event of Default shall then exist and be continuing Company may (i) make regularly scheduled payments of interest in respect of any Subordinated Indebtedness in accordance with the terms of, and only to the extent required by, and subject to the subordination provisions contained in, the indenture or other agreement pursuant to which such Subordinated Indebtedness was issued, as such indenture or other agreement may be amended from time to time to the extent permitted under subsection 7.15B and (ii) repurchase stock and options from officers, directors and employees in accordance with the terms of the Stockholders' Agreement in an aggregate amount not to exceed (i) $5,000,000 per year in the case of any then current or former chief executive officer, (ii) $2,500,000 per year in the aggregate in the case of all other officers, directors and employees and (iii) $10,000,000 in the aggregate for all such Persons after the Closing Date. 7.6 Financial Covenants. A. Minimum Fixed Charge Coverage Ratio. Company shall not permit the ratio of (i) Consolidated Adjusted EBITDA to (ii) Consolidated Fixed Charges for any four-Fiscal Quarter period ending on any of the dates set forth below to be less than the correlative ratio indicated: REVOLVING LOAN CREDIT AGREEMENT EXECUTION 119 127
=============================================== Minimum Period Fixed Charge Ending Coverage Ratio =============================================== March 31, 1998 1.00:1.00 ----------------------------------------------- June 30, 1998 1.00:1.00 ----------------------------------------------- September 30, 1998 1.00:1.00 ----------------------------------------------- December 31, 1998 1.00:1.00 ----------------------------------------------- March 31, 1999 1.00:1.00 ----------------------------------------------- June 30, 1999 1.00:1.00 ----------------------------------------------- September 30, 1999 1.00:1.00 ----------------------------------------------- December 31, 1999 1.00:1.00 ----------------------------------------------- March 31, 2000 1.10:1.00 ----------------------------------------------- June 30, 2000 1.10:1.00 ----------------------------------------------- September 30, 2000 1.10:1.00 ----------------------------------------------- December 31, 2000 1.10:1.00 ----------------------------------------------- March 31, 2001 1.15:1.00 ----------------------------------------------- June 30, 2001 1.15:1.00 ----------------------------------------------- September 30, 2001 1.15:1.00 ----------------------------------------------- December 31, 2001 1.15:1.00 ----------------------------------------------- March 31, 2002 1.20:1.00 ----------------------------------------------- June 30, 2002 1.20:1.00 ----------------------------------------------- September 30, 2002 1.20:1.00 ----------------------------------------------- December 31, 2002 1.20:1.00 ===============================================
B. Minimum Consolidated Adjusted EBITDA. Company shall not permit Consolidated Adjusted EBITDA for any four Fiscal Quarter period ending on the dates set forth below to be less than the correlative amount indicated: REVOLVING LOAN CREDIT AGREEMENT EXECUTION 120 128
============================================== Minimum Period Consolidated Ending Adjusted EBITDA ============================================== March 31, 1998 35,000,000 ---------------------------------------------- June 30, 1998 36,000,000 ---------------------------------------------- September 30, 1998 36,500,000 ---------------------------------------------- December 31, 1998 37,500,000 ---------------------------------------------- March 31, 1999 38,500,000 ---------------------------------------------- June 30, 1999 39,500,000 ---------------------------------------------- September 30, 1999 40,000,000 ---------------------------------------------- December 31, 1999 40,500,000 ---------------------------------------------- March 31, 2000 41,000,000 ---------------------------------------------- June 30, 2000 41,500,000 ---------------------------------------------- September 30, 2000 42,000,000 ---------------------------------------------- December 31, 2000 42,500,000 ---------------------------------------------- March 31, 2001 43,125,000 ---------------------------------------------- June 30, 2001 43,750,000 ---------------------------------------------- September 30, 2001 44,375,000 ---------------------------------------------- December 31, 2001 45,000,000 ---------------------------------------------- March 31, 2002 45,875,000 ---------------------------------------------- June 30, 2002 46,750,000 ---------------------------------------------- September 30, 2002 47,625,000 ---------------------------------------------- December 31, 2002 48,500,000 ==============================================
REVOLVING LOAN CREDIT AGREEMENT EXECUTION 121 129 C. Maximum Debt to EBITDA Ratio. Company shall not permit the ratio of (i) Consolidated Total Debt to (ii) Consolidated Adjusted EBITDA as of the last day of any four Fiscal Quarter period ending on any of the dates set forth below to exceed the correlative ratio indicated:
============================================== Maximum Period Debt to EBITDA Ending Ratio ============================================== March 31, 1998 6.60:1.00 ---------------------------------------------- June 30, 1998 6.40:1.00 ---------------------------------------------- September 30, 1998 6.35:1.00 ---------------------------------------------- December 31, 1998 6.10:1.00 ---------------------------------------------- March 31, 1999 5.90:1.00 ---------------------------------------------- June 30, 1999 5.80:1.00 ---------------------------------------------- September 30, 1999 5.70:1.00 ---------------------------------------------- December 31, 1999 5.50:1.00 ---------------------------------------------- March 31, 2000 5.40:1.00 ---------------------------------------------- June 30, 2000 5.25:1.00 ---------------------------------------------- September 30, 2000 5.10:1.00 ---------------------------------------------- December 31, 2000 5.00:1.00 ---------------------------------------------- March 31, 2001 4.85:1.00 ---------------------------------------------- June 30, 2001 4.70:1.00 ---------------------------------------------- September 30, 2001 4.55:1.00 ---------------------------------------------- December 31, 2001 4.40:1.00 ---------------------------------------------- March 31, 2002 4.20:1.00 ---------------------------------------------- June 30, 2002 4.10:1.00 ---------------------------------------------- September 30, 2002 3.90:1.00 ---------------------------------------------- December 31, 2002 3.70:1.00 ==============================================
REVOLVING LOAN CREDIT AGREEMENT EXECUTION 122 130 D. Certain Calculations. With respect to calculations of Consolidated Adjusted EBITDA and Consolidated Fixed Charges for any four-Fiscal Quarter period including the Closing Date, such calculations shall be made on a pro forma basis assuming, in each case, that the Closing Date, the Merger, the repayment of debt to be repaid in connection with the Closing, the issuance and sale of the Company Common Stock and the related borrowings by Company pursuant to this Agreement, the AXEL Credit Agreement and the Senior Subordinated Note Indenture occurred on the first day of the applicable four-Fiscal Quarter period and assuming further, for purposes of calculation of the pro forma interest accrued on AXELs and Revolving Loans during such four quarter periods prior to the Closing Date, that (i) all Revolving Loans outstanding were Eurodollar Rate Loans and that the applicable reference interest rates were the average effective Adjusted Eurodollar Rates on the Revolving Loans for the period from the Closing Date through the date of determination and (ii) all AXELs outstanding were Eurodollar Rate Loans (as defined in the AXEL Credit Agreement) and that the applicable reference interest rates were the average effective Adjusted Eurodollar Rates (as defined in the AXEL Credit Agreement) on the AXELs for the period from the Closing Date through the date of determination, all such calculations to be in form and substance satisfactory to Arranger and Administrative Agent. In addition, during the first three Fiscal Quarters of Fiscal Year 1998, in calculating Consolidated Fixed Charges for any such period, such calculation shall be made using actual Consolidated Capital Expenditures paid in Cash from the beginning of Fiscal Year 1998 and annualized. With respect to any period during which new Subsidiaries, assets or businesses are acquired pursuant to subsection 7.7(vi), for purposes of determining compliance with the financial covenants set forth in this subsection 7.6, calculations of Consolidated Adjusted EBITDA and Consolidated Fixed Charges shall exclude non-recurring restructuring charges associated with such transactions, one time costs associated with financing raised and equity issued pursuant to subsections 7.1 (viii) and 7.1(x) and the costs associated with the realization of cost savings described in the next sentence, provided that such exclusion shall not apply with respect to any non recurring restructuring charges and charges in connection with cost savings to the extent they are paid in cash but only in the period in which they are paid in cash. Consolidated Adjusted EBITDA and Consolidated Fixed Charges shall also be calculated with respect to such periods and such Subsidiaries, assets or businesses on a pro forma basis (including (without duplication for amounts otherwise included in Consolidated Adjusted EBITDA) pro forma adjustments for cost savings which have actually occurred (annualizing such cost savings) and arise out of events which are directly attributable to a specific transaction, are factually supportable and are expected to have a continuing impact, including, without limitation, cost savings resulting from head count reductions, closure of facilities and similar restructuring charges, which pro forma adjustments shall be certified in an Officers Certificate of the Company) using the historical financial statements of all entities or assets so acquired or to be acquired and the consolidated financial statements of Company and its Subsidiaries which shall be reformulated (i) as if such acquisition, and any acquisitions which have been consummated during such four quarter period, and any Indebtedness or other liabilities incurred in connection with REVOLVING LOAN CREDIT AGREEMENT EXECUTION 123 131 any such acquisition had been consummated or incurred at the beginning of such four quarter period (and assuming that such Indebtedness bears interest during any portion of the applicable measurement period prior to the relevant acquisition at the weighted average of the interest rates applicable to such Indebtedness during the period in which it is actually outstanding), and (ii) otherwise in conformity with certain procedures to be agreed upon between Administrative Agent and Company, all such calculations to be in form and substance satisfactory to Administrative Agent. In addition, in calculating compliance with Subsection 7.6A, discontinued operations will be given pro forma effect as follows: (1) Consolidated Adjusted EBITDA attributable to discontinued operations, as determined in accordance with GAAP, and operations or businesses disposed of on or prior to the calculation date, shall be excluded, and (2) Consolidated Fixed Charges attributable to discontinued operations, as determined in accordance with GAAP, and operations or businesses disposed of on or prior to the calculation date, shall be excluded, but only to the extent that the obligations giving rise to such Consolidated Fixed Charges will not be obligations of the Company or any of its Subsidiaries following the Calculation Date. 7.7 Restriction on Fundamental Changes; Asset Sales and Acquisitions. Company shall not, and shall not permit any of its Subsidiaries to, alter the corporate, capital or legal structure of Company or any of its Subsidiaries, or enter into any transaction of merger or consolidation, or liquidate, wind-up or dissolve itself (or suffer any liquidation or dissolution), or convey, sell, lease or sub-lease (as lessor or sublessor), transfer or otherwise dispose of, in one transaction or a series of transactions, all or any part of its business, property or assets, whether now owned or hereafter acquired, or acquire by purchase or otherwise all or substantially all the business, property or fixed assets of, or stock or other evidence of beneficial ownership of, any Person or any division or line of business of any Person, except: (i) any Subsidiary of Company may be merged with or into Company or any wholly-owned Subsidiary Guarantor, or be liquidated, wound up or dissolved, or all or any part of its business, property or assets may be conveyed, sold, leased, transferred or otherwise disposed of, in one transaction or a series of transactions, to Company or any wholly-owned Subsidiary Guarantor; provided that, in the case of such a merger, Company or such wholly-owned Subsidiary Guarantor shall be the continuing or surviving corporation; (ii) Company and its Subsidiaries may make Consolidated Capital Expenditures permitted under subsection 7.8; REVOLVING LOAN CREDIT AGREEMENT EXECUTION 124 132 (iii) Company and its Subsidiaries may dispose of obsolete, worn out or surplus property in the ordinary course of business and any assets acquired in connection with the acquisition of another Person or a division or line of business of such Person which the Company reasonably determines are surplus assets; (iv) Company and its Subsidiaries may sell or otherwise dispose of assets in transactions that do not constitute Asset Sales; provided that the consideration received for such assets shall be in an amount at least equal to the fair market value thereof; (v) subject to subsection 7.12, Company and its Subsidiaries may (x) sell the Chester, New York, Melbourne, Australia and Montreal, Quebec real estate and (y) make other Asset Sales of assets having a fair market value not in excess of $1,000,000 per year; provided that (1) the consideration received for such assets shall be in an amount at least equal to the fair market value thereof; (2) the consideration received shall be at least 85% cash; and (3) no later than the first Business Day following the date of receipt by Company or any of its Subsidiaries of any Net Asset Sale Proceeds of such Asset Sale, Company shall deliver to Agent an Officers' Certificate, satisfactory in form and substance to Administrative Agent, demonstrating the derivation of the Net Asset Sale Proceeds of such Asset Sale from the gross sales price received in connection therewith; and (vi) Company and its Subsidiaries may acquire all or substantially all the business, property or fixed assets of, or stock or other evidence of beneficial ownership of, any Person or any division or line of business of any Person that is in the same line of business as Company and its Subsidiaries ("Permitted Business Acquisitions"); provided that the aggregate consideration paid in respect of all such Permitted Business Acquisitions does not exceed $10,000,000 in the aggregate (excluding common stock of Company transferred to the seller as part of the consideration for a Permitted Business Acquisition). Notwithstanding the foregoing, expenditures on Permitted Business Acquisitions in an aggregate amount in excess of $10,000,000 will be permitted; provided that, (a) any amounts in excess of $25,000,000 (excluding common stock of Company transferred to the seller as part of the consideration for a Permitted Business Acquisition) are funded solely from the proceeds of the incurrence of additional subordinated debt in accordance with subsection 7.1(viii), the proceeds of the incurrence of additional AXELs under subsection 7.1(x) and/or the proceeds of an issuance of additional Company Common Stock in a private issuance after the Closing Date, (b) Company shall give Administrative Agent at least 10 days' notice of the proposed transaction, and copies of the definitive documentation relating thereto, (c) Company shall deliver an Officer's Certificate to Administrative Agent and Lenders in form and substance reasonably satisfactory to Administrative Agent, together with the related financial statements, demonstrating in reasonable detail that, after giving effect to such acquisition (including any Indebtedness incurred or assumed therein) the REVOLVING LOAN CREDIT AGREEMENT EXECUTION 125 133 Consolidated Leverage Ratio, determined on a Pro Forma Basis for the most recently completed four-Fiscal Quarter period, shall be not more than 5.50:1.00 (or such lesser Consolidated Leverage Ratio as may be required pursuant to subsection 7.6C at the time of such acquisition). 7.8 Consolidated Capital Expenditures. Company shall not, and shall not permit its Subsidiaries to, make or incur Consolidated Capital Expenditures, in any Fiscal Year ending on a date set forth below (or any four quarter period ending on any date set forth below on or prior to December 31, 1998), in an aggregate amount in excess of the corresponding amount (the "Maximum Consolidated Capital Expenditures Amount") set forth below opposite such date; provided that the Maximum Consolidated Capital Expenditures Amount for any Fiscal Year, commencing with Fiscal Year 1999, shall be increased by an amount equal to the excess, if any, (but in no event more than 50% of the Maximum Consolidated Capital Expenditures Amount for the previous Fiscal Year (or, in the case of Fiscal Year 1999, for the four Fiscal Quarter period ending as of December 31, 1998) of the Maximum Consolidated Capital Expenditures Amount (as adjusted in accordance with this proviso) over the actual amount of Consolidated Capital Expenditure for the previous Fiscal Year (or, in the case of Fiscal Year 1999, for the four Fiscal Quarter period ending as of December 31, 1998):
============================================== Period Maximum Ending Consolidated Capital Expenditures ============================================== March 31, 1998 7,500,000 ---------------------------------------------- June 30, 1998 8,250,000 ---------------------------------------------- September 30, 1998 7,250,000 ---------------------------------------------- December 31, 1998 7,000,000 ---------------------------------------------- December 31, 1999 10,000,000 ---------------------------------------------- December 31, 2000 10,500,000 ---------------------------------------------- December 31, 2001 10,500,000 ---------------------------------------------- December 31, 2002 11,000,000 ==============================================
Notwithstanding the foregoing, the Company and its Subsidiaries may fund Consolidated Capital Expenditures in excess of the foregoing limits from any proceeds of an additional issuance of Company common stock in a private issuance after the Closing Date. REVOLVING LOAN CREDIT AGREEMENT EXECUTION 126 134 7.9 Sales and Lease-Backs. Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, become or remain liable as lessee or as a guarantor or other surety with respect to any lease, whether an Operating Lease or a Capital Lease, of any property (whether real, personal or mixed), whether now owned or hereafter acquired, (i) which Company or any of its Subsidiaries has sold or transferred or is to sell or transfer to any other Person (other than Company or any of its Subsidiaries) or (ii) which Company or any of its Subsidiaries intends to use for substantially the same purpose as any other property which has been or is to be sold or transferred by Company or any of its Subsidiaries to any Person (other than Company or any of its Subsidiaries) in connection with such lease. 7.10 Transactions with Shareholders and Affiliates. Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, enter into or permit to exist any transaction (including the purchase, sale, lease or exchange of any property or the rendering of any service) with any holder of 10% or more of any class of equity Securities of Company or with any Affiliate of Company or of any such holder, on terms that are less favorable to Company or that Subsidiary, as the case may be, than those that might be obtained at the time from Persons who are not such a holder or Affiliate; provided that the foregoing restriction shall not apply to (i) any transaction between Company and any of its wholly owned Subsidiaries or between any of its wholly owned Subsidiaries, (ii) any transaction between Company or any of its wholly owned Subsidiaries and Goldman, Sachs & Co., GSCP or GSII or any Affiliate of any of them, (iii) reasonable and customary fees paid to members of the Boards of Directors of Company and its Subsidiaries or (iv) any transactions described on Schedule 7.10. 7.11 Disposal of Subsidiary Stock. Except for any sale of 100% of the capital stock or other equity Securities of any of its Subsidiaries in compliance with the provisions of subsection 7.7(v), Company shall not: (i) directly or indirectly sell, assign, pledge or otherwise encumber or dispose of any shares of capital stock or other equity Securities of any of its Subsidiaries, except to qualify directors if required by applicable law; or (ii) permit any of its Subsidiaries directly or indirectly to sell, assign, pledge or otherwise encumber or dispose of any shares of capital stock or other equity Securities of any of its Subsidiaries (including such Subsidiary), except to Company, another Subsidiary of Company, or to qualify directors if required by applicable law. REVOLVING LOAN CREDIT AGREEMENT EXECUTION 127 135 7.12 Conduct of Business. From and after the Closing Date, Company shall not, and shall not permit any of its Subsidiaries to, engage in any business other than (i) the businesses engaged in by Company and its Subsidiaries on the Closing Date and similar or related businesses and (ii) such other lines of business as may be consented to by Requisite Lenders. 7.13 Amendments or Waivers of Certain Related Agreements; Amendments of Documents Relating to Subordinated Indebtedness. A. Amendments or Waivers of Certain Related Agreements. Neither Company nor any of its Subsidiaries will agree to any material amendment to, or waive any of its material rights under, any Related Agreement (other than any Related Agreement evidencing or governing any Subordinated Indebtedness) after the Closing Date without in each case obtaining the prior written consent of Requisite Lenders to such amendment or waiver. B. Amendments of Documents Relating to Subordinated Indebtedness. Company shall not, and shall not permit any of its Subsidiaries to, amend or otherwise change the terms of any Subordinated Indebtedness, or make any payment consistent with an amendment thereof or change thereto, if the effect of such amendment or change is to increase the interest rate on such Subordinated Indebtedness, change (to earlier dates) any dates upon which payments of principal or interest are due thereon, change any event of default or condition to an event of default with respect thereto (other than to eliminate any such event of default or increase any grace period related thereto), change the redemption, prepayment or defeasance provisions thereof, change the subordination provisions of such Subordinated Indebtedness (or of any guaranty thereof), or change any collateral therefor (other than to release such collateral), or if the effect of such amendment or change, together with all other amendments or changes made, is to increase materially the obligations of the obligor thereunder or to confer any additional rights on the holders of such Subordinated Indebtedness (or a trustee or other representative on their behalf) which would be adverse to Company or Lenders. 7.14 Fiscal Year Company shall not change its Fiscal Year-end from December 31. REVOLVING LOAN CREDIT AGREEMENT EXECUTION 128 136 SECTION 8. EVENTS OF DEFAULT If any of the following conditions or events ("Events of Default") shall occur: 8.1 Failure to Make Payments When Due. Failure by Company to pay any installment of principal of any Revolving Loan when due, whether at stated maturity, by acceleration, by notice of voluntary prepayment, by mandatory prepayment or otherwise; failure by Company to pay when due any amount payable to an Issuing Lender in reimbursement of any drawing under a Letter of Credit; or failure by Company to pay any interest on any Revolving Loan or any fee or any other amount due under this Agreement within three days after the date due; or 8.2 Default in Other Agreements. (i) Failure of Company or any of its Subsidiaries to pay when due any principal of or interest on or any other amount payable in respect of one or more items of Indebtedness (other than Indebtedness referred to in subsection 8.1) or Contingent Obligations with an aggregate principal amount of $5,000,000 or more, in each case beyond the end of any grace period provided therefor; or (ii) breach or default by Company or any of its Subsidiaries with respect to any other material term of (a) one or more items of Indebtedness or Contingent Obligations in the individual or aggregate principal amounts referred to in clause (i) above or (b) any loan agreement (including the AXEL Credit Agreement), mortgage, indenture or other agreement relating to such item(s) of Indebtedness or Contingent Obligation(s), if the effect of such breach or default is to cause, or to permit the holder or holders of that Indebtedness or Contingent Obligation(s) (or a trustee on behalf of such holder or holders) to cause, that Indebtedness or Contingent Obligation(s) to become or be declared due and payable prior to its stated maturity or the stated maturity of any underlying obligation, as the case may be (upon the giving or receiving of notice, lapse of time, both, or otherwise); or 8.3 Breach of Certain Covenants. Failure of Company to perform or comply with any term or condition contained in subsection 2.5 or 6.2 or Section 7 of this Agreement; or 8.4 Breach of Warranty. Any representation, warranty, certification or other statement made by Company or any of its Subsidiaries in any Loan Document or in any statement or certificate at any time given by Company or any of its Subsidiaries in writing pursuant hereto or thereto or in connection herewith or therewith shall be false in any material respect on the date as of which made; or REVOLVING LOAN CREDIT AGREEMENT EXECUTION 129 137 8.5 Other Defaults Under Revolving Loan Documents. Any Loan Party shall default in the performance of or compliance with any term contained in this Agreement or any of the other Revolving Loan Documents, other than any such term referred to in any other subsection of this Section 8, and such default shall not have been remedied or waived within 30 days after the earlier of (i) an executive officer of Company or such Loan Party becoming aware of such default or (ii) receipt by Company and such Loan Party of notice from Administrative Agent or any Lender of such default; or 8.6 Involuntary Bankruptcy; Appointment of Receiver, etc. (i) A court having jurisdiction in the premises shall enter a decree or order for relief in respect of Company or any of its Subsidiaries in an involuntary case under the Bankruptcy Code or under any other applicable bankruptcy, insolvency or similar law now or hereafter in effect, which decree or order is not stayed; or any other similar relief shall be granted under any applicable federal or state law; or (ii) an involuntary case shall be commenced against Company or any of its Subsidiaries under the Bankruptcy Code or under any other applicable bankruptcy, insolvency or similar law now or hereafter in effect; or a decree or order of a court having jurisdiction in the premises for the appointment of a receiver, liquidator, sequestrator, trustee, custodian or other officer having similar powers over Company or any of its Subsidiaries, or over all or a substantial part of its property, shall have been entered; or there shall have occurred the involuntary appointment of an interim receiver, trustee or other custodian of Company or any of its Subsidiaries for all or a substantial part of its property; or a warrant of attachment, execution or similar process shall have been issued against any substantial part of the property of Company or any of its Subsidiaries, and any such event described in this clause (ii) shall continue for 60 days unless dismissed, bonded or discharged; or 8.7 Voluntary Bankruptcy; Appointment of Receiver, etc. (i) Company or any of its Subsidiaries shall have an order for relief entered with respect to it or commence a voluntary case under the Bankruptcy Code or under any other applicable bankruptcy, insolvency or similar law now or hereafter in effect, or shall consent to the entry of an order for relief in an involuntary case, or to the conversion of an involuntary case to a voluntary case, under any such law, or shall consent to the appointment of or taking possession by a receiver, trustee or other custodian for all or a substantial part of its property; or Company or any of its Subsidiaries shall make any assignment for the benefit of creditors; or (ii) Company or any of its Subsidiaries shall be unable, or shall fail generally, or shall admit in writing its inability, to pay its debts as such debts become due; or the Board of Directors of Company or any of its Subsidiaries (or any committee thereof) shall adopt any resolution or otherwise authorize any action to approve any of the actions referred to in clause (i) above or this clause (ii); or REVOLVING LOAN CREDIT AGREEMENT EXECUTION 130 138 8.8 Judgments and Attachments. Any money judgment, writ or warrant of attachment or similar process involving in the aggregate at any time an amount in excess of $5,000,000 (in either case not adequately covered by insurance as to which a solvent and unaffiliated insurance company has acknowledged coverage) shall be entered or filed against Company or any of its Subsidiaries or any of their respective assets and shall remain undischarged, unvacated, unbonded or unstayed for a period of 60 days (or in any event later than five days prior to the date of any proposed sale thereunder); or 8.9 Dissolution. Any order, judgment or decree shall be entered against Company or any of its Subsidiaries decreeing the dissolution or split up of Company or that Subsidiary and such order shall remain undischarged or unstayed for a period in excess of 30 days; or 8.10 Employee Benefit Plans. There shall occur one or more ERISA Events which individually or in the aggregate results in or might reasonably be expected to result in liability of Company or any of its Subsidiaries in excess of $5,000,000 during the term of this Agreement; or the excess of (1) the actuarial present value (determined on the basis of reasonable assumptions employed by the independent actuary for each Pension Plan for purposes of Section 412 of the Internal Revenue Code or Section 302 of ERISA) of benefit liabilities (as defined in Section 4001(a)(16) of ERISA) over (2) the fair market value of the assets of such Pension Plan, individually or in the aggregate for all Pension Plans (excluding for purposes of such computation any Pension Plans with respect to which assets exceed benefit liabilities), exceeds $7,500,000; or 8.11 Change in Control. If (i) prior to a Qualified Public Offering GSII together with any Affiliates of GSII shall cease to beneficially own and control 51% or more of the combined voting power of all Securities of the Company, (ii) following consummation of a Qualified Public Offering any Person or any two or more Persons acting in concert shall have acquired beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Exchange Act), directly or indirectly, of Securities of Company (or other Securities convertible into such Securities) representing more of the combined voting power of all Securities of Company than is owned by GSII and its Affiliates at such time, or (iii) a "Change of Control" as defined in the Senior Subordinated Notes Indenture occurs; or REVOLVING LOAN CREDIT AGREEMENT EXECUTION 131 139 8.12 Invalidity of Subsidiary Guaranty; Failure of Security; Repudiation of Obligations. At any time after the execution and delivery thereof, (i) the Subsidiary Guaranty for any reason, other than the satisfaction in full of all Obligations, shall cease to be in full force and effect (other than in accordance with its terms) or shall be declared to be null and void, (ii) any Collateral Document shall cease to be in full force and effect (other than by reason of a release of Collateral thereunder in accordance with the terms hereof or thereof, the satisfaction in full of the Obligations or any other termination of such Collateral Document in accordance with the terms hereof or thereof) or shall be declared null and void, or Administrative Agent shall not have or shall cease to have a valid and perfected First Priority Lien in any Collateral purported to be covered thereby, in each case for any reason other than the failure of Administrative Agent or any Lender to take any action within its control, or (iii) any Loan Party shall contest the validity or enforceability of any Loan Document in writing or deny in writing that it has any further liability, including with respect to future advances by Lenders, under any Loan Document to which it is a party; or 8.13 Failure to Consummate Merger. The Merger shall not be consummated in accordance with this Agreement and the applicable Related Agreements concurrently with the making of the initial Revolving Loans, or the Merger shall be unwound, reversed or otherwise rescinded in whole or in part for any reason; or 8.14 Amendment of Certain Documents of Company. Company shall agree to any material amendment to, or waive any of its material rights under, or otherwise change any material terms of, any of the Recapitalization Documents, in each case as in effect on the Closing Date, in a manner adverse to Company or any of its Subsidiaries or to Lenders without the prior written consent of Administrative Agent and Requisite Lenders; THEN (i) upon the occurrence of any Event of Default described in subsection 8.6 or 8.7, each of (a) the unpaid principal amount of and accrued interest on the Revolving Loans, (b) an amount equal to the maximum amount that may at any time be drawn under all Letters of Credit then outstanding (whether or not any beneficiary under any such Letter of Credit shall have presented, or shall be entitled at such time to present, the drafts or other documents or certificates required to draw under such Letter of Credit), and (c) all other Obligations shall automatically become immediately due and payable, without presentment, demand, protest or other requirements of any kind, all of which are hereby expressly waived by Company, and the obligation of each Lender to make any Revolving Loan, the obligation of Administrative Agent to issue any Letter of Credit and the right of any Lender to issue any Letter of Credit hereunder shall thereupon terminate, and (ii) upon the occurrence and during the continuation of any other Event of Default, Administrative Agent shall, upon the written request or with the written consent of Requisite Lenders, by REVOLVING LOAN CREDIT AGREEMENT EXECUTION 132 140 written notice to Company, declare all or any portion of the amounts described in clauses (a) through (c) above to be, and the same shall forthwith become, immediately due and payable, and the obligation of each Lender to make any Revolving Loan, the obligation of Administrative Agent to issue any Letter of Credit and the right of any Lender to issue any Letter of Credit hereunder shall thereupon terminate; provided that the foregoing shall not affect in any way the obligations of Lenders under subsection 3.3C(i). Any amounts described in clause (b) above, when received by Administrative Agent, shall be held by Collateral Agent pursuant to the terms of the Intercreditor Agreement and shall be applied as therein provided. Notwithstanding anything contained in the second preceding paragraph, if at any time within 60 days after an acceleration of the Revolving Loans pursuant to clause (ii) of such paragraph Company shall pay all arrears of interest and all payments on account of principal which shall have become due otherwise than as a result of such acceleration (with interest on principal and, to the extent permitted by law, on overdue interest, at the rates specified in this Agreement) and all Events of Default and Potential Events of Default (other than non-payment of the principal of and accrued interest on the Revolving Loans, in each case which is due and payable solely by virtue of acceleration) shall be remedied or waived pursuant to subsection 10.6, then Requisite Lenders, by written notice to Company, may at their option rescind and annul such acceleration and its consequences; but such action shall not affect any subsequent Event of Default or Potential Event of Default or impair any right consequent thereon. The provisions of this paragraph are intended merely to bind Lenders to a decision which may be made at the election of Requisite Lenders and are not intended, directly or indirectly, to benefit Company, and such provisions shall not at any time be construed so as to grant Company the right to require Lenders to rescind or annul any acceleration hereunder or to preclude Administrative Agent or Lenders from exercising any of the rights or remedies available to them under any of the Revolving Loan Documents, even if the conditions set forth in this paragraph are met. SECTION 9. AGENTS 9.1 Appointment. A. Appointment of Agents. GSCP is hereby appointed Arranger and Syndication Agent hereunder, and each Lender hereby authorizes Arranger and Syndication Agent to act as its agent in accordance with the terms of this Agreement and the other Revolving Loan Documents. Fleet is hereby appointed Administrative Agent hereunder and under the other Revolving Loan Documents and each Lender hereby authorizes Administrative Agent to act as its agent in accordance with the terms of this Agreement and the other Revolving Loan Documents. Fleet is also being appointed Collateral Agent under the Intercreditor Agreement and each Lender hereby authorizes Collateral Agent to act as its agent REVOLVING LOAN CREDIT AGREEMENT EXECUTION 133 141 in accordance with the terms of the Intercreditor Agreement and the other Revolving Loan Documents. Each Agent hereby agrees to act upon the express conditions contained in this Agreement and the other Revolving Loan Documents, as applicable. The provisions of this Section 9 are solely for the benefit of Agents and Lenders and Company shall have no rights as a third party beneficiary of any of the provisions thereof. In performing its functions and duties under this Agreement, each Agent shall act solely as an agent of Lenders and does not assume and shall not be deemed to have assumed any obligation towards or relationship of agency or trust with or for Company or any of its Subsidiaries. Each of Arranger and Syndication Agent, without consent of or notice to any party hereto, may assign any and all of its rights or obligations hereunder to any of its Affiliates. As of the Closing Date, all obligations of Arranger and Syndication Agent hereunder shall terminate. B. Appointment of Supplemental Collateral Agents. It is the purpose of this Agreement and the other Revolving Loan Documents that there shall be no violation of any law of any jurisdiction denying or restricting the right of banking corporations or associations to transact business as agent or trustee in such jurisdiction. It is recognized that in case of litigation under this Agreement or any of the other Revolving Loan Documents, and in particular in case of the enforcement of any of the Revolving Loan Documents, or in case Administrative Agent deems that by reason of any present or future law of any jurisdiction it may not exercise any of the rights, powers or remedies granted herein or in any of the other Revolving Loan Documents or take any other action which may be desirable or necessary in connection therewith, it may be necessary that Administrative Agent appoint an additional individual or institution as a separate trustee, co-trustee, collateral agent or collateral co-agent (any such additional individual or institution being referred to herein individually as a "Supplemental Collateral Agent" and collectively as "Supplemental Collateral Agents"). In the event that Administrative Agent appoints a Supplemental Collateral Agent with respect to any Collateral, (i) each and every right, power, privilege or duty expressed or intended by this Agreement or any of the other Revolving Loan Documents to be exercised by or vested in or conveyed to Administrative Agent with respect to such Collateral shall be exercisable by and vest in such Supplemental Collateral Agent to the extent, and only to the extent, necessary to enable such Supplemental Collateral Agent to exercise such rights, powers and privileges with respect to such Collateral and to perform such duties with respect to such Collateral, and every covenant and obligation contained in the Revolving Loan Documents and necessary to the exercise or performance thereof by such Supplemental Collateral Agent shall run to and be enforceable by either Agent or such Supplemental Collateral Agent, and (ii) the provisions of this Section 9 and of subsections 10.2 and 10.3 that refer to Administrative Agent shall inure to the benefit of such Supplemental Collateral Agent and all references therein to Administrative Agent shall be deemed to be references to Administrative Agent and/or such Supplemental Collateral Agent, as the context may require. REVOLVING LOAN CREDIT AGREEMENT EXECUTION 134 142 Should any instrument in writing from Company or any other Loan Party be required by any Supplemental Collateral Agent so appointed by Administrative Agent for more fully and certainly vesting in and confirming to him or it such rights, powers, privileges and duties, Company shall, or shall cause such Loan Party to, execute, acknowledge and deliver any and all such instruments promptly upon request by Administrative Agent. In case any Supplemental Collateral Agent, or a successor thereto, shall die, become incapable of acting, resign or be removed, all the rights, powers, privileges and duties of such Supplemental Collateral Agent, to the extent permitted by law, shall vest in and be exercised by Administrative Agent until the appointment of a new Supplemental Collateral Agent. 9.2 Powers and Duties; General Immunity. A. Powers; Duties Specified. Each Lender irrevocably authorizes each Agent to take such action on such Lender's behalf and to exercise such powers, rights and remedies hereunder and under the other Revolving Loan Documents as are specifically delegated or granted to such Agent by the terms hereof and thereof, together with such powers, rights and remedies as are reasonably incidental thereto. Each Agent shall have only those duties and responsibilities that are expressly specified in this Agreement and the other Revolving Loan Documents. Each Agent may exercise such powers, rights and remedies and perform such duties by or through its agents or employees. No Agent shall have, by reason of this Agreement or any of the other Revolving Loan Documents, a fiduciary relationship in respect of any Lender; and nothing in this Agreement or any of the other Revolving Loan Documents, expressed or implied, is intended to or shall be so construed as to impose upon any Agent any obligations in respect of this Agreement or any of the other Revolving Loan Documents except as expressly set forth herein or therein. B. No Responsibility for Certain Matters. No Agent shall be responsible to any Lender for the execution, effectiveness, genuineness, validity, enforceability, collectibility or sufficiency of this Agreement or any other Loan Document or for any representations, warranties, recitals or statements made herein or therein or made in any written or oral statements or in any financial or other statements, instruments, reports or certificates or any other documents furnished or made by any of Agent to Lenders or by or on behalf of Company to any Agent or any Lender in connection with the Revolving Loan Documents and the transactions contemplated thereby or for the financial condition or business affairs of Company or any other Person liable for the payment of any Obligations, nor shall any Agent be required to ascertain or inquire as to the performance or observance of any of the terms, conditions, provisions, covenants or agreements contained in any of the Revolving Loan Documents or as to the use of the proceeds of the Revolving Loans or as to the existence or possible existence of any Event of Default or Potential Event of Default. Anything contained in this Agreement to the contrary notwithstanding, Administrative Agent shall not have any liability arising from confirmations of the amount of outstanding Revolving Loans or the Letter of Credit Usage or the component amounts thereof. REVOLVING LOAN CREDIT AGREEMENT EXECUTION 135 143 C. Exculpatory Provisions. None of Agents nor any of their respective officers, partners, directors, employees or agents shall be liable to Lenders for any action taken or omitted by any Agent under or in connection with any of the Revolving Loan Documents except to the extent caused by such Agent's gross negligence or willful misconduct. Each Agent shall be entitled to refrain from any act or the taking of any action (including the failure to take an action) in connection with this Agreement or any of the other Revolving Loan Documents or from the exercise of any power, discretion or authority vested in it hereunder or thereunder unless and until such Agent shall have received instructions in respect thereof from Requisite Lenders (or such other Lenders as may be required to give such instructions under subsection 10.6) and, upon receipt of such instructions from Requisite Lenders (or such other Lenders, as the case may be), such Agent shall be entitled to act or (where so instructed) refrain from acting, or to exercise such power, discretion or authority, in accordance with such instructions. Without prejudice to the generality of the foregoing, (i) each Agent shall be entitled to rely, and shall be fully protected in relying, upon any communication, instrument or document believed by it to be genuine and correct and to have been signed or sent by the proper person or persons, and shall be entitled to rely and shall be protected in relying on opinions and judgments of attorneys (who may be attorneys for Company and its Subsidiaries), accountants, experts and other professional advisors selected by it; and (ii) no Lender shall have any right of action whatsoever against any Agent as a result of such Agent acting or (where so instructed) refraining from acting under this Agreement or any of the other Revolving Loan Documents in accordance with the instructions of Requisite Lenders (or such other Lenders as may be required to give such instructions under subsection 10.6). D. Agent Entitled to Act as Lender. The agency hereby created shall in no way impair or affect any of the rights and powers of, or impose any duties or obligations upon, any Agent in its individual capacity as a Lender hereunder. With respect to its participation in the Revolving Loans and the Letters of Credit, each Agent shall have the same rights and powers hereunder as any other Lender and may exercise the same as though it were not performing the duties and functions delegated to it hereunder, and the term "Lender" or "Lenders" or any similar term shall, unless the context clearly otherwise indicates, include each Agent in its individual capacity. Any Agent and its Affiliates may accept deposits from, lend money to and generally engage in any kind of banking, trust, financial advisory or other business with Company or any of its Affiliates as if it were not performing the duties specified herein, and may accept fees and other consideration from Company for services in connection with this Agreement and otherwise without having to account for the same to Lenders. 9.3 Representations and Warranties; No Responsibility For Appraisal of Creditworthiness. Each Lender represents and warrants that it has made its own independent investigation of the financial condition and affairs of Company and its Subsidiaries in connection with the making of the Revolving Loans and the issuance of Letters of Credit REVOLVING LOAN CREDIT AGREEMENT EXECUTION 136 144 hereunder and that it has made and shall continue to make its own appraisal of the creditworthiness of Company and its Subsidiaries. No Agent shall have any duty or responsibility, either initially or on a continuing basis, to make any such investigation or any such appraisal on behalf of Lenders or to provide any Lender with any credit or other information with respect thereto, whether coming into its possession before the making of the Revolving Loans or at any time or times thereafter, and no Agent shall have any responsibility with respect to the accuracy of or the completeness of any information provided to Lenders. 9.4 Right to Indemnity. Each Lender, in proportion to its Pro Rata Share, severally agrees to indemnify each Agent, to the extent that such Agent shall not have been reimbursed by Company, for and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses (including counsel fees and disbursements) or disbursements of any kind or nature whatsoever which may be imposed on, incurred by or asserted against such Agent in exercising its powers, rights and remedies or performing its duties hereunder or under the other Revolving Loan Documents or otherwise in its capacity as such Agent in any way relating to or arising out of this Agreement or the other Revolving Loan Documents; provided that no Lender shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from such Agent's gross negligence or willful misconduct and provided further that any such indemnification of the Collateral Agent shall be on the terms described in section 6(c) of the Intercreditor Agreement. If any indemnity furnished to any Agent for any purpose shall, in the opinion of such Agent, be insufficient or become impaired, such Agent may call for additional indemnity and cease, or not commence, to do the acts indemnified against until such additional indemnity is furnished. 9.5 Successor Agent. Successor Administrative Agent. Administrative Agent may resign at any time by giving 30 days' prior written notice thereof to Lenders and Company, and Administrative Agent may be removed at any time with or without cause by an instrument or concurrent instruments in writing delivered to Company and Administrative Agent and signed by Requisite Lenders. Upon any such notice of resignation or any such removal, Requisite Lenders shall have the right, upon five Business Days' notice to Company, to appoint a successor Administrative Agent. If no successor Administrative Agent shall have been so appointed by Requisite Lenders and shall have accepted such appointment within 30 days after the notice of the intent of the Administrative Agent to resign, then the retiring Administrative Agent may, on behalf of the Lenders, appoint a successor Administrative Agent. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor Administrative Agent, that successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring or removed Administrative Agent and the retiring or removed Administrative Agent REVOLVING LOAN CREDIT AGREEMENT EXECUTION 137 145 shall be discharged from its duties and obligations under this Agreement. After any retiring or removed Administrative Agent's resignation or removal hereunder as Administrative Agent, the provisions of this Section 9 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. 9.6 Collateral Documents and Guaranties. Each Lender hereby further authorizes Administrative Agent, on behalf of and for the benefit of Lenders, to enter into the Intercreditor Agreement and to appoint the Collateral Agent thereunder as agent for and representative of Lenders. Under the terms of the Intercreditor Agreement the Collateral Agent is authorized to enter into each Collateral Document as secured party and to be the agent for and representative of Secured Parties under the Subsidiary Guaranty, and each Lender agrees to be bound by the terms of the Intercreditor Agreement, each Collateral Document and the Subsidiary Guaranty. Administrative Agent shall not enter into or consent to any material amendment, modification or termination of the Intercreditor Agreement without the prior consent of Requisite Lenders. Each Lender acknowledges that under the terms of the Intercreditor Agreement without further written consent or authorization from Lenders, Collateral Agent may execute any documents or instruments necessary to (a) release any Lien encumbering any item of Collateral that is the subject of a sale or other disposition of assets permitted by this Agreement or to which Requisite Lenders have otherwise consented or (b) release any Subsidiary Guarantor from the Subsidiary Guaranty if all of the capital stock of such Subsidiary Guarantor is sold to any Person (other than an Affiliate of Company) pursuant to a sale or other disposition permitted hereunder or to which Requisite Lenders or Lenders (as applicable) have otherwise consented. Anything contained in any of the Revolving Loan Documents to the contrary notwithstanding, Company, Administrative Agent and each Lender hereby agree that (X) no Lender shall have any right individually to realize upon any of the Collateral under any Collateral Document or to enforce the Subsidiary Guaranty, it being understood and agreed that all powers, rights and remedies under the Collateral Documents and the Subsidiary Guaranty may be exercised solely by Collateral Agent for the benefit of Secured Parties in accordance with the terms thereof, and (Y) in the event of a foreclosure by Collateral Agent on any of the Collateral pursuant to a public or private sale, Collateral Agent or any Secured Party may be the purchaser of any or all of such Collateral at any such sale and Collateral Agent, as agent for and representative of Secured Parties (but not any Secured Party or Secured Parties in its or their respective individual capacities unless Requisite Lenders shall otherwise agree in writing) shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Collateral sold at any such public sale, to use and apply any of the Obligations as a credit on account of the purchase price for any collateral payable by Collateral Agent at such sale. The Lenders each further acknowledge and agree that pursuant to the Intercreditor Agreement and the Collateral Documents, Collateral Agent will act as the fonde de pouvoir (holder of the power of attorney) of the holders from time to time of Notes issued pursuant hereto to the extent necessary or desirable for the purposes of creating, maintaining or enforcing any Liens or guarantees created or established under any REVOLVING LOAN CREDIT AGREEMENT EXECUTION 138 146 Collateral Documents contemplated hereby to be executed under the laws of the Province of Quebec, Canada including, without limiting the generality of the foregoing, entering into any such Collateral Documents and exercising all or any of the rights, powers, trusts or duties conferred upon the Collateral Agent therein and in the Intercreditor Agreement and each holder of Notes by receiving and holding same accepts and confirms the appointment of the collateral Agent as fonde de pouvoir (holder of the power of attorney) of such holder for such purposes. SECTION 10. MISCELLANEOUS 10.1 Assignments and Participations in Loans and Letters of Credit. A. General. Subject to subsection 10.1B, each Lender shall have the right at any time to (i) sell, assign or transfer to any Eligible Assignee, or (ii) sell participations to any Person in, all or any part of its Revolving Loan Commitments or any Revolving Loan or Revolving Loans made by it or its Letters of Credit or participations therein or any other interest herein or in any other Obligations owed to it; provided that no such sale, assignment, transfer or participation shall, without the consent of Company, require Company to file a registration statement with the Securities and Exchange Commission or apply to qualify such sale, assignment, transfer or participation under the securities laws of any state; provided, further that no such sale, assignment or transfer described in clause (i) above shall be effective unless and until an Assignment Agreement effecting such sale, assignment or transfer shall have been accepted by Administrative Agent and recorded in the Register as provided in subsection 10.1B(ii); provided, further that no such sale, assignment, transfer or participation of any Letter of Credit or any participation therein may be made separately from a sale, assignment, transfer or participation of a corresponding interest in the Revolving Loan Commitment and the Revolving Loans of the Lender effecting such sale, assignment, transfer or participation. Except as otherwise provided in this subsection 10.1, no Lender shall, as between Company and such Lender, be relieved of any of its obligations hereunder as a result of any sale, assignment or transfer of, or any granting of participations in, all or any part of its Revolving Loan Commitments or the Revolving Loans, the Letters of Credit or participations therein, or the other Obligations owed to such Lender. B. Assignments. (i) Amounts and Terms of Assignments. Each Revolving Loan Commitment, Revolving Loan, Letter of Credit or participation therein, or other Obligation may (a) be assigned in any amount to another Lender, or to a Related Fund or an Affiliate of the assigning Lender or another Lender, with the giving of notice to Company, Administrative Agent and Syndication Agent or (b) be assigned in an aggregate amount of not less than $5,000,000 (or such lesser amount as shall REVOLVING LOAN CREDIT AGREEMENT EXECUTION 139 147 constitute the aggregate amount of the Revolving Loan Commitments, Revolving Loans, Letters of Credit and participations therein, and other Obligations of the assigning Lender) to any other Eligible Assignee with the giving of notice to Company and with the consent of Administrative Agent and Syndication Agent (which consent shall not be unreasonably withheld or delayed). To the extent of any such assignment in accordance with either clause (a) or (b) above, the assigning Lender shall be relieved of its obligations with respect to its Revolving Loan Commitments, Revolving Loans, Letters of Credit or participations therein, or other Obligations or the portion thereof so assigned. The parties to each such assignment shall execute and deliver to Administrative Agent, for its acceptance and recording in the Register, an Assignment Agreement, together with a processing and recordation fee of $500, if such assignment is to another Lender or an Affiliate or Related Fund of the assigning Lender, or $2000, if such assignment is to any other Eligible Assignee, and such forms, certificates or other evidence, if any, with respect to United States federal income tax withholding matters as the assignee under such Assignment Agreement may be required to deliver to Administrative Agent pursuant to subsection 2.7B(iii)(a). Upon such execution, delivery, acceptance and recordation, from and after the effective date specified in such Assignment Agreement, (y) the assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment Agreement, shall have the rights and obligations of a Lender hereunder and (z) the assigning Lender thereunder shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment Agreement, relinquish its rights (other than any rights which survive the termination of this Agreement under subsection 10.9B) and be released from its obligations under this Agreement (and, in the case of an Assignment Agreement covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto; provided that, anything contained in any of the Revolving Loan Documents to the contrary notwithstanding, if such Lender is the Issuing Lender with respect to any outstanding Letters of Credit such Lender shall continue to have all rights and obligations of an Issuing Lender with respect to such Letters of Credit until the cancellation or expiration of such Letters of Credit and the reimbursement of any amounts drawn thereunder). The Revolving Loan Commitments hereunder shall be modified to reflect the Revolving Loan Commitment of such assignee and any remaining Revolving Loan Commitment of such assigning Lender and, if any such assignment occurs after the issuance of the Revolving Notes hereunder, the assigning Lender shall, upon the effectiveness of such assignment or as promptly thereafter as practicable, surrender its applicable Revolving Notes to Administrative Agent for cancellation, and thereupon new Revolving Notes shall be issued to the assignee and/or to the assigning Lender, substantially in the form of Exhibit V annexed hereto, as the case may be, with appropriate insertions, to reflect the new Revolving Loan Commitments of the assignee and/or the assigning Lender. REVOLVING LOAN CREDIT AGREEMENT EXECUTION 140 148 (ii) Acceptance by Administrative Agent; Recordation in Register. Upon its receipt of an Assignment Agreement executed by an assigning Lender and an assignee representing that it is an Eligible Assignee, together with the processing and recordation fee referred to in subsection 10.1B(i) and any forms, certificates or other evidence with respect to United States federal income tax withholding matters that such assignee may be required to deliver to Administrative Agent pursuant to subsection 2.7B(iii)(a), Administrative Agent shall, if Administrative Agent has consented to the assignment evidenced thereby (to the extent such consent is required pursuant to subsection 10.1B(i)), (a) accept such Assignment Agreement by executing a counterpart thereof as provided therein (which acceptance shall evidence any required consent of Administrative Agent to such assignment), (b) record the information contained therein in the Register, and (c) give prompt notice thereof to Company. Administrative Agent shall maintain a copy of each Assignment Agreement delivered to and accepted by it as provided in this subsection 10.1B(ii). C. Participations. The holder of any participation, other than an Affiliate of the Lender granting such participation, shall not be entitled to require such Lender to take or omit to take any action hereunder except action directly affecting (i) the extension of the regularly scheduled maturity of any portion of the principal amount of or interest on any Revolving Loan allocated to such participation or (ii) a reduction of the principal amount of or the rate of interest payable on any Revolving Loan allocated to such participation, and all amounts payable by Company hereunder (including amounts payable to such Lender pursuant to subsections 2.6D, 2.7 and 3.6) shall be determined as if such Lender had not sold such participation. Company and each Lender hereby acknowledge and agree that, solely for purposes of subsections 10.4 and 10.5, (a) any participation will give rise to a direct obligation of Company to the participant and (b) the participant shall be considered to be a "Lender". D. Assignments to Federal Reserve Banks. In addition to the assignments and participations permitted under the foregoing provisions of this subsection 10.1, any Lender may assign and pledge all or any portion of its Revolving Loans, the other Obligations owed to such Lender, and its Revolving Notes to any Federal Reserve Bank as collateral security pursuant to Regulation A of the Board of Governors of the Federal Reserve System and any operating circular issued by such Federal Reserve Bank; provided that (i) no Lender shall, as between Company and such Lender, be relieved of any of its obligations hereunder as a result of any such assignment and pledge and (ii) in no event shall such Federal Reserve Bank be considered to be a "Lender" or be entitled to require the assigning Lender to take or omit to take any action hereunder. E. Information. Each Lender may furnish any information concerning Company and its Subsidiaries in the possession of that Lender from time to time to assignees and participants (including prospective assignees and participants), subject to subsection 10.19. 141 149 F. Representations of Lenders. Each Lender listed on the signature pages hereof hereby represents and warrants (i) that it is an Eligible Assignee described in clause (A) of the definition thereof; (ii) that it has experience and expertise in the making of or investing in loans such as the Revolving Loans; and (iii) that it will make its Revolving Loans for its own account in the ordinary course of its business and without a view to distribution of such Revolving Loans within the meaning of the Securities Act or the Exchange Act or other federal securities laws (it being understood that, subject to the provisions of this subsection 10.1, the disposition of such Revolving Loans or any interests therein shall at all times remain within its exclusive control). Each Lender that becomes a party hereto pursuant to an Assignment Agreement shall be deemed to agree that the representations and warranties of such Lender contained in Section 2(c) of such Assignment Agreement are incorporated herein by this reference. 10.2 Expenses. Whether or not the transactions contemplated hereby shall be consummated, Company agrees to pay promptly (i) all the actual and reasonable costs and expenses of preparation of the Revolving Loan Documents and any consents, amendments, waivers or other modifications thereto; (ii) all the costs of furnishing all opinions by counsel for Company (including any opinions requested by Lenders as to any legal matters arising hereunder) and of Company's performance of and compliance with all agreements and conditions on its part to be performed or complied with under this Agreement and the other Revolving Loan Documents including with respect to confirming compliance with environmental, insurance and solvency requirements; (iii) the reasonable fees, expenses and disbursements of counsel to Arranger and counsel to Administrative Agent (in each case including allocated costs of internal counsel) in connection with the negotiation, preparation, execution and administration of the Revolving Loan Documents and any consents, amendments, waivers or other modifications thereto and any other documents or matters requested by Company; (iv) all the actual costs and reasonable expenses of creating and perfecting Liens in favor of Collateral Agent on behalf of Secured Parties pursuant to any Collateral Document, including filing and recording fees, expenses and taxes, stamp or documentary taxes, search fees, title insurance premiums, and reasonable fees, expenses and disbursements of counsel to Arranger and counsel to Administrative Agent and of counsel providing any opinions that Arranger, Administrative Agent or Requisite Lenders may request in respect of the Collateral Documents or the Liens created pursuant thereto; (v) all the actual costs and reasonable expenses (including the reasonable fees, expenses and disbursements of any auditors, accountants or appraisers and any environmental or other consultants, advisors and agents employed or retained by Administrative Agent or Arranger and its counsel) of obtaining and reviewing any appraisals provided for under subsection 4.1L or 6.9C, any environmental audits or reports provided for under subsection 4.1M or 6.9B(viii) and any audits or reports provided for under subsection 4.1K or 6.5B with respect to Inventory and accounts receivable of Company and its Subsidiaries; (vi) all the actual costs and reasonable expenses (including the reasonable fees, expenses and disbursements of any consultants, advisors and agents employed or retained by Administrative Agent and 142 150 its counsel) in connection with the custody or preservation of any of the Collateral; (vii) all other actual and reasonable costs and expenses incurred by Syndication Agent, Arranger or Administrative Agent in connection with the syndication of the Revolving Loan Commitments and the negotiation, preparation and execution of the Revolving Loan Documents and any consents, amendments, waivers or other modifications thereto and the transactions contemplated thereby; and (viii) after the occurrence of an Event of Default, all costs and expenses, including reasonable attorneys' fees (including allocated costs of internal counsel) and costs of settlement, incurred by Arranger, Administrative Agent and Lenders in enforcing any Obligations of or in collecting any payments due from any Loan Party hereunder or under the other Revolving Loan Documents by reason of such Event of Default (including in connection with the sale of, collection from, or other realization upon any of the Collateral or the enforcement of the Subsidiary Guaranty) or in connection with any refinancing or restructuring of the credit arrangements provided under this Agreement in the nature of a "work-out" or pursuant to any insolvency or bankruptcy proceedings. 10.3 Indemnity. In addition to the payment of expenses pursuant to subsection 10.2, whether or not the transactions contemplated hereby shall be consummated, Company agrees to defend (subject to Indemnitees' selection of counsel), indemnify, pay and hold harmless Agents and Lenders, and the officers, partners, directors, employees, agents and affiliates of any of Agents and Lenders (collectively called the "Indemnitees"), from and against any and all Indemnified Liabilities (as hereinafter defined); provided that Company shall not have any obligation to any Indemnitee hereunder with respect to any Indemnified Liabilities to the extent such Indemnified Liabilities arise solely from the gross negligence or willful misconduct of that Indemnitee as determined by a final, non-appealable judgment of a court of competent jurisdiction. As used herein, "Indemnified Liabilities" means, collectively, any and all liabilities, obligations, losses, damages (including natural resource damages), penalties, actions, judgments, suits, claims (including Environmental Claims), costs (including the costs of any investigation, study, sampling, testing, abatement, cleanup, removal, remediation or other response action necessary to remove, remediate, clean up or abate any Hazardous Materials Activity), expenses and disbursements of any kind or nature whatsoever (including the reasonable fees and disbursements of counsel for Indemnitees in connection with any investigative, administrative or judicial proceeding commenced or threatened by any Person, whether or not any such Indemnitee shall be designated as a party or a potential party thereto, and any fees or expenses incurred by Indemnitees in enforcing this indemnity), whether direct, indirect or consequential and whether based on any federal, state or foreign laws, statutes, rules or regulations (including securities and commercial laws, statutes, rules or regulations and Environmental Laws), on common law or equitable cause or on contract or otherwise, that may be imposed on, incurred by, or asserted against any such Indemnitee, in any manner relating to or arising out of (i) this Agreement or the other Revolving Loan Documents or the Related Agreements or the transactions contemplated hereby or thereby 143 151 (including Lenders' agreement to make the Revolving Loans hereunder or the use or intended use of the proceeds thereof or the issuance of Letters of Credit hereunder or the use or intended use of any thereof, or any enforcement of any of the Revolving Loan Documents (including any sale of, collection from, or other realization upon any of the Collateral or the enforcement of the Subsidiary Guaranty)), (ii) the statements contained in the commitment letter delivered by any Lender to Company with respect thereto, or (iii) any Environmental Claim or any Hazardous Materials Activity relating to or arising from, directly or indirectly, any past or present activity, operation, land ownership, or practice of Company or any of its Subsidiaries. To the extent that the undertakings to defend, indemnify, pay and hold harmless set forth in this subsection 10.3 may be unenforceable in whole or in part because they are violative of any law or public policy, Company shall contribute the maximum portion that it is permitted to pay and satisfy under applicable law to the payment and satisfaction of all Indemnified Liabilities incurred by Indemnitees or any of them. 10.4 Set-Off; Security Interest in Deposit Accounts. In addition to any rights now or hereafter granted under applicable law and not by way of limitation of any such rights, upon the occurrence of any Event of Default each Lender is hereby authorized by Company at any time or from time to time, subject to the consent of Administrative Agent, without notice to Company or to any other Person (other than Administrative Agent), any such notice being hereby expressly waived, to set off and to appropriate and to apply any and all deposits (general or special, including Indebtedness evidenced by certificates of deposit, whether matured or unmatured, but not including trust accounts) and any other Indebtedness at any time held or owing by that Lender to or for the credit or the account of Company against and on account of the obligations and liabilities of Company to that Lender under this Agreement, the Letters of Credit and participations therein and the other Revolving Loan Documents, including all claims of any nature or description arising out of or connected with this Agreement, the Letters of Credit and participations therein or any other Revolving Loan Document, irrespective of whether or not (i) that Lender shall have made any demand hereunder or (ii) the principal of or the interest on the Revolving Loans or any amounts in respect of the Letters of Credit or any other amounts due hereunder shall have become due and payable pursuant to Section 8 and although said obligations and liabilities, or any of them, may be contingent or unmatured. Company hereby further grants to Collateral Agent and each Lender a security interest in all deposits and accounts maintained with Administrative Agent or such Lender as security for the Obligations. 10.5 Ratable Sharing. Lenders hereby agree among themselves that if any of them shall, whether by voluntary payment (other than a voluntary prepayment of Revolving Loans made and applied in accordance with the terms of this Agreement), by realization upon security, 144 152 through the exercise of any right of set-off or banker's lien, by counterclaim or cross action or by the enforcement of any right under the Revolving Loan Documents or otherwise, or as adequate protection of a deposit treated as cash collateral under the Bankruptcy Code, receive payment or reduction of a proportion of the aggregate amount of principal, interest, amounts payable in respect of Letters of Credit, fees and other amounts then due and owing to that Lender hereunder or under the other Revolving Loan Documents (collectively, the "Aggregate Amounts Due" to such Lender) which is greater than the proportion received by any other Lender in respect of the Aggregate Amounts Due to such other Lender, then the Lender receiving such proportionately greater payment shall (i) notify Administrative Agent and each other Lender of the receipt of such payment and (ii) apply a portion of such payment to purchase participations (which it shall be deemed to have purchased from each seller of a participation simultaneously upon the receipt by such seller of its portion of such payment) in the Aggregate Amounts Due to the other Lenders so that all such recoveries of Aggregate Amounts Due shall be shared by all Lenders in proportion to the Aggregate Amounts Due to them; provided that if all or part of such proportionately greater payment received by such purchasing Lender is thereafter recovered from such Lender upon the bankruptcy or reorganization of Company or otherwise, those purchases shall be rescinded and the purchase prices paid for such participations shall be returned to such purchasing Lender ratably to the extent of such recovery, but without interest. Company expressly consents to the foregoing arrangement and agrees that any holder of a participation so purchased may exercise any and all rights of banker's lien, set-off or counterclaim with respect to any and all monies owing by Company to that holder with respect thereto as fully as if that holder were owed the amount of the participation held by that holder. 10.6 Amendments and Waivers. A. No amendment, modification, termination or waiver of any provision of the Revolving Loan Documents, or consent to any departure by the Company therefrom, shall in any event be effective without the written concurrence of Requisite Lenders; provided that no such amendment, modification, termination, waiver or consent shall, without the consent of each Lender (with Obligations directly affected in the case of the following clause (i)): (i) extend the scheduled final maturity of any Revolving Loan or Revolving Note, or extend the stated expiration date of any Letter of Credit beyond the Revolving Loan Commitment Termination Date, or reduce the rate of interest on any Revolving Loan (other than any waiver of any increase in the interest rate applicable to any Revolving Loan pursuant to subsection 2.2E) or any commitment fees or letter of credit fees payable hereunder, or extend the time for payment of any such interest or fees, or reduce the principal amount of any Revolving Loan or any reimbursement obligation in respect of any Letter of Credit, (ii) amend, modify, terminate or waive any provision of this subsection 10.6, (iii) reduce the percentage specified in the definition of "Requisite Lenders" (it being understood that, with the consent of Requisite Lenders, additional extensions of credit pursuant to this Agreement may be included in the determination of "Requisite Lenders" on substantially the same basis as the Revolving Loan Commitments and the Revolving Loans are included on the Closing Date), (iv) consent to the assignment or transfer by the 145 153 Company of any of its rights and obligations under this Agreement or (v) release all or substantially all the Liens granted pursuant to the Collateral Documents (including Liens on real property) or to release any Subsidiary from the Subsidiary Guaranty if such release would constitute a release of all or substantially all of the Collateral; provided, further that no such amendment, modification, termination or waiver shall (1) increase the Revolving Loan Commitments of any Lender over the amount thereof then in effect without the consent of such Lender (it being understood that no amendment, modification or waiver of any condition precedent, covenant, Potential Event of Default or Event of Default shall constitute an increase in the Revolving Loan Commitment of any Lender, and that no increase in the available portion of any Revolving Loan Commitment of any Lender shall constitute an increase in such Revolving Loan Commitment of such Lender); (2) amend, modify, terminate or waive any obligation of Lenders relating to the purchase of participations in Letters of Credit as provided in subsection 3.1C without the written concurrence of Administrative Agent and of each Issuing Lender which has a Letter of Credit then outstanding or which has not been reimbursed for a drawing under a Letter of Credit issued it; or (3) amend, modify, terminate or waive any provision of Section 9 as the same applies to any Agent, or any other provision of this Agreement as the same applies to the rights or obligations of any Agent, in each case without the consent of such Agent. B. Administrative Agent may, but shall have no obligation to, with the concurrence of any Lender, execute amendments, modifications, waivers or consents on behalf of that Lender. Any waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. No notice to or demand on the Company in any case shall entitle Company to any other or further notice or demand in similar or other circumstances. Any amendment, modification, termination, waiver or consent effected in accordance with this subsection 10.6 shall be binding upon each Lender at the time outstanding, each future Lender and, if signed by Company, the Company. 10.7 Independence of Covenants. All covenants hereunder shall be given independent effect so that if a particular action or condition is not permitted by any of such covenants, the fact that it would be permitted by an exception to, or would otherwise be within the limitations of, another covenant shall not avoid the occurrence of an Event of Default or Potential Event of Default if such action is taken or condition exists. 10.8 Notices. Unless otherwise specifically provided herein, any notice or other communication herein required or permitted to be given shall be in writing and may be personally served, telexed or sent by telefacsimile or United States mail or courier service and shall be deemed to have been given when delivered in person or by courier service, upon receipt of telefacsimile or telex, or three Business Days after depositing it in the United States mail with postage prepaid and properly addressed; provided that notices to Arranger, Syndication 146 154 Agent or Administrative Agent shall not be effective until received. For the purposes hereof, the address of each party hereto shall be as set forth under such party's name on the signature pages hereof or (i) as to Company and Administrative Agent, such other address as shall be designated by such Person in a written notice delivered to the other parties hereto and (ii) as to each other party, such other address as shall be designated by such party in a written notice delivered to Administrative Agent and Company. 10.9 Survival of Representations, Warranties and Agreements. A. All representations, warranties and agreements made herein shall survive the execution and delivery of this Agreement and the making of the Revolving Loans and the issuance of the Letters of Credit hereunder. B. Notwithstanding anything in this Agreement or implied by law to the contrary, the agreements of Company set forth in subsections 2.6D, 2.7, 3.5A, 3.6, 10.2, 10.3 and 10.4 and the agreements of Lenders set forth in subsections 9.2C, 9.4 and 10.5 shall survive the payment of the Revolving Loans, the cancellation or expiration of the Letters of Credit and the reimbursement of any amounts drawn thereunder, and the termination of this Agreement. 10.10 Failure or Indulgence Not Waiver; Remedies Cumulative. No failure or delay on the part of Administrative Agent or any Lender in the exercise of any power, right or privilege hereunder or under any other Revolving Loan Document shall impair such power, right or privilege or be construed to be a waiver of any default or acquiescence therein, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other power, right or privilege. All rights and remedies existing under this Agreement and the other Revolving Loan Documents are cumulative to, and not exclusive of, any rights or remedies otherwise available. 10.11 Marshalling; Payments Set Aside. Neither Administrative Agent nor any Lender shall be under any obligation to marshal any assets in favor of Company or any other party or against or in payment of any or all of the Obligations. To the extent that Company makes a payment or payments to Administrative Agent or Lenders (or to Administrative Agent for the benefit of Lenders), or Administrative Agent or Lenders enforce any security interests or exercise their rights of setoff, and such payment or payments or the proceeds of such enforcement or setoff or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside and/or required to be repaid to a trustee, receiver or any other party under any bankruptcy law, any other state or federal law, common law or any equitable cause, then, to the extent of such recovery, the obligation or part thereof originally intended to be satisfied, and all Liens, rights and remedies therefor or related thereto, shall be revived and continued in full 147 155 force and effect as if such payment or payments had not been made or such enforcement or setoff had not occurred. 10.12 Severability. In case any provision in or obligation under this Agreement or the Revolving Notes shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. 10.13 Obligations Several; Independent Nature of Lenders' Rights. The obligations of Lenders hereunder are several and no Lender shall be responsible for the obligations or Revolving Loan Commitments of any other Lender hereunder. Nothing contained herein or in any other Loan Document, and no action taken by Lenders pursuant hereto or thereto, shall be deemed to constitute Lenders as a partnership, an association, a joint venture or any other kind of entity. The amounts payable at any time hereunder to each Lender shall be a separate and independent debt, and each Lender shall be entitled to protect and enforce its rights arising out of this Agreement and it shall not be necessary for any other Lender to be joined as an additional party in any proceeding for such purpose. 10.14 Headings. Section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect. 10.15 Applicable Law. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES. 10.16 Successors and Assigns. This Agreement shall be binding upon the parties hereto and their respective successors and assigns and shall inure to the benefit of the parties hereto and the successors and assigns of Lenders (it being understood that Lenders' rights of assignment are subject to subsection 10.1). Neither Company's rights or obligations hereunder nor any interest 148 156 therein may be assigned or delegated by Company without the prior written consent of all Lenders. 10.17 Consent to Jurisdiction and Service of Process. ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST COMPANY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY OBLIGATIONS THEREUNDER, MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE, COUNTY AND CITY OF NEW YORK. BY EXECUTING AND DELIVERING THIS AGREEMENT, COMPANY, FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, IRREVOCABLY (I) ACCEPTS GENERALLY AND UNCONDITIONALLY THE NONEXCLUSIVE JURISDICTION AND VENUE OF SUCH COURTS; (II) WAIVES ANY DEFENSE OF FORUM NON CONVENIENS; (III) AGREES THAT SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDING IN ANY SUCH COURT MAY BE MADE BY REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO COMPANY AT ITS ADDRESS PROVIDED IN ACCORDANCE WITH SUBSECTION 10.8; (IV) AGREES THAT SERVICE AS PROVIDED IN CLAUSE (III) ABOVE IS SUFFICIENT TO CONFER PERSONAL JURISDICTION OVER COMPANY IN ANY SUCH PROCEEDING IN ANY SUCH COURT, AND OTHERWISE CONSTITUTES EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT; (V) AGREES THAT LENDERS RETAIN THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO BRING PROCEEDINGS AGAINST COMPANY IN THE COURTS OF ANY OTHER JURISDICTION; AND (VI) AGREES THAT THE PROVISIONS OF THIS SUBSECTION 10.17 RELATING TO JURISDICTION AND VENUE SHALL BE BINDING AND ENFORCEABLE TO THE FULLEST EXTENT PERMISSIBLE UNDER NEW YORK GENERAL OBLIGATIONS LAW SECTION 5-1402 OR OTHERWISE. 10.18 Waiver of Jury Trial. EACH OF THE PARTIES TO THIS AGREEMENT HEREBY AGREES TO WAIVE ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY OF THE OTHER REVOLVING LOAN DOCUMENTS OR ANY DEALINGS BETWEEN THEM RELATING 149 157 TO THE SUBJECT MATTER OF THIS LOAN TRANSACTION OR THE LENDER/BORROWER RELATIONSHIP THAT IS BEING ESTABLISHED. The scope of this waiver is intended to be all-encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including contract claims, tort claims, breach of duty claims and all other common law and statutory claims. Each party hereto acknowledges that this waiver is a material inducement to enter into a business relationship, that each has already relied on this waiver in entering into this Agreement, and that each will continue to rely on this waiver in their related future dealings. Each party hereto further warrants and represents that it has reviewed this waiver with its legal counsel and that it knowingly and voluntarily waives its jury trial rights following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING (OTHER THAN BY A MUTUAL WRITTEN WAIVER SPECIFICALLY REFERRING TO THIS SUBSECTION 10.18 AND EXECUTED BY EACH OF THE PARTIES HERETO), AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT OR ANY OF THE OTHER REVOLVING LOAN DOCUMENTS OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THE OBLIGATIONS MADE HEREUNDER. In the event of litigation, this Agreement may be filed as a written consent to a trial by the court. 10.19 Confidentiality. Each Lender shall hold all non-public information obtained pursuant to the requirements of this Agreement in accordance with such Lender's customary procedures for handling confidential information of this nature and in accordance with safe and sound banking practices (and any Lender without such customary procedures agrees to keep such information confidential), it being understood and agreed by Company that in any event a Lender may make disclosures to Affiliates or Related Funds of such Lender or disclosures reasonably required by any bona fide assignee, transferee or participant in connection with the contemplated assignment or transfer by such Lender of any Revolving Loans or any participations therein (so long as such Persons agree in advance in writing to keep such information confidential) or disclosures required or requested by any governmental agency or representative thereof or pursuant to legal process; provided that, unless specifically prohibited by applicable law or court order, each Lender shall notify Company of any request by any governmental agency or representative thereof (other than any such request in connection with any examination of the financial condition of such Lender by such governmental agency) for disclosure of any such non-public information prior to disclosure of such information; and provided, further that in no event shall any Lender be obligated or required to return any materials furnished by Company or any of its Subsidiaries. 10.20 Counterparts; Effectiveness. This Agreement and any amendments, waivers, consents or supplements hereto or in connection herewith may be executed in any number of counterparts and by different REVOLVING LOAN CREDIT AGREEMENT EXECUTION 150 158 parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. This Agreement shall become effective upon the execution of a counterpart hereof by each of the parties hereto and receipt by Company and Administrative Agent of written or telephonic authorization of delivery thereof. [Remainder of page intentionally left blank] 151 159 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above. COMPANY: AMSCAN HOLDINGS, INC. By: /s/ Gerald C. Rittenberg ------------------------------ Name: Gerald C. Rittenberg Title: Chief Executive Officer Notice Address: Amscan Holdings, Inc. 80 Grasslands Road Elmsford, New York 10523 Attention: James M. Harrison Telecopy: (914) 345-2056 REVOLVING LOAN CREDIT AGREEMENT EXECUTION S-1 160 AGENTS AND LENDERS: GOLDMAN SACHS CREDIT PARTNERS L.P., as Arranger and Syndication Agent By: /s/ ------------------------ Authorized Signatory Notice Address: Goldman Sachs Credit Partners L.P. 16th Floor 85 Broad Street New York, New York 10004 Attention: Stephen King (Credit) Telecopy: (212) 902-2417 With a copy to: Goldman Sachs Credit Partners L.P. 27th Floor 85 Broad Street New York, New York 10004 Attention: Kathy King (Operations) Telecopy: (212) 902-3757 REVOLVING LOAN CREDIT AGREEMENT S-2 161 FLEET NATIONAL BANK, individually and as Administrative Agent By: /s/ Robert H. Dial ------------------------ Name: Robert H. Dial Title: Director Notice Address: Fleet National Bank One Federal Street, 5th Floor Mail Stop MAOFD05P Boston, Massachusetts 02110 Attention: John Mann Telecopy: (617) 346-4682 with a copy to: Fleet National Bank One Federal Street, 3rd Floor Mail Stop MAOFD03C Boston, Massachusetts 02110 Attention: Steve Curran Telecopy: (617) 346-5093 REVOLVING LOAN CREDIT AGREEMENT EXECUTION S-3 162 GENERAL ELECTRIC CAPITAL CORPORATION By: /s/ Murry K. Stegelmann ----------------------- Name: Murry K. Stegelmann Title: Duly Authorized Signatory Notice Address: GE Capital 201 High Ridge Road Stamford, CT 06927-5200 Attention: Joseph Badini, Associate Telecopy: (203) 316-7978 With a copy to: GE Capital 201 High Ridge Road Stamford, CT 06927-5200 Attention: Janet K. Williams, Senior Vice President Telecopy: (203) 316-7978 REVOLVING LOAN CREDIT AGREEMENT S-4 163 SOUTHERN PACIFIC BANK By: /s/ Charles Martorano ---------------------------- Name: Charles Martorano Title: Senior Vice President Notice Address: Southern Pacific Bank 12300 Wilshire Blvd. Los Angeles, CA 90025 Attention: Chris Kelleher Telecopy: (310) 207-4067 With a copy to: Southern Pacific Bank 12300 Wilshire Blvd. Los Angeles, CA 90025 Attention: Chuck Martorano Telecopy: (310) 207-4067 REVOLVING LOAN CREDIT AGREEMENT S-5 164 TRANSAMERICA BUSINESS CREDIT CORPORATION By: /s/ Perry Vavoules ------------------------ Name: Perry Vavoules Title: Senior Vice President Notice Address: Transamerica Business Credit Corporation 555 Theodore Fremd Avenue, Suite C-301 Rye, New York 10580 Attention: Ron Walker (Credit) Telecopy: (914) 921-0110 With a copy to: Transamerica Business Credit Corporation 555 Theodore Fremd Avenue, Suite C-301 Rye, New York 10580 Attention: Maria Bellizzi (Operations) Telecopy: (914) 925-7248 REVOLVING LOAN CREDIT AGREEMENT S-6 EX-10.3 3 AXEL CREDIT AGREEMENT 1 Exhibit 10.3 ================================================================================ AXEL CREDIT AGREEMENT DATED AS OF DECEMBER 19, 1997 AMONG AMSCAN HOLDINGS, INC., AS BORROWER, THE LENDERS LISTED HEREIN, AS LENDERS, GOLDMAN SACHS CREDIT PARTNERS L.P., AS ARRANGER AND SYNDICATION AGENT, AND FLEET NATIONAL BANK, AS ADMINISTRATIVE AGENT ================================================================================ AXEL CREDIT AGREEMENT EXECUTION 2 AMSCAN HOLDINGS, INC. AXEL CREDIT AGREEMENT TABLE OF CONTENTS Page ---- SECTION 1. DEFINITIONS.............................. 3 1.1 Certain Defined Terms.................................... 3 1.2 Accounting Terms; Utilization of GAAP for Purposes of Calculations Under Agreement............................. 36 1.3 Other Definitional Provisions and Rules of Construction.. 36 SECTION 2. AMOUNTS AND TERMS OF COMMITMENTS AND LOANS............... 37 2.1 Commitments; Making of Loans; the Register; Notes........ 37 2.2 Interest on the Loans.................................... 40 2.3 Fees..................................................... 44 2.4 Repayments, Prepayments; General Provisions Regarding Payments; Application of Proceeds of Collateral and Payments Under Subsidiary Guaranty....................... 44 2.5 Use of Proceeds.......................................... 49 2.6 Special Provisions Governing Eurodollar Rate AXELs....... 50 2.7 Increased Costs; Taxes; Capital Adequacy................. 52 2.8 Obligation of Lenders to Mitigate........................ 56 2.9 Removal or Replacement of a Lender....................... 57 SECTION 3. CONDITIONS TO AXELs.......................... 58 3.1 Certain Conditions to AXELs.............................. 58 3.2 Additional Conditions to AXELs........................... 66 SECTION 4. COMPANY'S REPRESENTATIONS AND WARRANTIES................ 68 4.1 Organization, Powers, Qualification, Good Standing, Business and Subsidiaries................................ 68 4.2 Authorization of Borrowing, etc.......................... 69 4.3 Financial Condition...................................... 70 4.4 No Material Adverse Change; No Restricted Payments....... 71 4.5 Title to Properties; Liens; Real Property................ 71 4.6 Litigation; Adverse Facts................................ 71 4.7 Payment of Taxes......................................... 72 AXEL CREDIT AGREEMENT EXECUTION (i) 3 Page ---- 4.8 Performance of Agreements; Materially Adverse Agreements; Material Contracts........................... 72 4.9 Governmental Regulation.................................. 73 4.10 Securities Activities.................................... 73 4.11 Employee Benefit Plans................................... 73 4.12 Certain Fees............................................. 74 4.13 Environmental Protection................................. 74 4.14 Employee Matters......................................... 75 4.15 Solvency................................................. 75 4.16 Matters Relating to Collateral........................... 75 4.17 Related Agreements....................................... 76 4.18 Disclosure............................................... 76 SECTION 5. COMPANY'S AFFIRMATIVE COVENANTS.................... 77 5.1 Financial Statements and Other Reports................... 77 5.2 Corporate Existence, etc................................. 83 5.3 Payment of Taxes and Claims; Tax Consolidation........... 83 5.4 Maintenance of Properties; Insurance; Application of Net Insurance/Condemnation Proceeds.......................... 84 5.5 Inspection Rights; Lender Meeting........................ 85 5.6 Compliance with Laws, etc................................ 86 5.7 Environmental Review and Investigation, Disclosure, Etc.; Company's Actions Regarding Hazardous Materials Activities, Environmental Claims and Violations of Environmental Laws....................................... 86 5.8 Execution of Subsidiary Guaranty and Personal Property Collateral Documents by Certain Subsidiaries and Future Subsidiaries ............................................ 89 5.9 Conforming Leasehold Interests; Matters Relating to Real Property Collateral................................. 90 5.10 Interest Rate Protection................................. 93 5.11 Cash Management System................................... 93 SECTION 6. COMPANY'S NEGATIVE COVENANTS...................... 94 6.1 Indebtedness and Issuance of Disqualified Stock ......... 94 6.2 Liens and Related Matters ............................... 96 6.3 Restricted Payments ..................................... 97 6.4 Dividends and Other Payment Restrictions Affecting Subsidiaries ............................................ 99 6.5 Restrictions on Fundamental Changes; Asset Sales.........100 6.6 Transactions with Affiliates.............................101 6.7 Asset Sales..............................................102 AXEL CREDIT AGREEMENT EXECUTION (ii) 4 Page ---- SECTION 7. EVENTS OF DEFAULT...........................103 7.1 Failure to Make Payments When Due........................103 7.2 Default in Other Agreements..............................104 7.3 Breach of Certain Covenants..............................104 7.5 Other Defaults under AXEL Loan Documents.................104 7.6 Judgments................................................104 7.7 Bankruptcy; Appointment of Custodian.....................105 7.8 Invalidity of Subsidiary Guaranty........................105 7.9 Change in Control........................................106 8.1 Appointment..............................................107 8.2 Powers and Duties; General Immunity......................108 8.3 Representations and Warranties; No Responsibility For Appraisal of Creditworthiness............................110 8.4 Right to Indemnity.......................................110 8.5 Successor Administrative Agent...........................110 8.6 Collateral Documents and Guaranties......................111 SECTION 9. MISCELLANEOUS.............................112 9.1 Assignments and Participations in AXELs..................112 9.2 Expenses.................................................115 9.3 Indemnity................................................116 9.4 Set-Off; Security Interest in Deposit Accounts...........117 9.5 Ratable Sharing..........................................117 9.6 Amendments and Waivers...................................118 9.7 Independence of Covenants................................119 9.8 Notices..................................................119 9.9 Survival of Representations, Warranties and Agreements...119 9.10 Failure or Indulgence Not Waiver; Remedies Cumulative....120 9.11 Marshalling; Payments Set Aside..........................120 9.12 Severability.............................................120 9.13 Obligations Several; Independent Nature of Lenders' Rights...................................................120 9.14 Headings.................................................121 9.15 Applicable Law...........................................121 9.16 Successors and Assigns...................................121 9.17 Consent to Jurisdiction and Service of Process...........121 9.18 Waiver of Jury Trial.....................................122 9.19 Confidentiality..........................................123 9.20 Counterparts; Effectiveness..............................123 Signature pages S-1 AXEL CREDIT AGREEMENT EXECUTION (iii) 5 EXHIBITS I FORM OF NOTICE OF BORROWING II FORM OF NOTICE OF CONVERSION/CONTINUATION III FORM OF AXEL NOTE IV FORM OF COMPLIANCE CERTIFICATE V-A FORM OF OPINION OF WACHTELL, LIPTON ROSEN & KATZ V-B FORM OF OPINION OF KURZMAN & EISENBERG VI FORM OF OPINION OF O'MELVENY & MYERS LLP VII FORM OF ASSIGNMENT AGREEMENT VIII FORM OF CERTIFICATE RE NON-BANK STATUS IX FORM OF FINANCIAL CONDITION CERTIFICATE X FORM OF COMPANY PLEDGE AGREEMENT XI FORM OF COMPANY SECURITY AGREEMENT XII FORM OF SUBSIDIARY GUARANTY XIII FORM OF SUBSIDIARY PLEDGE AGREEMENT XIV FORM OF SUBSIDIARY SECURITY AGREEMENT XV FORM OF MORTGAGE XVI FORM OF COLLATERAL ACCESS AGREEMENT AXEL CREDIT AGREEMENT EXECUTION (iv) 6 SCHEDULES 2.1 LENDERS' COMMITMENTS AND PRO RATA SHARES 3.1C CORPORATE AND CAPITAL STRUCTURE; OWNERSHIP; MANAGEMENT 3.1F INDEBTEDNESS TO BE REPAID UNDER EXISTING CREDIT AGREEMENTS 4.1 SUBSIDIARIES OF COMPANY 4.5 REAL PROPERTY 4.6 LITIGATION 4.8 MATERIAL CONTRACTS 4.13 ENVIRONMENTAL MATTERS 5.11 CASH MANAGEMENT SYSTEM 6.1 CERTAIN EXISTING INDEBTEDNESS AXEL CREDIT AGREEMENT EXECUTION (v) 7 AMSCAN HOLDINGS, INC. AXEL CREDIT AGREEMENT This AXEL CREDIT AGREEMENT is dated as of December 19, 1997 and entered into by and among AMSCAN HOLDINGS, INC., a Delaware corporation ("Company"), GOLDMAN SACHS CREDIT PARTNERS L.P., ("GSCP") as arranger (in such capacity, "Arranger"), and as syndication agent (in such capacity, "Syndication Agent"), THE FINANCIAL INSTITUTIONS LISTED ON THE SIGNATURE PAGES HEREOF (each, including GSCP and Fleet (as hereinafter defined), individually referred to herein as a "Lender" and collectively as "Lenders"), and FLEET NATIONAL BANK ("Fleet"), as administrative agent for Lenders (in such capacity, "Administrative Agent"). R E C I T A L S WHEREAS, GSII (this and other capitalized terms used in these recitals without definition being used as defined in subsection 1.1) has formed Confetti Acquisition, Inc., a Delaware corporation ("Newco") for the purpose of entering into a series of recapitalization transactions pursuant to the Recapitalization Agreement; WHEREAS, on or before the Closing Date, Newco and Company shall have consummated the transactions contemplated under the Recapitalization Agreement, and in connection with such transactions, Company will have, following the Merger of Newco with and into Company, not less than $75,000,000 of equity financing, consisting of (i) approximately $7,500,000 in shares of Company retained by current shareholders, (ii) approximately $750,000 in cash common equity contributions by certain Management Investors (which contributions will be financed by Company and will be made following consummation of the Merger) and (iii) approximately $67,500,000 in equity financing from Newco, which equity financing shall have been contributed to Newco immediately prior to the Merger as follows: (x) an amount not less than $61,875,000 in cash by GSII, (y) approximately $4,500,000 of Old Management Shares (valued at the highest cash price offered to public shareholders in the Acquisition) contributed by a certain Management Investor in exchange for common stock of Newco which will be converted in the Merger into shares of Company Common Stock and (z) approximately $1,125,000 of restricted shares of common stock of Newco granted to a certain Management Investor which will be converted in the Merger into shares of Company Common Stock; 8 WHEREAS, pursuant to the Recapitalization Agreement, on the Closing Date, Newco will be merged with and into Company, with Company being the surviving corporation in such merger; WHEREAS, on or before the Closing Date, Company will issue and sell not less than $110,000,000 in aggregate principal amount of Senior Subordinated Notes; WHEREAS, on the date hereof Company has entered into a separate Revolving Credit Agreement (such credit agreement as amended, supplemented, refinanced, renewed or extended or otherwise modified from time to time the "Revolving Credit Agreement" with Fleet National Bank as administrative agent, (the "Revolving Credit Facility Agent"), Goldman Sachs Credit Partners L.P. as arranger and syndication agent and the financial institutions named therein as lenders (the "Revolving Credit Lenders") pursuant to which Revolving Credit Lenders have agreed to extend certain credit facilities to Company the proceeds of which will be used (i) together with the proceeds of the AXELs made hereunder, the issuance and sale of the Senior Subordinated Notes and the equity financing described above to fund the Recapitalization Financing Requirements and (ii) to provide financing for working capital, completion of Permitted Business Acquisitions and other general corporate purposes of Company and its Subsidiaries; WHEREAS, Lenders have agreed to extend certain credit facilities to Company pursuant to the terms and conditions of this Agreement, the proceeds of which will be used together with the proceeds of the Revolving Loan facility under the Revolving Credit Agreement and the issuance and sale of the Senior Subordinated Notes and the equity financing described above, to fund the Recapitalization Financing Requirements; WHEREAS, on the date hereof, the Administrative Agent and the Revolving Credit Facility Agent, have entered into an Intercreditor Agreement pursuant to which the Administrative Agent and the Revolving Credit Facility Agent have appointed Fleet to serve as collateral agent and representative (in such capacity, the "Collateral Agent") for the Lenders, the Revolving Credit Lenders, the Administrative Agent, the Revolving Credit Facility Agent and the other agents under this Agreement and the Revolving Credit Agreement (collectively, the "Secured Parties") and agreed to the terms on which Collateral, the benefits of guarantees and the proceeds thereof will be shared between the credit facilities; WHEREAS, Company desires to secure all of the Obligations hereunder and under the other Loan Documents by granting to Collateral Agent, on behalf of Secured Parties, a first priority Lien on substantially all of its real, personal and mixed property, including a pledge of all of the capital stock of each of its Domestic Subsidiaries and 66% of the capital stock of each of its Foreign Subsidiaries; and WHEREAS, all of the Domestic Subsidiaries of Company have agreed to guarantee the Obligations hereunder and under the other Loan Documents and to secure their AXEL CREDIT AGREEMENT EXECUTION 2 9 guaranties by granting to Collateral Agent, on behalf of Secured Parties, a first priority Lien on substantially all of their respective personal and mixed property, including a pledge of all of the capital stock of each of their respective Domestic Subsidiaries and 66% of the capital stock of each of their respective Foreign Subsidiaries: NOW, THEREFORE, in consideration of the premises and the agreements, provisions and covenants herein contained, Company, Lenders and Agents agree as follows: SECTION 1. DEFINITIONS 1.1 Certain Defined Terms. The following terms used in this Agreement shall have the following meanings: "Acquired Debt" means, with respect to any specified Person, (i) indebtedness of any other Person existing at the time such other Person is merged with or into or became a Restricted Subsidiary of such specified Person, including, without limitation, Indebtedness incurred in connection with, or in contemplation of, such other Person merging with or into or becoming a Restricted Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien encumbering any asset acquired by such specified Person. "Adjusted Eurodollar Rate" means, for any Interest Rate Determination Date with respect to an Interest Period for a Eurodollar Rate AXEL, the interest rate per annum (rounded upward, if necessary, to the nearest 1/32 of one percent) as determined on the basis of the offered rates for deposits in U.S. dollars, for a period of time comparable to such Interest Period which appears on the Telerate Page 3750 as of 11:00 a.m. (New York time) two Business Days before the first day of such Interest Period; provided, however, that if the rate described above does not appear on the Telerate System on any applicable interest determination date, the Adjusted Eurodollar Rate shall be the rate (rounded upward as described above, if necessary for deposits in U.S. dollars for a period substantially equal to the interest period on the Reuters Page "LIBO" or such other page as may replace the LIBO page on that service for the purpose of displaying such rates), as of 11:00 a.m. (London time) two Business Days before the first day of such Interest Period. If both the Telerate and Reuters system are unavailable, then the rate for that date will be determined on the basis of the offered rates for deposits in U.S. dollars for a period of time comparable to such Interest Period which are offered by four major banks in the London interbank market at approximately 11:00 a.m. (New York time) two Business Days before the first day of such Interest Period as selected by the Administrative Agent. The principal London office of each of the four major AXEL CREDIT AGREEMENT EXECUTION 3 10 London banks will be requested to provide a quotation of its U.S. dollar deposit offered rate. If at least two such quotations are provided, the rate for that date will be the arithmetic mean of the quotations. If fewer than two quotations are provided as requested, the rate for the date will be determined on the basis of the rates quoted for loans in U.S. dollars to leading European banks for a period of time comparable to such Interest Period offered by major banks in New York City at approximately 11:00 a.m. (New York time) two Business Days before the first day of such Interest Period. In the event that Administrative Agent is unable to obtain any such quotation as provided above, it will be deemed that the Adjusted Eurodollar Rate for such Interest Rate cannot be determined. In the event that the Board of Governors of the Federal Reserve System shall impose a Eurodollar Rate Reserve Percentage with respect to Eurocurrency Liabilities, the Adjusted Eurodollar Rate for an Interest Period shall be equal to the amount determined above for such Interest Period divided by a percentage equal to 100% minus the Eurodollar Rate Reserve Percentage for such Interest Period. "Administrative Agent" has the meaning assigned to that term in the introduction to this Agreement and also means and includes any successor Administrative Agent appointed pursuant to subsection 8.5A. "Affected Lender" has the meaning assigned to that term in subsection 2.6C. "Affiliate", of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlling", "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise; provided that beneficial ownership of 10% or more of the voting securities of a Person shall be deemed to be control. "Affiliate Transaction" has the meaning assigned to that term in subsection 6.6. "Agent" means, individually, each of Arranger, Syndication Agent, Collateral Agent and Administrative Agent and "Agents" means Arranger, Syndication Agent, Collateral Agent and Administrative Agent, collectively. "Agreement" means this AXEL Credit Agreement dated as of December 19, 1997, as it may be amended, supplemented or otherwise modified from time to time. AXEL CREDIT AGREEMENT EXECUTION 4 11 "Arranger" has the meaning assigned to that term in the introduction to this Agreement. "Asset Sale" means the sale by Company or any of its Subsidiaries to any Person other than Company or any of its wholly-owned Subsidiaries of (i) any of the stock of any of Company's Subsidiaries, (ii) substantially all of the assets of any division or line of business of Company or any of its Subsidiaries, or (iii) any other assets (whether tangible or intangible) of Company or any of its Subsidiaries (other than (a) inventory sold in the ordinary course of business (b) sales of Cash Equivalents (as defined in the Revolving Credit Agreement) for the fair market value thereof, and (c) any such other assets to the extent that the aggregate value of such assets sold in any single transaction or related series of transactions is equal to $500,000 or less). "Assignment Agreement" means an Assignment Agreement in substantially the form of Exhibit VII annexed hereto. "Auxiliary Pledge Agreement" means each pledge agreement or similar instrument governed by the laws of a country other than the United States, executed on the Closing Date pursuant to subsection 3.1I(vii) or from time to time thereafter in accordance with subsection 5.8 by Company or any Domestic Subsidiary that owns capital stock of one or more Foreign Subsidiaries organized in such country, in form and substance satisfactory to Collateral Agent, as such Auxiliary Pledge Agreement may be amended, supplemented or otherwise modified from time to time, and "Auxiliary Pledge Agreements" means all such pledge agreements or instruments, collectively. "AXEL(TM)" or "AXELs(TM)" means a loan made by a Lender to Company as an amortization extended loan pursuant to subsection 2.1A. The term AXEL is a registered trademark of Goldman, Sachs & Co. "AXEL Commitment" means a commitment of a Lender to make an AXEL as set forth in subsection 2.1A, and "AXEL Commitments" means such commitments of all Lenders in the aggregate. "AXEL Exposure" means, with respect to any Lender as of any date of determination (i) prior to the funding of the AXELs, that Lender's AXEL Commitment and (ii) after the funding of the AXELs, the outstanding principal amount of the AXEL of that Lender. "AXEL Loan Documents" means this Agreement, the AXEL Notes, the Subsidiary Guaranty, the Collateral Documents any Hedging Agreements with Lenders, and the Intercreditor Agreement. AXEL CREDIT AGREEMENT EXECUTION 5 12 "AXEL Notes" means (i) the promissory notes of Company issued pursuant to subsection 2.1E on the Closing Date and (ii) any promissory notes issued by Company pursuant to the last sentence of subsection 9.1B(i) in connection with assignments of the AXELs of any Lenders, in each case substantially in the form of Exhibit III annexed hereto, as they may be amended, supplemented or otherwise modified from time to time. "Bankruptcy Code" means Title 11 of the United States Code entitled "Bankruptcy", as now and hereafter in effect, or any successor statute. "Bankruptcy Law" means title 11, U.S. Code or any similar Federal or state law for the relief of debtors. "Base Rate" means, at any time, the higher of (x) the Prime Rate or (y) the rate which is 1/2 of 1% in excess of the Federal Funds Effective Rate. "Base Rate AXELs" means AXELs bearing interest at rates determined by reference to the Base Rate as provided in subsection 2.2A. "Business Day" means any day excluding Saturday, Sunday and any day which is a legal holiday under the laws of the State of New York or is a day on which banking institutions located in such state are authorized or required by law or other governmental action to close. "Capital Lease", means, at any time any determination thereof is to be made, the amount of the liability in respect of a capital lease that would at such time be required to be capitalized on a balance sheet in accordance with GAAP. "Capital Stock" means (i) in the case of a corporation, corporate stock, (ii) in the case of an association or business entity, any and all shares, interests, participation, rights or other equivalents (however designated) of corporate stock, (iii) in the case of a partnership, partnership interests (whether of general or limited) and (iv) any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing Person (but excluding customary employee incentive or bonus arrangements, and customary earn-out provisions granted in connection with acquisition transactions and providing for aggregate payouts not in excess of $5,000,000 per year). "Cash" means money, currency or a credit balance in a Deposit Account. "Cash Equivalents" means, (i) United States dollars, (ii) securities issued or directly and fully guaranteed or insured by the United States government or any agency or instrumentality thereof, (iii) certificates of deposit and eurodollar time AXEL CREDIT AGREEMENT EXECUTION 6 13 deposits with maturities of one year or less from the date of acquisition, bankers' acceptances with maturities not exceeding one year and overnight bank deposits, in each case with any domestic bank having capital and surplus in excess of $500 million and a Keefe Bank Watch Rating of "B" (or the equivalent rating under a substantially similar ratings system if Keefe Bank Watch Ratings are no longer published) or better, (iv) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clauses (ii) and (iii) above entered into with any financial institution meeting the qualifications specified in clause (iii) above and (v) commercial paper having the highest rating obtainable from Moody's Investors Service, Inc. or Standard & Poor's Corporation (or in their absence, an equivalent rating from another nationally recognized securities rating agency) and in each case maturing within one year after the date of acquisition. "Certificate of Merger" means the Certificate of Merger dated as of December 19, 1997 for the Merger of Newco with and into Company, as in effect on the Closing Date. "Certificate re Non-Bank Status" means a certificate substantially in the form of Exhibit VIII annexed hereto delivered by a Lender to Administrative Agent pursuant to subsection 2.7B(iii). "Closing Date" means the date on or before December 19, 1997, on which the AXELs are made. "Collateral" means, collectively, all of the real, personal and mixed property (including capital stock) in which Liens are purported to be granted pursuant to the Collateral Documents as security for the Obligations. "Collateral Access Agreement" means any landlord waiver, mortgagee waiver, bailee letter or any similar acknowledgement or agreement of any landlord in respect of any Leased Property, or mortgagee in respect of any real property, in which Company or any of its Subsidiaries owns or holds a fee interest and which is subject to a mortgage, held by such mortgagee, in either case where any Collateral is located, or any warehouseman or processor in possession of any Inventory of any Loan Party, substantially in the form of Exhibit XVI annexed hereto with such changes thereto as may be agreed to by Collateral Agent in the reasonable exercise of its discretion. "Collateral Accounts" has the meaning assigned to that term in the Intercreditor Agreement. "Collateral Agent" has the meaning assigned to that term in the introduction to this Agreement. AXEL CREDIT AGREEMENT EXECUTION 7 14 "Collateral Documents" means the Company Pledge Agreement, the Company Security Agreement, the Subsidiary Pledge Agreements, the Subsidiary Security Agreements, the Mortgages, the Auxiliary Pledge Agreements and all other instruments or documents delivered by any Loan Party pursuant to this Agreement or any of the other Loan Documents in order to grant to Collateral Agent, on behalf of Secured Parties, a Lien on any real, personal or mixed property of that Loan Party as security for the Obligations. "Company" means Company as the surviving corporation in the Merger. "Company Common Stock" means the shares of common stock of Company par value $0.10 per share. "Company Pledge Agreement" means the Company Pledge Agreement executed and delivered by Company on the Closing Date, substantially in the form of Exhibit X annexed hereto, as such Company Pledge Agreement may thereafter be amended, supplemented or otherwise modified from time to time. "Company Security Agreement" means the Company Security Agreement executed and delivered by Company on the Closing Date, substantially in the form of Exhibit XI annexed hereto, as such Company Security Agreement may thereafter be amended, supplemented or otherwise modified from time to time. "Compliance Certificate" means a certificate substantially in the form of Exhibit IV annexed hereto delivered to Administrative Agent and Lenders by Company pursuant to subsection 5.1(iv). "Confidential Information Memorandum" means that certain Confidential Information Memorandum prepared by GSCP relating to the AXELs and Revolving Loans dated November 1997. "Conforming Leasehold Interest" means any Recorded Leasehold Interest as to which the lessor has agreed in writing for the benefit of Collateral Agent (which writing has been delivered to Collateral Agent), whether under the terms of the applicable lease, under the terms of a Landlord Consent and Estoppel, or otherwise, to the matters described in the definition of "Landlord Consent and Estoppel," which interest, if a sub-leasehold or sub-sub-leasehold interest, is not subject to any contrary restrictions contained in a superior lease or sublease. "Consolidated Cash Flow" means, with respect to any Person for any period, the Consolidated Net Income of such Person for such period plus (i) an amount equal to any extraordinary loss plus any net loss realized in connection with an Asset Sale (to the extent such losses were deducted in computing such Consolidated Net Income), plus (ii) provision for taxes based on income or profits of such Person and AXEL CREDIT AGREEMENT EXECUTION 8 15 its Restricted Subsidiaries for such period, to the extent that such provision for taxes was deducted in computing such Consolidated Net Income, plus (iii) consolidated interest expense of such Person and its Restricted Subsidiaries for such period, whether paid or accrued and whether or not capitalized (including, without limitation, amortization of original issue discount, non-cash interest payments, the interest component of any deferred payment obligations, the interest component of all payments associated with Capital Leases, commissions, discounts and other fees and charges incurred in respect of letter of credit or bankers' acceptance financings, and net payments (if any) pursuant to Hedging Obligations), to the extent that any such expense was deducted in computing such Consolidated Net Income, plus (iv) depreciation, amortization (including amortization of goodwill and other intangibles but excluding amortization of prepaid cash operating expenses that were paid in a prior period) and other non-cash charges of prepaid cash operating expenses that were paid in a prior period) and other non-cash charges of such Person and its Restricted Subsidiaries for such period to the extent that such depreciation, amortization and other non-cash charges were deducted in computing such Consolidated Net Income, minus (v) cash outlays that were made by such Person or any of its Restricted Subsidiaries during such period in respect of any item that was reflected as a non-cash charge in a prior period, provided that such non-cash charge was added to Consolidated Net Income in determining Consolidated Cash Flow for such prior period. "Consolidated Excess Cash Flow" has the meaning assigned to that term under the Revolving Credit Agreement as in effect as of the date hereof. "Consolidated Fixed Charges" means with respect to any Person for any period, the sum of (i) the consolidated interest expense of such Person and its Restricted Subsidiaries for such period, whether paid or accrued (including, without limitation, amortization of original issue discount, non-cash interest payments, the interest component of any deferred payment obligations, the interest component of all payments associated with Capital Leases, commissions, discounts and other fees and charges incurred in respect of letter of credit or bankers' acceptance financings, and net payments (if any) pursuant to Hedging Obligations) and (ii) the consolidated interest expense of such Person and its Restricted Subsidiaries that was capitalized during such period, and (iii) any interest expense on Indebtedness of another Person that is Guaranteed by such Person or one of its Restricted Subsidiaries or secured by a Lien on assets of such Person or one of its Restricted Subsidiaries (whether or not such Guarantee or Lien is called upon) and (iv) the product of (a) all cash dividend payments (and non-cash dividend payments in the case of a Person that is a Restricted Subsidiary) paid to any Person other than Company or a Restricted Subsidiary on any series of Preferred Stock of such Person, times (b) a fraction, the numerator of which is one and the denominator of which is one minus the then current combined annual federal, state and local statutory tax rate of such Person AXEL CREDIT AGREEMENT EXECUTION 9 16 paying the dividend, expressed as a decimal, in each case, on a consolidated basis and in accordance with GAAP. "Consolidated Leverage Ratio" has the meaning assigned to that term in the Revolving Credit Agreement as of the date hereof. "Consolidated Net Income" means, with respect to any Person for any period, the aggregate of the Net Income of such Person and its Restricted Subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP; provided that (i) the Net Income (but not loss) for such period of any Person that is not a Restricted Subsidiary or that is accounted for by the equity method of accounting shall be included only to the extent of the amount of dividends or distributions paid in cash to the referent Person or a Wholly Owned Restricted Subsidiary thereof, (ii) the Net Income of any Restricted Subsidiary shall be excluded to the extent that the declaration or payment of dividends or similar distributions by that Restricted Subsidiary of that Net Income is not at the date of determination permitted without any prior governmental approval (that has not been obtained) or, directly or indirectly, by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Restricted Subsidiary or its stockholders, (iii) the Net Income of any Person acquired in a pooling of interests transaction for any period prior to the date of such acquisition shall be excluded, (iv) the cumulative effect of a change in accounting principles shall be excluded and (v) the Net Income of any Unrestricted Subsidiary shall be excluded, whether or not distributed to Company or one of its Restricted Subsidiaries. "Contractual Obligation", as applied to any Person, means any provision of any Security issued by that Person or of any material indenture, mortgage, deed of trust, contract, undertaking, agreement or other instrument to which that Person is a party or by which it or any of its properties is bound or to which it or any of its properties is subject. "Currency Agreement" means any foreign exchange contract, currency swap agreement, futures contract, option contract, synthetic cap or other similar agreement or arrangement to which Company or any of its Subsidiaries is a party. "Deposit Account" means a demand, time, savings, passbook or like account with a bank, savings and loan association, credit union or like organization, other than an account evidenced by a negotiable certificate of deposit. "Disqualified Stock" means any Capital Stock that, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, matures or is mandatorily redeemable, pursuant AXEL CREDIT AGREEMENT EXECUTION 10 17 to a sinking fund obligation or otherwise, or redeemable at the option of the holder thereof, in whole or in part, on or prior to the date on which the AXELs mature. "Dollars" and the sign "$" mean the lawful money of the United States of America. "Domestic Subsidiary" means a Subsidiary of Company that is organized under the laws of a state of the United States or the District of Columbia. "Eligible Assignee" means (A) (i) a commercial bank organized under the laws of the United States or any state thereof; (ii) a savings and loan association or savings bank organized under the laws of the United States or any state thereof; (iii) a commercial bank organized under the laws of any other country or a political subdivision thereof; provided that (x) such bank is acting through a branch or agency located in the United States or (y) such bank is organized under the laws of a country that is a member of the Organization for Economic Cooperation and Development or a political subdivision of such country; and (iv) any other entity which is an "accredited investor" (as defined in Regulation D under the Securities Act) which extends credit or buys loans as one of its businesses including insurance companies, mutual funds and lease financing companies; and (B) any Lender, and any Related Fund or any Affiliate of any Lender; provided that no Loan Party or any Subsidiary of any Loan Party shall be an Eligible Assignee. "Employee Benefit Plan" means any "employee benefit plan" as defined in Section 3(3) of ERISA which is or was maintained or contributed to by Company, any of its Subsidiaries or any of their respective ERISA Affiliates. "Employment Agreements" means, collectively, the employment agreements and stock and option agreements between the Company and certain employees of the Company as set forth on Schedule 3.1C annexed hereto, in certain cases providing for the exclusive employment of such Persons by Company, in the form provided to Arranger and Administrative Agent pursuant to subsection 3.1C on or prior to the Closing Date. "Environmental Claim" means any investigation, notice, notice of violation, claim, action, suit, proceeding, demand, abatement order or other order or directive (conditional or otherwise), by any governmental authority or any other Person, arising (i) pursuant to or in connection with any actual or alleged violation of any Environmental Law, (ii) in connection with any Hazardous Materials or any actual or alleged Hazardous Materials Activity, or (iii) in connection with any actual or alleged damage, injury, threat or harm to natural resources or the environment. "Environmental Laws" means any and all current or future statutes, ordinances, orders, rules, regulations, guidance documents, judgments, Governmental AXEL CREDIT AGREEMENT EXECUTION 11 18 Authorizations, or any other requirements of governmental authorities relating to (i) environmental matters, including those relating to any Hazardous Materials Activity, (ii) the generation, use, storage, transportation or disposal of Hazardous Materials, or (iii) occupational safety and health, industrial hygiene, land use or the protection of human, plant or animal health or welfare, in any manner applicable to Company or any of its Subsidiaries or any Facility, including the Comprehensive Environmental Response, Compensation, and Liability Act (42 U.S.C. ss. 9601 et seq.), the Hazardous Materials Transportation Act (49 U.S.C. ss. 1801 et seq.), the Resource Conservation and Recovery Act (42 U.S.C. ss. 6901 et seq.), the Federal Water Pollution Control Act (33 U.S.C. ss. 1251 et seq.), the Clean Air Act (42 U.S.C. ss. 7401 et seq.), the Toxic Substances Control Act (15 U.S.C. ss. 2601 et seq.), the Federal Insecticide, Fungicide and Rodenticide Act (7 U.S.C. ss.136 et seq.), the Occupational Safety and Health Act (29 U.S.C. ss. 651 et seq.), the Oil Pollution Act (33 U.S.C. ss. 2701 et seq) and the Emergency Planning and Community Right-to-Know Act (42 U.S.C. ss. 11001 et seq.), each as amended or supplemented, any analogous present or future state or local statutes or laws, and any regulations promulgated pursuant to any of the foregoing. "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). "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and any successor thereto. "ERISA Affiliate" means, as applied to any Person, (i) any corporation which is a member of a controlled group of corporations within the meaning of Section 414(b) of the Internal Revenue Code of which that Person is a member; (ii) any trade or business (whether or not incorporated) which is a member of a group of trades or businesses under common control within the meaning of Section 414(c) of the Internal Revenue Code of which that Person is a member; and (iii) any member of an affiliated service group within the meaning of Section 414(m) or (o) of the Internal Revenue Code of which that Person, any corporation described in clause (i) above or any trade or business described in clause (ii) above is a member. Any former ERISA Affiliate of Company or any of its Subsidiaries shall continue to be considered an ERISA Affiliate of Company or such Subsidiary within the meaning of this definition with respect to the period such entity was an ERISA Affiliate of Company or such Subsidiary and with respect to liabilities arising after such period for which Company or such Subsidiary could be liable under the Internal Revenue Code or ERISA. "ERISA Event" means (i) a "reportable event" within the meaning of Section 4043 of ERISA and the regulations issued thereunder with respect to any Pension Plan (excluding those for which the provision for 30-day notice to the PBGC has AXEL CREDIT AGREEMENT EXECUTION 12 19 been waived by regulation); (ii) the failure to meet the minimum funding standard of Section 412 of the Internal Revenue Code with respect to any Pension Plan (whether or not waived in accordance with Section 412(d) of the Internal Revenue Code) or the failure to make by its due date a required installment under Section 412(m) of the Internal Revenue Code with respect to any Pension Plan or the failure to make any required contribution to a Multiemployer Plan; (iii) the provision by the administrator of any Pension Plan pursuant to Section 4041(a)(2) of ERISA of a notice of intent to terminate such plan in a distress termination described in Section 4041(c) of ERISA; (iv) the withdrawal by Company, any of its Subsidiaries or any of their respective ERISA Affiliates from any Pension Plan with two or more contributing sponsors or the termination of any such Pension Plan resulting in liability pursuant to Section 4063 or 4064 of ERISA; (v) the institution by the PBGC of proceedings to terminate any Pension Plan, or the occurrence of any event or condition which could reasonably be expected to constitute grounds under ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan; (vi) the imposition of liability on Company, any of its Subsidiaries or any of their respective ERISA Affiliates pursuant to Section 4062(e) or 4069 of ERISA or by reason of the application of Section 4212(c) of ERISA; (vii) the withdrawal of Company, any of its Subsidiaries or any of their respective ERISA Affiliates in a complete or partial withdrawal (within the meaning of Sections 4203 and 4205 of ERISA) from any Multiemployer Plan if there is any potential liability therefor, or the receipt by Company, any of its Subsidiaries or any of their respective ERISA Affiliates of notice from any Multiemployer Plan that it is in reorganization or insolvency pursuant to Section 4241 or 4245 of ERISA, or that it intends to terminate or has terminated under Section 4041A or 4042 of ERISA; (viii) the occurrence of an act or omission which could reasonably be expected to give rise to the imposition on Company, any of its Subsidiaries or any of their respective ERISA Affiliates of fines, penalties, taxes or related charges under Chapter 43 of the Internal Revenue Code or under Section 409, Section 502(c), (i) or (1), or Section 4071 of ERISA in respect of any Employee Benefit Plan; (ix) the assertion of a material claim (other than routine claims for benefits) against any Employee Benefit Plan other than a Multiemployer Plan or the assets thereof, or against Company, any of its Subsidiaries or any of their respective ERISA Affiliates in connection with any Employee Benefit Plan; (x) receipt from the Internal Revenue Service of notice of the failure of any Pension Plan (or any other Employee Benefit Plan intended to be qualified under Section 401(a) of the Internal Revenue Code) to qualify under Section 401(a) of the Internal Revenue Code, or the failure of any trust forming part of any Pension Plan to qualify for exemption from taxation under Section 501(a) of the Internal Revenue Code; or (xi) the imposition of a Lien pursuant to Section 401(a)(29) or 412(n) of the Internal Revenue Code or pursuant to ERISA with respect to any Pension Plan. "Eurocurrency Liabilities" has the meaning specified in Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time. AXEL CREDIT AGREEMENT EXECUTION 13 20 "Eurodollar Rate AXELs" means AXELs bearing interest at rates determined by reference to the Adjusted Eurodollar Rate as provided in subsection 2.2A. "Eurodollar Rate Reserve Percentage" means, for any Interest Period for all Eurodollar Rate AXELs comprising part of the same Borrowing, the reserve percentage applicable two Business Days before the first day of such Interest Period under regulations issued from time to time by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including, without limitation, any emergency, supplemental or other marginal reserve requirement) for a member bank of the Federal Reserve System in New York City with respect to liabilities or assets consisting of or including Eurocurrency Liabilities (or with respect to any other category of liabilities that includes deposits by reference to which the interest rate on Eurodollar Rate AXELs is determined) having a term equal to such Interest Period. "Event of Default" means each of the events set forth in Section 7. "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, and any successor statute. "Excludable Current Liabilities" means, with respect to the consideration received by the Company in connection with any Asset Sale, (i) each trade payable incurred in the ordinary course of business of the Company or any Restricted Subsidiary, (ii) each current liability that is in an amount less than $50,000 on an individual basis, and (iii) each liability due within 90 days of the date of consummation of such Asset Sale, in the case of each of clauses (i) through (iii), that is assumed by the transferee of the assets the subject to such Asset Sale pursuant to customary assumption provisions. "Existing Credit Agreements" means any and all credit agreements entered into by Company, in each case as amended prior to the Closing Date, as set forth on Schedule 3.1F. "Existing Indebtedness" means Indebtedness of Company and its Restricted Subsidiaries (other than Indebtedness under this Agreement and the Revolving Credit Agreement) in existence on the date of the Senior Subordinated Note Indenture, until such amounts are repaid. "Facilities" means any and all real property (including all buildings, fixtures or other improvements located thereon) now, hereafter or heretofore owned, leased, operated or used by Company or any of its Subsidiaries or any of their respective predecessors or Affiliates. 14 21 "Federal Funds Effective Rate" means, for any period, a fluctuating interest rate equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by Administrative Agent from three Federal funds brokers of recognized standing selected by Administrative Agent. "Fee Property" means any real property owned in fee simple by any Loan Party, other than any such real property designated from time to time by Collateral Agent in its sole discretion as not being required to be included in the Collateral. "Financial Plan" has the meaning assigned to that term in subsection 5.1(xiii). "First Priority" means, with respect to any Lien purported to be created in any Collateral pursuant to any Collateral Document, that (i) such Lien has priority over any other Lien on such Collateral (other than Liens permitted pursuant to subsection 6.2A) and (ii) such Lien is the only Lien (other than Permitted Encumbrances and Liens permitted pursuant to subsection 6.2) to which such Collateral is subject. "Fiscal Quarter" means a fiscal quarter of any Fiscal Year. "Fiscal Year" means the fiscal year of Company and its Subsidiaries ending on December 31 of each calendar year. For purposes of this Agreement, any particular Fiscal Year shall be designated by reference to the calendar year in which such Fiscal Year ends. "Fixed Charge Coverage Ratio means with respect to any Person for any period, the ratio of the Consolidated Cash Flow of such Person and its Restricted Subsidiaries for such period to the Consolidated Fixed Charges of such Person and its Restricted Subsidiaries for such period. In the event that Company or any of its Restricted Subsidiaries incurs, assumes, Guarantees or redeems any Indebtedness (other than revolving credit borrowings) or issues Preferred Stock subsequent to the commencement of the period for which the Fixed Charge Coverage Ratio is being calculated but on or prior to the date on which the event for which the calculation of the Fixed Charge Coverage Ratio is made (the "Calculation Date"), then the Fixed Charge Coverage Ratio shall be calculated giving pro forma effect to such incurrence, assumption, Guarantee or redemption or Indebtedness, or such issuance or redemption of Preferred Stock, as if the same had occurred at the beginning of the applicable four-quarter reference period. AXEL CREDIT AGREEMENT EXECUTION 15 22 In calculating the Fixed Charge Coverage Ratio, acquisitions will be given pro forma effect as follows: (i) (a) acquisitions that have been made or are being made by Company or any of its Restricted Subsidiaries during the four-quarter reference period or subsequent to such reference period and on or prior to the Calculation Date (including through mergers or consolidations and including any related financing transactions) shall be deemed to have occurred on the first day of the four-quarter reference period, and (b) for purposes of determining the pro forma effects of any such acquisition, Consolidated Cash Flow shall be increased to reflect the annualized amount of any cost savings expected by Company to be realized in connection with such acquisition (from steps to be taken not later than the first anniversary of such acquisition, and without reduction for any non-recurring charges expected in connection with such acquisition), as set forth in an Officers' Certificate signed by Company's chief executive and chief financial officers (which shall be determinative of such matters) which states (x) the amount of such increase, (y) that such increase is based on the reasonable beliefs of the officers executing such Officers' Certificate at the time of such execution (and that estimates of cost savings from prior acquisitions have been reevaluated and updated) and (z) that any related incurrence of Indebtedness is permitted pursuant to the this Agreement. (ii) Consolidated Cash Flow shall be further increased to reflect the annualized amount of any cost savings expected by Company but not yet realized in respect of any acquisition made by Company during the four fiscal quarters immediately preceding the four quarter reference period prior to the Calculation Date, to the extent such cost savings are (x) expected to result from steps taken not later than the first anniversary of the relevant acquisition and (y) determined and certified as set forth in clause (i) above. In addition, in calculating the Fixed Charge Coverage Ratio, discontinued operations will be given pro forma effect as follows: (i) the Consolidated Cash Flow attributable to discontinued operations, as determined in accordance with GAAP, and operations or businesses disposed of on or prior to the Calculation Date, shall be excluded, and (ii) the Consolidated Fixed Charges attributable to discontinued operations, as determined in accordance with GAAP, and operations or businesses disposed of on or prior to the Calculation Date, shall be excluded, but only to the extent that the obligations giving rise to such AXEL CREDIT AGREEMENT EXECUTION 16 23 Consolidated Fixed Charges will not be obligations of Company or any of its Restricted Subsidiaries following the Calculation Date. "Fleet" has the meaning assigned to that term in the introduction to this Agreement. "Flood Hazard Property" means a Mortgaged Property located in an area designated by the Federal Emergency Management Agency as having special flood or mud slide hazards. "Foreign Subsidiary" means a Subsidiary of Company other than a Domestic Subsidiary. "Funding and Payment Office" means (i) the office of Administrative Agent located at Fleet National Bank, 1 Federal Street, Boston, Massachusetts 02110, or (ii) such other office of Administrative Agent as may from time to time hereafter be designated as such in a written notice delivered by Administrative Agent to Company and each Lender. "Funding Default" has the meaning assigned to that term in subsection 2.9. "GAAP" means, subject to the limitations on the application thereof set forth in subsection 1.2, generally accepted accounting principles set forth in 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 may be approved by a significant segment of the accounting profession, in each case as the same are applicable to the circumstances as of the date of determination. "Governmental Authorization" means any permit, license, authorization, plan, directive, consent order or consent decree of or from any federal, state or local governmental authority, agency or court. "GSCP" has the meaning assigned to that term in the introduction to this Agreement. "GSII" means, collectively, GS Capital Partners II, L.P., GS Capital Partners II Offshore, L.P., Goldman, Sachs & Co. Verwaltungs GmbH, Stone Street Fund 1997, L.P. and Bridge Street Fund 1997, L.P. "Guarantee" means a guarantee (other than by endorsement of negotiable instruments for collection in the ordinary course of business), direct or indirect, in any manner (including, without limitation, letters of credit and reimbursement agreements in respect thereof), of all of any part of any Indebtedness. AXEL CREDIT AGREEMENT EXECUTION 17 24 "Hazardous Materials" means (i) any chemical, material or substance at any time defined as or included in the definition of "hazardous substances", "hazardous wastes", "hazardous materials", "extremely hazardous waste", "acutely hazardous waste", "radioactive waste", "biohazardous waste", "pollutant", "toxic pollutant", "contaminant", "restricted hazardous waste", "infectious waste", "toxic substances", or any other term or expression intended to define, list or classify substances by reason of properties harmful to health, safety or the indoor or outdoor environment (including harmful properties such as ignitability, corrosivity, reactivity, carcinogenicity, toxicity, reproductive toxicity, "TCLP toxicity" or "EP toxicity" or words of similar import under any applicable Environmental Laws); (ii) any oil, petroleum, petroleum fraction or petroleum derived substance; (iii) any drilling fluids, produced waters and other wastes associated with the exploration, development or production of crude oil, natural gas or geothermal resources; (iv) any flammable substances or explosives; (v) any radioactive materials; (vi) any asbestos-containing materials; (vii) urea formaldehyde foam insulation; (viii) electrical equipment which contains any oil or dielectric fluid containing polychlorinated biphenyls; (ix) pesticides; and (x) any other chemical, material or substance, exposure to which is prohibited, limited or regulated by any governmental authority or which may or could pose a hazard to the health and safety of the owners, occupants or any Persons in the vicinity of any Facility or to the indoor or outdoor environment. "Hazardous Materials Activity" means any past, current or future activity, event or occurrence involving any Hazardous Materials, including the use, manufacture, possession, storage, holding, presence, existence, location, Release, threatened Release, discharge, placement, generation, transportation, processing, construction, treatment, abatement, removal, remediation, disposal, disposition or handling of any Hazardous Materials, and any corrective action or response action with respect to any of the foregoing. "Hedge Agreement" means an Interest Rate Agreement or a Currency Agreement designed to hedge against fluctuations in interest rates or currency values, respectively. "Hedging Obligations" means, with respect to any Person, the obligations of such Person under (i) currency exchange or interest rate swap agreements, currency exchange or interest rate cap agreements and currency exchange or interest rate collar agreements and (ii) other agreements or arrangements designed to protect such Person against fluctuations in currency exchange or interest rates. "Increased Cost Lender" has the meaning assigned to that term in subsection 2.10. "Indebtedness" means, with respect to any Person, any indebtedness of such Person, whether or not contingent, in respect of borrowed money or evidenced by AXEL CREDIT AGREEMENT EXECUTION 18 25 bonds, notes, debentures or similar instruments or letters of credit (or reimbursement agreements in respect thereof) or bankers' acceptances or representing Capital Leases or the balance deferred and unpaid of the purchase price of any property or representing any Hedging Obligations, except any such balance that constitutes an accrued expense or trade payable, if and to the extent any of the foregoing indebtedness (other than letters of credit and Hedging Obligations) would appear as liability upon a balance sheet of such Person prepared in accordance with GAAP, as well as all indebtedness of others secured by a Lien on any asset of such Person (whether or not such indebtedness is assumed by such Person) and, to the extent not otherwise included, the Guarantee by such Person of any indebtedness of any other Person. "Indemnitee" has the meaning assigned to that term in subsection 9.3. "Insolvency Laws" means the Bankruptcy Code or any other applicable bankruptcy, insolvency or similar law now or hereafter in effect in the United States of America or any state thereof. "Intellectual Property" means all patents, trademarks, tradenames, copyrights, technology, know-how and processes used in or necessary for the conduct of the business of Company and its Subsidiaries as currently conducted that are material to the condition (financial or otherwise), business or operations of Company and its Subsidiaries, taken as a whole. "Intercreditor Agreement" means the Intercreditor Agreement dated as of December 19, 1997 among the Administrative Agent, the Revolving Credit Facility Agent, the Collateral Agent, the Company and the Subsidiary Guarantors as such agreement may be amended, supplemented or otherwise modified from time to time. "Interest Payment Date" means (i) with respect to any Base Rate AXEL, each March 15, June 15, September 15 and December 15 of each year, commencing on the first such date to occur after the Closing Date, and (ii) with respect to any Eurodollar Rate AXEL, the last day of each Interest Period applicable to such Eurodollar Rate AXEL; provided that in the case of each Interest Period of longer than three months "Interest Payment Date" shall also include each date that is three months, or an integral multiple thereof, after the commencement of such Interest Period. "Interest Period" has the meaning assigned to that term in subsection 2.2B. "Interest Rate Agreement" means any interest rate swap agreement, interest rate cap agreement, interest rate collar agreement or other similar agreement or arrangement to which Company or any of its Subsidiaries is a party. AXEL CREDIT AGREEMENT EXECUTION 19 26 "Interest Rate Determination Date" means, with respect to any Interest Period, the second Business Day prior to the first day of such Interest Period. "Internal Revenue Code" means the Internal Revenue Code of 1986, as amended to the date hereof and from time to time hereafter, and any successor statute. "Investment" means, with respect to any Person, all investments by such Person in other Persons (including Affiliates) in the forms of direct or indirect loans (including guarantees of indebtedness or other obligations), advances (other than cash advances made to suppliers with respect to current or anticipated purchases of inventory in the ordinary course of business) or capital contributions (excluding commission, travel and similar advances to officers and employees made in the ordinary course of business), purchases or other acquisitions of Indebtedness, Equity Interests or other securities (directly from the issuer thereof or from third parties) together with all items that are or would be classified as investments on a balance sheet prepared in accordance with GAAP; provided that an acquisition of Equity Interests or other securities by the Company for consideration consisting of common equity securities of Company shall not be deemed to be an Investment. If Company or any Subsidiary of Company sells or otherwise disposes of any Equity Interests of any direct or indirect Subsidiary of Company such that, after giving effect to any such sale or disposition, Company no longer owns, directly or indirectly greater than 50% of the outstanding Equity Interest of such Subsidiary, Company shall be deemed to have made an Investment on the date of any such sale or disposition equal to the fair market value of the Equity Interests of such Subsidiary not sold or disposed of. "Joint Venture" means all corporations, partnerships, associations or other business entities (i) that are engaged in a Principal Business and (ii) of which 50% of the total voting power of shares of Capital Stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by the Company or one or more Restricted Subsidiaries of the Company (or a combination thereof). "Landlord Consent and Estoppel" means, with respect to any Leasehold Property, a letter, certificate or other instrument in writing from the lessor under the related lease, satisfactory in form and substance to Collateral Agent, pursuant to which such lessor agrees, for the benefit of Collateral Agent, (i) to the matters contained in the form of Collateral Access Agreement applicable to a Leasehold Property, and (ii) to such other matters relating to such Leasehold Property as Collateral Agent may reasonably request, including, without limitation, that without any further consent of such lessor or any further action on the part of the Loan Party holding such Leasehold Property, such Leasehold Property may be encumbered pursuant to a Mortgage and may be assigned to the purchaser at a foreclosure sale AXEL CREDIT AGREEMENT EXECUTION 20 27 or in a transfer in lieu of such a sale (and to a subsequent third party assignee if Collateral Agent, any Lender, or an Affiliate of either so acquires such Leasehold Property). "Leasehold Property" means any leasehold interest of any Loan Party as lessee under any lease of real property, other than any such leasehold interest designated from time to time by Collateral Agent in its sole discretion as not being required to be included in the Collateral. "Lender" and "Lenders" means the persons identified as "Lenders" and listed on the signature pages of this Agreement, together with their successors and permitted assigns pursuant to subsection 9.1. "Lien" means any lien, mortgage, pledge, assignment, security interest, charge or encumbrance of any kind (including any conditional sale or other title retention agreement, any lease in the nature thereof, and any agreement to give any security interest) and any option, trust or other preferential arrangement having the practical effect of any of the foregoing. "Loan Documents" means the Revolving Loan Documents and the AXEL Loan Documents. "Loan Party" means each of Company and any of Company's Subsidiaries from time to time executing a Loan Document, and "Loan Parties" means all such Persons, collectively. "Management Investors" means the management officers and employees of Company and its Subsidiaries identified as Management Investors on Schedule 3.1C annexed hereto. "Margin Stock" has the meaning assigned to that term in Regulation U of the Board of Governors of the Federal Reserve System as in effect from time to time. "Material Adverse Effect" means (i) a material adverse effect upon the business, operations, properties, assets, condition (financial or otherwise) or prospects of Company or any of its Subsidiaries or (ii) the impairment in any material respect of the ability of the Loan Parties, taken as a whole, to perform, or of Administrative Agent or Lenders to enforce, the Obligations. "Material Contract" means any contract or other arrangement to which Company or any of its Subsidiaries is a party (other than the Loan Documents) for which breach, nonperformance, cancellation or failure to renew could reasonably be expected to have a Material Adverse Effect. AXEL CREDIT AGREEMENT EXECUTION 21 28 "Material Domestic Subsidiary" means (a) each Restricted Subsidiary and (b) each other Domestic Subsidiary of Company now existing or hereafter acquired or formed by Company which, on a consolidated basis for such Subsidiary and its Subsidiaries, (i) for the most recent Fiscal Year account for more than 5% of the consolidated revenues of Company and its Subsidiaries or (ii) as at the end of such Fiscal Year, was the owner of more than 5% of the consolidated assets of Company and its Subsidiaries. "Material Leasehold Property" means a Leasehold Property reasonably determined by Administrative Agent to be of material value as Collateral or of material importance to the operations of Company or any of its Subsidiaries; provided, however that, excepting any such Leasehold Properties set forth on Schedule 4.1I annexed hereto, no Leasehold Property with respect to which the aggregate amount of all rents payable during any one Fiscal Year is not expected to exceed $500,000 shall be a "Material Leasehold Property". "Merger" means the merger of Newco with and into Company in accordance with the terms of the Recapitalization Agreement, with Company being the surviving corporation in such Merger. "Mortgage" means a security instrument (whether designated as a deed of trust or a mortgage or by any similar title) executed and delivered by any Loan Party, substantially in the form of Exhibit XV annexed hereto or in such other form as may be approved by Collateral Agent in its sole discretion, in each case with such changes thereto as may be recommended by Collateral Agent's local counsel based on local laws or customary local mortgage or deed of trust practices. "Mortgages" means all such instruments collectively. "Mortgage Financing" means the incurrence by the Company or a Restricted Subsidiary of the Company of any Indebtedness secured by a mortgage or other Lien on real property acquired or improved by the Company or any Restricted Subsidiary of the Company after the date hereof. "Mortgage Refinancing" means the incurrence by the Company or a Restricted Subsidiary of the Company of any Indebtedness secured by a mortgage or other Lien on real property subject to a mortgage or other Lien existing on the date hereof or created or incurred subsequent to the date hereof and owned by the Company or any Restricted Subsidiary of the Company. "Mortgaged Property" has the meaning assigned to that term in subsection 5.9. "Mortgage Policy" has the meaning assigned to that term in subsection 5.9. AXEL CREDIT AGREEMENT EXECUTION 22 29 "Multiemployer Plan" means any Employee Benefit Plan which is a "multiemployer plan" as defined in Section 3(37) of ERISA. "Net Asset Sale Proceeds" means, with respect to any Asset Sale, Cash payments (including any Cash received by way of deferred payment pursuant to, or by monetization of, a note receivable or otherwise, but only as and when so received) received from such Asset Sale, net of any bona fide direct costs, including, without limitation, all transaction costs, incurred in connection with such Asset Sale, including (i) income taxes reasonably estimated to be actually payable within two years of the date of such Asset Sale as a result of any gain recognized in connection with such Asset Sale and (ii) payment of the outstanding principal amount of, premium or penalty, if any, and interest on any Indebtedness that is secured by a Lien on the stock or assets in question and that prior to the Lien securing the AXELs on such stock or assets and is required to be repaid under the terms thereof as a result of such Asset Sale. "Net Income" means, with respect to any Person, the net income (loss) of such Person, determined in accordance with GAAP and before any reduction in respect of Preferred Stock dividends, excluding, however, (i) any gain (but not loss), together with any related provision for taxes on such gain (but not loss) realized in connection with (a) any Asset Sale (including, without limitation, dispositions pursuant to sale and leaseback transactions) or (b) the disposition of any securities by such Person or any of its Restricted Subsidiaries or the extinguishment of any Indebtedness of such Person or any of its Restricted Subsidiaries and (ii) any extraordinary or nonrecurring gain (but not loss) together with any related provision for taxes on such extraordinary or nonrecurring gain (but not loss). "Net Insurance/Condemnation Proceeds" means any Cash payments or proceeds received by Company or any of its Subsidiaries (i) under any business interruption or casualty insurance policy in respect of a covered loss thereunder or (ii) as a result of the taking of any assets of Company or any of its Subsidiaries by any Person pursuant to the power of eminent domain, condemnation or otherwise, or pursuant to a sale of any such assets to a purchaser with such power under threat of such a taking, in each case net of (x) any actual and reasonable documented costs incurred by Company or any of its Subsidiaries in connection with the adjustment or settlement of any claims of Company or such Subsidiary in respect thereof and (y) any amounts required to be applied to the repayment of any Indebtedness secured by a Lien which is prior to any Liens of the Lenders on the asset or assets that are subject to the taking, condemnation or casualty but excluding, however, in each case any payments or proceeds relating to assets having a value of $500,000 or less in any single transaction or related series of transactions. "Newco" has the meaning assigned to that term in the introduction to this Agreement. AXEL CREDIT AGREEMENT EXECUTION 23 30 "Newco Common Stock" means the shares of common stock of Newco par value $0.10 per share to be converted into shares of Company Common Stock upon consummation of the Merger. "Non-Consenting Lender" has the meaning assigned to that term in subsection 2.10. "Non-Recourse Debt" means Indebtedness of any Unrestricted Subsidiary (i) as to which neither Company nor any of its Restricted Subsidiaries (a) provides credit support of any kind (including any undertaking, agreement or instrument that would constitute Indebtedness), (b) is directly or indirectly liable (as a guarantor or otherwise), or (c) constitutes the lender; and (ii) no default with respect to which (including any rights that the holders thereof may have to take enforcement action against an Unrestricted Subsidiary) would permit (upon notice, lapse of time or both) any holder of any other Indebtedness of Company or any of its Restricted Subsidiaries to declare a default on such other Indebtedness of Company or any of its Restricted Subsidiaries or cause the payment thereof to be accelerated or payable prior to its stated maturity; and (iii) as to which the lenders, have been notified in writing that they will not have any recourse to the stock or assets of Company or any of its Restricted Subsidiaries. "Notice of Borrowing" means a notice substantially in the form of Exhibit I annexed hereto delivered by Company to Administrative Agent pursuant to subsection 2.1B with respect to a proposed borrowing. "Notice of Conversion/Continuation" means a notice substantially in the form of Exhibit II annexed hereto delivered by Company to Administrative Agent pursuant to subsection 2.2D with respect to a proposed conversion or continuation of the applicable basis for determining the interest rate with respect to the AXELs specified therein. "Obligations" means all obligations of every nature of each Loan Party from time to time owed to Agents, Lenders or their respective Affiliates or any of them under the AXEL Loan Documents, whether for principal, interest, fees, expenses, indemnification or otherwise. "Officers' Certificate" means, as applied to any corporation, a certificate executed on behalf of such corporation by its chairman of the board (if an officer) or its president or one of its vice presidents and by its chief financial officer or its treasurer; provided that every Officers' Certificate with respect to the compliance with a condition precedent to the making of any AXELs hereunder shall include (i) a statement that the officer or officers making or giving such Officers' Certificate have read such condition and any definitions or other provisions contained in this Agreement relating thereto, (ii) a statement that, in the opinion of the signers, they AXEL CREDIT AGREEMENT EXECUTION 24 31 have made or have caused to be made such examination or investigation as is necessary to enable them to express an informed opinion as to whether or not such condition has been complied with, and (iii) a statement as to whether, in the opinion of the signers, such condition has been complied with. "Old Management Shares" means shares of Company Common Stock held by Management Investors prior to the consummation of the Merger. "PBGC" means the Pension Benefit Guaranty Corporation or any successor thereto. "Pension Plan" means any Employee Benefit Plan, other than a Multi- employer Plan, which is subject to Section 412 of the Internal Revenue Code or Section 302 of ERISA. "Permitted Encumbrances" means the following types of Liens (excluding any such Lien imposed pursuant to Section 401(a)(29) or 412(n) of the Internal Revenue Code or by ERISA, any such Lien relating to or imposed in connection with any Environmental Claim, and any such Lien expressly prohibited by any applicable terms of any of the Collateral Documents): (i) Liens for taxes, assessments or governmental charges or claims the payment of which is not, at the time, required by subsection 5.3; (ii) statutory Liens of landlords, statutory Liens of banks and rights of set-off, statutory Liens of carriers, warehousemen, mechanics, repairmen, workmen and materialmen, and other Liens imposed by law, in each case incurred in the ordinary course of business (a) for amounts not yet overdue or (b) for amounts that are overdue and that (in the case of any such amounts overdue for a period in excess of 15 days) are being contested in good faith by appropriate proceedings, so long as (1) such reserves or other appropriate provisions, if any, as shall be required by GAAP shall have been made for any such contested amounts, and (2) in the case of a Lien with respect to any portion of the Collateral, such contest proceedings conclusively operate to stay the sale of any portion of the Collateral on account of such Lien; (iii) Liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security, or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, leases, government contracts, trade contracts, performance and return-of-money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money), so long as no foreclosure, sale or similar proceedings have been commenced with respect to any portion of the Collateral on account thereof; AXEL CREDIT AGREEMENT EXECUTION 25 32 (iv) any attachment or judgment Lien not constituting an Event of Default under subsection 7.6; (v) leases or subleases granted to third parties in accordance with any applicable terms of the Collateral Documents and not interfering in any material respect with the ordinary conduct of the business of Company or any of its Subsidiaries or resulting in a material diminution in the value of any Collateral as security for the Obligations; (vi) easements, rights-of-way, covenants, conditions, restrictions, encroachments, and other defects or irregularities in title, in each case which do not and will not interfere in any material respect with the ordinary conduct of the business of Company or any of its Subsidiaries or result in a material diminution in the value of any Collateral as security for the Obligations; (vii) any (a) interest or title of a lessor or sublessor under any lease permitted hereunder, (b) restriction or encumbrance that the interest or title of such lessor or sublessor may be subject to, or (c) subordination of the interest of the lessee or sublessee under such lease to any restriction or encumbrance referred to in the preceding clause (b), so long as the holder of such restriction or encumbrance agrees to recognize the rights of such lessee or sublessee under such lease; (viii) Liens arising from filing UCC financing statements relating solely to leases permitted by this Agreement; (ix) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods; (x) any zoning or similar law or right reserved to or vested in any governmental office or agency to control or regulate the use of any real property; (xi) Liens securing obligations (other than obligations representing Indebtedness for borrowed money) under operating, reciprocal easement or similar agreements entered into in the ordinary course of business of Company and its Subsidiaries; and (xii) licenses of patents, trademarks and other intellectual property rights granted by Company or any of its Subsidiaries in the ordinary course of business and not interfering in any material respect with the ordinary conduct of the business of Company or such Subsidiary. AXEL CREDIT AGREEMENT EXECUTION 26 33 "Permitted Holders" means Goldman, Sachs & Co.. and any of its Affiliates. "Permitted Investments" means (i) any Investment in Company or in a Restricted Subsidiary of Company (including the acquisition of any Equity Interest in a Restricted Subsidiary); (ii) any investment in cash and Cash Equivalents; (iii) any Investment by the Company or any Restricted Subsidiary of Company in a Person, if as a result of such Investment (a) such Person becomes a Restricted Subsidiary of Company or (b) such Person, in one transaction or a series of related transactions, is merged, consolidated or amalgamated with or into, or transfer or conveys substantially all of its assets to, or is liquidated into, Company or a Restricted Subsidiary of Company; (iv) any Investment made as a result of the receipt of consideration not constituting cash or Cash Equivalents from an Asset Sale; (v) any Investment existing on the date of the Indenture; (vi) any Investment by Restricted Subsidiaries in other Restricted Subsidiaries and Investments by Subsidiaries that are not Restricted Subsidiaries in other Subsidiaries that are not Restricted Subsidiaries; (vii) advances to employees not in excess of $2,500,000 outstanding at any one time; (viii) any Investment acquired by Company or any of its Restricted Subsidiaries (a) in exchange for any other Investment or accounts receivable held by Company or any such Restricted Subsidiary in connection with or as a result of a bankruptcy, workout, reorganization or recapitalization of the issuer of such other Investment or accounts receivable or (b) as a result of a foreclosure by Company or any of its Restricted Subsidiaries with respect to any secured Investment or other transfer of title with respect to any secured Investment in default; (ix) Hedging Obligations; (x) loans and advances to officers, directors and employees for business-related travel expenses, moving expenses and other similar expenses, in each case incurred in the ordinary course of business; (xi) Investments the payment for which consists exclusively of Equity Interests (exclusive of Disqualified Stock) of Company; and (xii) additional Investments having an aggregate fair market value, taken together with all other Investments made pursuant to this clause (xii) that are at that time outstanding, not to exceed $15,000,000 plus 5% of the increase in Total Asset since the Closing Date at the time of such Investment (with the fair market value of each Investment being measured at the time made and without giving effect to subsequent changes in value). "Permitted Refinancing Indebtedness" means any Indebtedness of 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 Company or any of its Restricted Subsidiaries in whole or in part; provided that: (i) the principal amount (or accreted value, if applicable) of such Permitted Refinancing Indebtedness does not exceed the principal amount (or accreted value, if applicable) of the Indebtedness so extended, refinanced, renewed, replaced, defeased or refunded (plus the amount of reasonable expenses incurred in connection therewith); (ii) such Permitted Refinancing Indebtedness has a final maturity date on or later than the final maturity date of, and has a Weighted AXEL CREDIT AGREEMENT EXECUTION 27 34 Average Life to Maturity equal to or greater than the Weighted Average Life to Maturity of, the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; (iii) if the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded is subordinated in right of payment to the Obligations, such Permitted Refinancing Indebtedness has a final maturity date later than the final maturity date of the AXELs, and is subordinated in right of payment to the AXELs, on terms at least as favorable to the Lenders as those contained in the documentation governing the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; and (iv) such Indebtedness is incurred either by Company or by the Restricted Subsidiary who is the obligor on the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded. "Person" means and includes natural persons, corporations, limited partnerships, general partnerships, limited liability companies, limited liability partnerships, joint stock companies, Joint Ventures, associations, companies, trusts, banks, trust companies, land trusts, business trusts or other organizations, whether or not legal entities, and governments (whether federal, state or local, domestic or foreign, and including political subdivisions thereof) and agencies or other administrative or regulatory bodies thereof. "Pledged Collateral" means, collectively, the "Pledged Collateral" as defined in the Company Pledge Agreement and the Subsidiary Pledge Agreements. "Potential Event of Default" means a condition or event that, after notice or lapse of time or both, would constitute an Event of Default. "Preferred Stock" means any Equity Interest with preferential right of payment of dividends or upon liquidation, dissolution, or winding up. "Prime Rate" means the rate that Fleet announces from time to time as its prime lending rate, as in effect from time to time. The Prime Rate is a reference rate and does not necessarily represent the lowest or best rate actually charged to any customer. Fleet or any other Lender may make commercial loans or other loans at rates of interest at, above or below the Prime Rate. "Pro Rata Share" means with respect to all payments, computations and other matters relating to the AXEL Commitment or the AXEL of any Lender, the percentage obtained by dividing (x) the AXEL Exposure of that Lender by (y) the aggregate AXEL Exposure of all Lenders. "Qualified Public Offering" means any sale of capital stock of Company to the public pursuant to an offering registered under the Securities Act of 1933 pursuant to which Company receives cash proceeds (net of all fees and expenses (including underwriting discounts and legal, investment banking and accounting and AXEL CREDIT AGREEMENT EXECUTION 28 35 other professional fees) and disbursements actually incurred in connection therewith) in an amount not less than $50,000,000. "Real Property Asset" means, at any time of determination, any interest then owned by any Loan Party in any real property. "Recapitalization Agreement" means that certain Agreement and Plan of Merger between Company and Newco dated as of August 10, 1997, in the form delivered to Arranger, Administrative Agent and Lenders prior to their execution of this Agreement and as such agreement may be amended from time to time thereafter. "Recapitalization Consideration" means payments required under Article II of the Recapitalization Agreement. "Recapitalization Documents" means the Recapitalization Agreement and all other instruments or documents relating to the Recapitalization Agreement. "Recapitalization Financing Requirements" means the aggregate of all amounts necessary (i) to pay the Recapitalization Consideration, (ii) to refinance all Indebtedness outstanding under the Existing Credit Agreements, and (iii) to pay Transaction Costs. "Recorded Leasehold Interest" means a Leasehold Property with respect to which a Record Document (as hereinafter defined) has been recorded in all places necessary or desirable, in Collateral Agent's reasonable judgment, to give constructive notice of such Leasehold Property to third-party purchasers and encumbrancers of the affected real property. For purposes of this definition, the term "Record Document" means, with respect to any Leasehold Property, (a) the lease evidencing such Leasehold Property or a memorandum thereof, executed and acknowledged by the owner of the affected real property, as lessor, or (b) if such Leasehold Property was acquired or subleased from the holder of a Recorded Leasehold Interest, the applicable assignment or sublease document, executed and acknowledged by such holder, in each case in form sufficient to give such constructive notice upon recordation and otherwise in form reasonably satisfactory to Administrative Agent. "Refunding Capital Stock" has the meaning assigned to that term in subsection 6.3A. "Register" has the meaning assigned to that term in subsection 2.1D. "Regulation D" means Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time. AXEL CREDIT AGREEMENT EXECUTION 29 36 "Related Fund" means, with respect to any Lender that is a fund that invests in commercial loans, any other fund that invests in commercial loans and is managed by the same investment advisor as such Lender or by any Affiliate of such investment advisor. "Related Agreements" means, collectively, the Certificate of Merger, the Stockholders Agreement, the Voting Agreement, the Employment Agreements, the Tax Indemnification Agreement, the Recapitalization Agreement and the Senior Subordinated Note Indenture. "Related Parties" means any Person controlled by the Permitted Holders, including any partnership of which any of the Permitted Holders or their Affiliates is a general partner. "Release" means any release, spill, emission, leaking, pumping, pouring, injection, escaping, deposit, disposal, discharge, dispersal, dumping, leaching or migration of Hazardous Materials into the indoor or outdoor environment (including the abandonment or disposal of any barrels, containers or other closed receptacles containing any Hazardous Materials), including the movement of any Hazardous Materials through the air, soil, surface water or groundwater. "Requirement of Law" means, with respect to any Person, (i) the certificate or articles of incorporation, by-laws and other organizational or governing documents of such Person, (ii) any law, treaty, rule, regulation or determination of an arbitrator, court or other governmental authority binding on such Person or any of its property, or (iii) any franchise, license, lease, permit, certificate, authorization, qualification, easement, right of way, or right of approval binding on such Person or any of its property. "Required Prepayment Date" has the meaning assigned to that term in subsection 2.4. "Requisite Lenders" means Lenders having or holding more than 50% of the sum of the aggregate AXEL Exposure of all Lenders. "Restricted Investment" means an Investment other than a Permitted Investment. "Restricted Payments" has the meaning assigned to that team in subsection 6.3. "Restricted Subsidiary" of a Person means any Subsidiary of a Person that is not (i) an Unrestricted Subsidiary or (ii) a direct or indirect Subsidiary of an Unrestricted Subsidiary; provided, however, that upon the occurrence of any AXEL CREDIT AGREEMENT EXECUTION 30 37 Unrestricted Subsidiary ceasing to be an Unrestricted Subsidiary, such Subsidiary shall be included in the definition of Restricted Subsidiary. "Retired Capital Stock" has the meaning assigned to that term in subsection 6.3A. "Revolving Credit Agreement" means the Revolving Credit Agreement dated as of December 19, 1997 among Company, the financial institutions from time to time parties thereto, GSCP, as arranger and syndication agent, and Revolving Credit Facility Agent as such Revolving Credit Agreement may be amended, supplemented, refinanced, renewed, extended or otherwise modified from time to time. "Revolving Credit Facility Agent" has the meaning assigned to that term in the introduction to this Agreement. "Revolving Credit Lender" means a lender under the Revolving Credit Agreement holding an outstanding Revolving Loan or having a Revolving Loan Commitment (as defined in the Revolving Credit Agreement), and "Revolving Lenders" means any such lenders or lenders under the Revolving Credit Agreement, collectively. "Revolving Loans" means the loans made by a Revolving Credit Lender to Company pursuant to the Revolving Credit Agreement. "Revolving Loan Documents" means the Revolving Credit Agreement, the Revolving Loan Notes, the Subsidiary Guaranty, the Collateral Documents and the Intercreditor Agreement. "Secured Parties" has the meaning assigned to that term in the introduction to this Agreement. "Securities" means any stock, shares, partnership interests, voting trust certificates, certificates of interest or participation in any profit-sharing agreement or arrangement, options, warrants, bonds, debentures, notes, or other evidences of indebtedness, secured or unsecured, convertible, subordinated or otherwise, or in general any instruments commonly known as "securities" or any certificates of interest, shares or participations in temporary or interim certificates for the purchase or acquisition of, or any right to subscribe to, purchase or acquire, any of the foregoing; provided that "Securities" shall not include any earnout agreement or obligation or any employee bonus or other incentive compensation plan or agreement. "Securities Act" means the Securities Act of 1933, as amended from time to time, and any successor statute. AXEL CREDIT AGREEMENT EXECUTION 31 38 "Senior Subordinated Note Indenture" means the indenture pursuant to which the Senior Subordinated Notes are issued, as such indenture may be amended from time to time. "Senior Subordinated Guarantees" means the Guarantees by the guarantors of the Obligations under the Senior Subordinated Notes Indenture and the Senior Subordinated Notes; "Senior Subordinated Notes" means the $110,000,000 in aggregate principal amount of 9.875% Senior Subordinated Notes due 2007 of Company issued pursuant to the Senior Subordinated Note Indenture. "Solvent" means, with respect to any Person, that as of the date of determination both (A) (i) the then fair saleable value of the property of such Person is (y) greater than the total amount of liabilities (including contingent liabilities) of such Person and (z) not less than the amount that will be required to pay the probable liabilities on such Person's then existing debts as they become absolute and matured considering all financing alternatives and potential asset sales reasonably available to such Person; (ii) such Person's capital is not unreasonably small in relation to its business or any contemplated or undertaken transaction; and (iii) such Person does not intend to incur, or believe (nor should it reasonably believe) that it will incur, debts beyond its ability to pay such debts as they become due; and (B) such Person is "solvent" within the meaning given that term and similar terms under applicable laws relating to fraudulent transfers and conveyances. For purposes of this definition, the amount of any contingent liability at any time shall be computed as the amount that, in light of all of the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability. "Stated Maturity" means, with respect to any installment of interest or principal on, or any other payments with respect to, any series of Indebtedness, the date on which such payment of interest or principal or other payment (including any sinking fund payment) was scheduled or required to be paid, but shall not include any acceleration of such payment or any contingent obligations to repay, redeem or repurchase any such interest or principal prior to the date originally scheduled for the payment thereof. "Stockholders Agreement" means the Stockholders Agreement dated as of December 19, 1997 by and among Company, GSII, the Estate of John A. Svenningsen and certain other individuals and as such agreement may be amended from time to time thereafter. "Subordinated Indebtedness" means any Indebtedness of the Company or any of its Restricted Subsidiaries which is expressly by its terms subordinated in right of payment to the Obligations. AXEL CREDIT AGREEMENT EXECUTION 32 39 "Subsidiary" means, with respect to any Person, (i) any corporation, association or other business entity of which more than 50% of the total voting power of shares of Capital Stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by such Person or one or more of the other Subsidiaries of that Person (or a combination thereof) and (ii) any partnership (a) the sole general partner or the managing general partner of which is such Person or a Subsidiary of such Person or (b) the only general partners of which are such Person or one or more Subsidiaries of such Person (or any combination thereof). "Subsidiary Guarantor" means any Subsidiary of Company that executes and delivers a counterpart of the Subsidiary Guaranty on the Closing Date or from time to time thereafter pursuant to subsection 5.8. "Subsidiary Guaranty" means the Subsidiary Guaranty executed and delivered by existing Domestic Subsidiaries of Company on the Closing Date and to be executed and delivered by additional Domestic Subsidiaries of Company from time to time thereafter in accordance with subsection 5.8, substantially in the form of Exhibit XII annexed hereto, as such Subsidiary Guaranty may hereafter be amended, supplemented or otherwise modified from time to time. "Subsidiary Pledge Agreement" means each Subsidiary Pledge Agreement executed and delivered by an existing Subsidiary Guarantor on the Closing Date or executed and delivered by any additional Subsidiary Guarantor from time to time thereafter in accordance with subsection 5.8, in each case substantially in the form of Exhibit XIII annexed hereto, as such Subsidiary Pledge Agreement may be amended, supplemented or otherwise modified from time to time, and "Subsidiary Pledge Agreements" means all such Subsidiary Pledge Agreements, collectively. "Subsidiary Security Agreement" means each Subsidiary Security Agreement executed and delivered by an existing Subsidiary Guarantor on the Closing Date or executed and delivered by any additional Subsidiary Guarantor from time to time thereafter in accordance with subsection 5.8, in each case substantially in the form of Exhibit XIV annexed hereto, as such Subsidiary Security Agreement may be amended, supplemented or otherwise modified from time to time, and "Subsidiary Security Agreements" means all such Subsidiary Security Agreements, collectively. "Supplemental Collateral Agent" has the meaning assigned to that term in subsection 8.1B. "Syndication Agent" has the meaning assigned to that term in the introduction to this Agreement. AXEL CREDIT AGREEMENT EXECUTION 33 40 "Tax" or "Taxes" means any present or future tax, levy, impost, duty, charge, fee, deduction or withholding of any nature and whatever called, by whomsoever, on whomsoever and wherever imposed, levied, collected, withheld or assessed; provided that "Tax on the overall net income" of a Person shall be construed as a reference to a tax imposed by the jurisdiction in which that Person is organized or in which that Person's principal office (and/or, in the case of a Lender, its lending office) is located or in which that Person (and/or, in the case of a Lender, its lending office) is deemed to be doing business on all or part of the net income, profits or gains (whether worldwide, or only insofar as such income, profits or gains are considered to arise in or to relate to a particular jurisdiction, or otherwise) of that Person (and/or, in the case of a Lender, its lending office). "Tax Indemnification Agreement" means the Tax Indemnification Agreement dated as of August 10, 1997 by and between Company, Christine Svenningsen and the Estate of John A. Svenningsen and as such agreement may be amended from time to time thereafter. "Terminated Lender" has the meaning assigned to that term in subsection 2.10. "Title Company" means, collectively one or more title insurance companies that are members of ALTA and are reasonably satisfactory to Arranger and Administrative Agent. "Total Assets" means, with respect to any Person, the total consolidated assets of such Person and its Restricted Subsidiaries, as shown on the most recent balance sheet of such Person. "Transaction Costs" means the fees, costs and expenses payable by Company in connection with the transactions contemplated by the Loan Documents and the Related Agreements. "UCC" means the Uniform Commercial Code (or any similar or equivalent legislation) as in effect in any applicable jurisdiction. "Unrestricted Subsidiary" means any Subsidiary (other than the Subsidiary Guarantors or any successor to any of them) that is designated by the Board of Directors as an Unrestricted Subsidiary pursuant to a Board Resolution, but only to the extent that such Subsidiary: (a) has no Indebtedness other than Non-Recourse Debt; (b) is not party to any agreement, contract, arrangement or understanding with Company or any Restricted Subsidiary of Company unless the terms of any such agreement, contract, arrangement or understanding are no less favorable to Company or such Restricted Subsidiary than those that might be obtained at the time from Persons who are not Affiliates of Company; (c) is a Person with respect to which AXEL CREDIT AGREEMENT EXECUTION 34 41 neither Company nor any of its Restricted Subsidiaries has any direct or indirect obligation (x) to subscribe for additional Equity Interests or (y) to maintain or preserve such Person's financial condition or to cause such Person to achieve any specified levels of operating results; (d) has not guaranteed and does not otherwise directly or indirectly provide credit support for any Indebtedness of Company or any of its Restricted Subsidiaries; and (e) has at least one director on its board of directors that is not a director or executive officer of Company or any of its Restricted Subsidiaries and has at least one executive officer that is not a director or executive officer of Company or any of its Restricted Subsidiaries. If, at any time, any Unrestricted Subsidiary would fail to meet the foregoing requirements as an Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for purposes hereof and, so long as such Unrestricted Subsidiary remains a Subsidiary, any Indebtedness of such Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of Company as of such date (and, if such Indebtedness is not permitted to be incurred as of such date under the covenant described under subsection 6.1, Company shall be in default of such covenant). The Board of Directors of Company may at any time designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such designation shall be deemed to be an incurrence of Indebtedness by a Restricted Subsidiary of Company of any outstanding Indebtedness of such Unrestricted Subsidiary and such designation shall only be permitted if (i) such Indebtedness is permitted under the covenant described under subsection 6.1, and (ii) no Potential Event of Default or Event of Default would be in existence following such designation. "Unreinvested Asset Sale Proceeds" means that portion, if any, of any Net Asset Sale Proceeds that shall not have been reinvested by Company and its Subsidiaries in the business of Company and its Subsidiaries within six months after the date of receipt by Company or any of its Subsidiaries of such Net Asset Sale Proceeds or in the case of Net Asset Sale Proceeds from the sale of the Chester, New York, Montreal, Quebec or Melbourne, Australia properties, (i) that portion of Net Asset Sale Proceeds that is not subject to a binding agreement with a third party to reinvest such net Asset Sale Proceeds entered into within six months after the date of receipt of such Net Asset Sale Proceeds or (ii) if subject to such a binding agreement, that portion of such Net Asset Sale Proceeds that shall not have been reinvested within nine months of such binding agreement, such reinvestment to be evidenced by an Officers' Certificate, satisfactory in form and substance to Administrative Agent, delivered by Company to Administrative Agent prior to the expiration of such six-month period and demonstrating in reasonable detail the reinvestment of such Net Asset Sale Proceeds as aforesaid. "Voting Agreement" means the Voting Agreement dated as of August 10, 1997 by and between Newco and the Estate of John A. Svenningsen and Christine Svenningsen and as such agreement may be amended from time to time thereafter. AXEL CREDIT AGREEMENT EXECUTION 35 42 "Voting Stock" means, with respect to any Person, any class or series of capital stock of such Person that is ordinarily entitled to vote in the election of directors thereof at a meeting of stockholders called for such purpose, without the occurrence of any additional event or contingency. "Weighted Average Life to Maturity" means, when applied to any Indebtedness at any date, the number of years obtained by dividing (i) the sum of the products obtained by multiplying (a) the amount of each then remaining installment, sinking fund, serial maturity or other required payments of principal, including payment at final maturity, in respect thereof, by (b) the number of years (calculated to the nearest one-twelfth) that will elapse between such date and the making of such payment, by (ii) the then outstanding principal amount of such Indebtedness. "Wholly Owned Restricted Subsidiary" is any Wholly Owned Subsidiary that is a Restricted Subsidiary. "Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person all of the outstanding Capital Stock or other ownership interests of which (other than directors' qualifying shares) shall at the time be owned by such person or by one or more Wholly Owned Subsidiaries of such Person or by such Person and one or more Wholly Owned Subsidiaries of such Person. 1.2 Accounting Terms; Utilization of GAAP for Purposes of Calculations Under Agreement. Except as otherwise expressly provided in this Agreement, all accounting terms not otherwise defined herein shall have the meanings assigned to them in conformity with GAAP. Financial statements and other information required to be delivered by Company to Lenders pursuant to clauses (i), (ii), (iii) and (xiii) of subsection 5.1 shall be prepared in accordance with GAAP as in effect at the time of such preparation (and delivered together with the reconciliation statements provided for in subsection 5.1(v)). Calculations in connection with the definitions, covenants and other provisions of this Agreement shall utilize accounting principles and policies in conformity with those used to prepare the financial statements referred to in subsection 4.3. 1.3 Other Definitional Provisions and Rules of Construction. A. Any of the terms defined herein may, unless the context otherwise requires, be used in the singular or the plural, depending on the reference. B. References to "Sections" and "subsections" shall be to Sections and subsections, respectively, of this Agreement unless otherwise specifically provided. AXEL CREDIT AGREEMENT EXECUTION 36 43 C. The use herein of the word "include" or "including", when following any general statement, term or matter, shall not be construed to limit such statement, term or matter to the specific items or matters set forth immediately following such word or to similar items or matters, whether or not nonlimiting language (such as "without limitation" or "but not limited to" or words of similar import) is used with reference thereto, but rather shall be deemed to refer to all other items or matters that fall within the broadest possible scope of such general statement, term or matter. D. Any term incorporated herein from the Revolving Credit Agreement (as amended, supplemented or otherwise modified from time to time) shall continue to have the meaning assigned thereto whether or not the Revolving Agreement is still in effect. SECTION 2. AMOUNTS AND TERMS OF COMMITMENTS AND LOANS 2.1 Commitments; Making of Loans; the Register; Notes. A. Commitments. Subject to the terms and conditions of this Agreement and in reliance upon the representations and warranties of Company herein set forth, each Lender hereby severally agrees to lend to Company on the Closing Date an amount not exceeding its Pro Rata Share of the aggregate amount of the AXEL Commitments to be used for the purposes identified in subsection 2.5A. The amount of each Lender's AXEL Commitment is set forth opposite its name on Schedule 2.1 annexed hereto and the aggregate amount of the AXEL Commitments is $117,000,000; provided that the AXEL Commitments of Lenders shall be adjusted to give effect to any assignments of the AXEL Commitments pursuant to subsection 9.1B. Each Lender's AXEL Commitment shall expire immediately and without further action on January 31, 1998 if the AXELs are not funded on or before that date. Company may make only one borrowing under the AXEL Commitments. Amounts borrowed under this section 2.1A and subsequently repaid or prepaid may not be reborrowed. B. Borrowing Mechanics. AXELs or Eurodollar Rate AXELs with a particular Interest Period shall be in an aggregate minimum amount of (x) $1,000,000 and integral multiples of $100,000 in excess of that amount in the case of Eurodollar Rate AXELs and (y) $100,000 and integral multiples of $100,000 in excess of that amount in the case of Base Rate AXELs. Whenever Company desires that Lenders make AXELs it shall deliver to Administrative Agent a Notice of Borrowing no later than 10:00 A.M. (New York City time) at least three Business Days in advance of the proposed Closing Date (in the case of a Eurodollar Rate AXEL) or at least one Business Day in advance of the proposed Closing Date (in the case of a Base Rate AXEL). The Notice of Borrowing shall specify (i) the proposed Closing Date (which shall be a Business Day), (ii) the amount requested, (iii) whether such AXELS shall be Base Rate AXELs or Eurodollar Rate AXELs and (iv) in the case of any AXELS requested to be made as Eurodollar Rate AXELs, the initial Interest Period requested therefor. AXELs may be continued as or converted into Base AXEL CREDIT AGREEMENT EXECUTION 37 44 Rate AXELs and Eurodollar Rate AXELs in the manner provided in subsection 2.2D. In lieu of delivering the above-described Notice of Borrowing, Company may give Administrative Agent telephonic notice by the required time of any proposed borrowing under this subsection 2.1B; provided that such notice shall be promptly confirmed in writing by delivery of a Notice of Borrowing to Administrative Agent on or before the Closing Date. Neither Administrative Agent nor any Lender shall incur any liability to Company in acting upon any telephonic notice referred to above that Administrative Agent believes in good faith to have been given by a duly authorized officer or other person authorized to borrow on behalf of Company or for otherwise acting in good faith under this subsection 2.1B, and upon funding of AXELs by Lenders in accordance with this Agreement pursuant to any such telephonic notice Company shall have effected AXELs hereunder. Company shall notify Administrative Agent prior to the Closing Date in the event that any of the matters to which Company is required to certify in the Notice of Borrowing is no longer true and correct as of the Closing Date, and the acceptance by Company of the proceeds of any AXELs shall constitute a re-certification by Company, as of the Closing Date, as to the matters to which Company is required to certify in the applicable Notice of Borrowing. Except as otherwise provided in subsections 2.6B, 2.6C and 2.6G, a Notice of Borrowing for a Eurodollar Rate AXEL (or telephonic notice in lieu thereof) shall be irrevocable on and after the related Interest Rate Determination Date, and Company shall be bound to make a borrowing in accordance therewith. C. Disbursement of Funds. All AXELs under this Agreement shall be made by Lenders simultaneously and proportionately to their respective Pro Rata Shares, it being understood that no Lender shall be responsible for any default by any other Lender in that other Lender's obligation to make an AXEL requested hereunder nor shall the AXEL Commitment of any Lender to make the AXEL requested be increased or decreased as a result of a default by any other Lender in that other Lender's obligation to make an AXEL requested hereunder. Promptly after receipt by Administrative Agent of a Notice of Borrowing pursuant to subsection 2.1B (or telephonic notice in lieu thereof), Administrative Agent shall notify each Lender of the proposed borrowing. Each Lender shall make the amount of its AXEL available to Administrative Agent not later than 12:00 Noon (New York City time) on the Closing Date, in same day funds in Dollars, at the Funding and Payment Office. Upon satisfaction or waiver of the conditions precedent specified in subsections 3.1 and 3.2, Administrative Agent shall make the proceeds of such AXELs available to Company on the Closing Date by causing an amount of same day funds in Dollars equal to the proceeds of all such AXELs received by Administrative Agent from Lenders to be credited to the account of Company at the Funding and Payment Office. Unless Administrative Agent shall have been notified by any Lender prior to the Closing Date for any AXELs that such Lender does not intend to make available to AXEL CREDIT AGREEMENT EXECUTION 38 45 Administrative Agent the amount of such Lender's AXEL requested on such Closing Date, Administrative Agent may assume that such Lender has made such amount available to Administrative Agent on the Closing Date and Administrative Agent may, in its sole discretion, but shall not be obligated to, make available to Company a corresponding amount on the Closing Date. If such corresponding amount is not in fact made available to Administrative Agent by such Lender, Administrative Agent shall be entitled to recover such corresponding amount on demand from such Lender together with interest thereon, for each day from the Closing Date until the date such amount is paid to Administrative Agent, at the customary rate set by Administrative Agent for the correction of errors among banks for three Business Days and thereafter at the Base Rate. If such Lender does not pay such corresponding amount forthwith upon Administrative Agent's demand therefor, Administrative Agent shall promptly notify Company and Company shall immediately pay such corresponding amount to Administrative Agent together with interest thereon, for each day from the Closing Date until the date such amount is paid to Administrative Agent, at the rate payable under this Agreement for Base Rate AXELs. Nothing in this subsection 2.1C shall be deemed to relieve any Lender from its obligation to fulfill its AXEL Commitments hereunder or to prejudice any rights that Company may have against any Lender as a result of any default by such Lender hereunder. D. The Register. (i) Administrative Agent shall maintain, at its address referred to in subsection 9.8, a register for the recordation of the names and addresses of Lenders and the AXEL Commitments and AXELs of each Lender from time to time (the "Register"). The Register shall be available for inspection by Company or any Lender at any reasonable time and from time to time upon reasonable prior notice. (ii) Administrative Agent shall record in the Register the AXEL Commitment and the AXELs from time to time of each Lender and each repayment or prepayment in respect of the principal amount of the AXEL of each Lender. Any such recordation shall be conclusive and binding on Company and each Lender, absent manifest error; provided that failure to make any such recordation, or any error in such recordation, shall not affect any Lender's Commitments or Company's Obligations in respect of any AXELs. (iii) Each Lender shall record on its internal records (including the AXEL Notes held by such Lender) the amount of the AXEL made by it and each payment in respect thereof. Any such recordation shall be conclusive and binding on Company, absent manifest error; provided that failure to make any such recordation, or any error in such recordation, shall not affect any Lender's AXEL Commitments or Company's Obligations in respect of any AXELs and provided, further that in the event of any inconsistency between the Register and any Lender's records, the recordations in the Register shall govern. AXEL CREDIT AGREEMENT EXECUTION 39 46 (iv) Company, Administrative Agent and Lenders shall deem and treat the Persons listed as Lenders in the Register as the holders and owners of the corresponding AXEL Commitments and AXELs listed therein for all purposes hereof, and no assignment or transfer of any such AXEL Commitment or AXEL shall be effective, in each case unless and until an Assignment Agreement effecting the assignment or transfer thereof shall have been accepted by Administrative Agent and recorded in the Register as provided in subsection 9.1B(ii). Prior to such recordation, all amounts owed with respect to the applicable AXEL Commitment or AXEL shall be owed to the Lender listed in the Register as the owner thereof, and any request, authority or consent of any Person who, at the time of making such request or giving such authority or consent, is listed in the Register as a Lender shall be conclusive and binding on any subsequent holder, assignee or transferee of the corresponding AXEL Commitments or AXELs. (v) Company hereby designates Fleet to serve as Company's agent solely for purposes of maintaining the Register as provided in this subsection 2.1D, and Company hereby agrees that, to the extent Fleet serves in such capacity, Fleet and its officers, directors, employees, agents and affiliates shall constitute Indemnitees for all purposes under subsection 9.3. E. AXEL Notes. Company shall execute and deliver on the Closing Date to each Lender (or to Administrative Agent for that Lender) an AXEL Note substantially in the form of Exhibit III annexed hereto to evidence that Lender's AXEL, in the principal amount of that Lender's AXEL and with other appropriate insertions. 2.2 Interest on the Loans. A. Rate of Interest. Subject to the provisions of subsections 2.6 and 2.7, each AXEL shall bear interest on the unpaid principal amount thereof from the date made through maturity (whether by acceleration or otherwise) at a rate determined by reference to the Base Rate or the Adjusted Eurodollar Rate. The applicable basis for determining the rate of interest with respect to any AXEL shall be selected by Company initially at the time a Notice of Borrowing is given with respect to such AXEL pursuant to subsection 2.1B. The basis for determining the interest rate with respect to any AXEL may be changed from time to time pursuant to subsection 2.2D. If on any day an AXEL is outstanding with respect to which notice has not been delivered to Administrative Agent in accordance with the terms of this Agreement specifying the applicable basis for determining the rate of interest, then for that day that AXEL shall bear interest determined by reference to the Base Rate. Subject to the provisions of subsections 2.2E and 2.7, the AXELs shall bear interest through maturity as follows: AXEL CREDIT AGREEMENT EXECUTION 40 47 (i) if a Base Rate AXEL, then at the sum of the Base Rate plus 1-3/8% per annum; or (ii) if a Eurodollar Rate AXEL, then at the sum of the Adjusted Eurodollar Rate plus 2-3/8% per annum. B. Interest Periods. In connection with each Eurodollar Rate AXEL, Company may, pursuant to the applicable Notice of Borrowing or Notice of Conversion/ Continuation, as the case may be, select an interest period (each an "Interest Period") to be applicable to such Eurodollar Rate AXEL, which Interest Period shall be, at Company's option, either a one-, two-, three- or six-month period; provided that: (i) the initial Interest Period for any Eurodollar Rate AXEL shall commence on the Closing Date in respect of such Eurodollar Rate AXEL, in the case of an AXEL initially made as a Eurodollar Rate AXEL, or on the date specified in the applicable Notice of Conversion/Continuation, in the case of an AXEL converted to a Eurodollar Rate AXEL; (ii) in the case of immediately successive Interest Periods applicable to a Eurodollar Rate AXEL continued as such pursuant to a Notice of Conversion/Continuation, each successive Interest Period shall commence on the day on which the next preceding Interest Period expires; (iii) if an Interest Period would otherwise expire on a day that is not a Business Day, such Interest Period shall expire on the next succeeding Business Day; provided that, if any Interest Period would otherwise expire on a day that is not a Business Day but is a day of the month after which no further Business Day occurs in such month, such Interest Period shall expire on the next preceding Business Day; (iv) any Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (v) of this subsection 2.2B, end on the last Business Day of a calendar month; (v) no Interest Period with respect to any portion of the AXELs shall extend beyond December 31, 2004; (vi) no Interest Period with respect to any portion of the AXELs shall extend beyond a date on which Company is required to make a scheduled payment of principal of the AXELs unless the sum of (a) the aggregate principal amount of AXELs that are Base Rate AXELs plus (b) the aggregate principal amount of AXELs that are Eurodollar Rate AXELs with Interest Periods expiring on or before such date equals or exceeds the principal amount required to be paid on the AXELs on such date; AXEL CREDIT AGREEMENT EXECUTION 41 48 (vii) there shall be no more than seven (7) Interest Periods outstanding at any time under this Agreement and the Revolving Credit Agreement; and (viii) in the event Company fails to specify an Interest Period for any Eurodollar Rate AXEL in the applicable Notice of Borrowing or Notice of Conversion/Continuation, Company shall be deemed to have selected an Interest Period of one month. C. Interest Payments. Subject to the provisions of subsection 2.2E, interest on each AXEL shall be payable in arrears on and to each Interest Payment Date applicable to that AXEL, upon any prepayment of that AXEL (to the extent accrued on the amount being prepaid) and at maturity (including final maturity). D. Conversion or Continuation. Subject to the provisions of subsection 2.6, Company shall have the option (i) to convert at any time all or any part of its outstanding AXELs equal to $1,000,000 and integral multiples of $100,000 in excess of that amount from Base Rate AXELs to Eurodollar Rate AXELs or (ii) to convert at any time all or any part of its outstanding AXELs equal to $100,000 and integral multiples of $100,000 in excess of that amount from Eurodollar Rate AXELs to Base Rate AXELs upon the expiration of any Interest Period applicable to a Eurodollar Rate AXEL, to continue all or any portion of such Eurodollar Rate AXEL equal to $1,000,000 and integral multiples of $100,000 in excess of that amount as a Eurodollar Rate AXEL; provided, however, that a Eurodollar Rate AXEL may only be converted into a Base Rate AXEL on the expiration date of an Interest Period applicable thereto. Company shall deliver a Notice of Conversion/Continuation to Administrative Agent no later than 10:00 A.M. (New York City time) at least one Business Day in advance of the proposed conversion date (in the case of a conversion to a Base Rate AXEL) and at least three Business Days in advance of the proposed conversion/continuation date (in the case of a conversion to, or a continuation of, a Eurodollar Rate AXEL). A Notice of Conversion/Continuation shall specify (i) the proposed conversion/continuation date (which shall be a Business Day), (ii) the amount to be converted/continued, (iii) the nature of the proposed conversion/continuation, (iv) in the case of a conversion to, or a continuation of, a Eurodollar Rate AXEL, the requested Interest Period, and (v) in the case of a conversion to, or a continuation of, a Eurodollar Rate AXEL, that no Potential Event of Default or Event of Default has occurred and is continuing. In lieu of delivering the above-described Notice of Conversion/Continuation, Company may give Administrative Agent telephonic notice by the required time of any proposed conversion/continuation under this subsection 2.2D; provided that such notice shall be promptly confirmed in writing by delivery of a Notice of Conversion/Continuation to Administrative Agent on or before the proposed conversion/continuation date. Upon receipt of written or telephonic notice of any proposed conversion/continuation under this subsection 2.2D, Administrative Agent shall promptly transmit such notice by telefacsimile or telephone to each Lender. AXEL CREDIT AGREEMENT EXECUTION 42 49 Neither Administrative Agent nor any Lender shall incur any liability to Company in acting upon any telephonic notice referred to above that Administrative Agent believes in good faith to have been given by a duly authorized officer or other person authorized to act on behalf of Company or for otherwise acting in good faith under this subsection 2.2D, and upon conversion or continuation of the applicable basis for determining the interest rate with respect to any AXELs in accordance with this Agreement pursuant to any such telephonic notice Company shall have effected a conversion or continuation, as the case may be, hereunder. Except as otherwise provided in subsections 2.6B, 2.6C and 2.6G, a Notice of Conversion/Continuation for conversion to, or continuation of, a Eurodollar Rate AXEL (or telephonic notice in lieu thereof) shall be irrevocable on and after the related Interest Rate Determination Date, and Company shall be bound to effect a conversion or continuation in accordance therewith. E. Default Rate. Upon the occurrence and during the continuation of any Event of Default, the outstanding principal amount of all AXELs and, to the extent permitted by applicable law, any interest payments thereon not paid when due and any fees and other amounts then due and payable hereunder, shall thereafter bear interest (including post-petition interest in any proceeding under the Bankruptcy Code or other applicable bankruptcy laws) payable upon demand at a rate that is 2% per annum in excess of the interest rate otherwise payable under this Agreement with respect to the applicable AXELs (or, in the case of any such fees and other amounts, at a rate which is 2% per annum in excess of the interest rate otherwise payable under this Agreement for Base Rate AXELs); provided that, in the case of Eurodollar Rate AXELs, upon the expiration of the Interest Period in effect at the time any such increase in interest rate is effective such Eurodollar Rate AXELs shall thereupon become Base Rate AXELs and shall thereafter bear interest payable upon demand at a rate which is 2% per annum in excess of the interest rate otherwise payable under this Agreement for Base Rate AXELs. Payment or acceptance of the increased rates of interest provided for in this subsection 2.2E is not a permitted alternative to timely payment and shall not constitute a waiver of any Event of Default or otherwise prejudice or limit any rights or remedies of Administrative Agent or any Lender. F. Computation of Interest. Interest on the AXELs shall be computed on the basis of a 360-day year, in each case for the actual number of days elapsed in the period during which it accrues. In computing interest on any AXEL, the date of the making of such AXEL or the first day of an Interest Period applicable to such AXEL or, with respect to a Base Rate AXEL being converted from a Eurodollar Rate AXEL, the date of conversion of such Eurodollar Rate AXEL to such Base Rate AXEL, as the case may be, shall be included, and the date of payment of such AXEL or the expiration date of an Interest Period applicable to such AXEL or, with respect to a Base Rate AXEL being converted to a Eurodollar Rate AXEL, the date of conversion of such Base Rate AXEL to such Eurodollar Rate AXEL, as the case may be, shall be excluded; provided that if a AXEL CREDIT AGREEMENT EXECUTION 43 50 AXEL is repaid on the same day on which it is made, one day's interest shall be paid on that AXEL. 2.3 Fees. Company agrees to pay to Arranger and Administrative Agent such fees in the amounts and at the times separately agreed upon between Company, Arranger and Administrative Agent. 2.4 Repayments, Prepayments; General Provisions Regarding Payments; Application of Proceeds of Collateral and Payments Under Subsidiary Guaranty. A. Scheduled Payments of AXELs. Company shall make principal payments on the AXELs in installments on the dates and in the amounts set forth below:
================================================= Scheduled Payment Repayment Date of AXELs ================================================= March 31, 1998 $292,500 ------------------------------------------------- June 30, 1998 $292,500 ------------------------------------------------- September 30, 1998 $292,500 ------------------------------------------------- December 31, 1998 $292,500 ------------------------------------------------- March 31, 1999 $292,500 ------------------------------------------------- June 30, 1999 $292,500 ------------------------------------------------- September 30, 1999 $292,500 ------------------------------------------------- December 31, 1999 $292,500 ------------------------------------------------- March 31, 2000 $292,500 ------------------------------------------------- June 30, 2000 $292,500 ------------------------------------------------- September 30, 2000 $292,500 ------------------------------------------------- December 31, 2000 $292,500 ------------------------------------------------- March 31, 2001 $292,500 ------------------------------------------------- June 30, 2001 $292,500 ------------------------------------------------- September 30, 2001 $292,500 ------------------------------------------------- December 31, 2001 $292,500 -------------------------------------------------
AXEL CREDIT AGREEMENT EXECUTION 44 51
================================================= Scheduled Payment Repayment Date of AXELs ================================================= March 31, 2002 $292,500 ------------------------------------------------- June 30, 2002 $292,500 ------------------------------------------------- September 30, 2002 $292,500 ------------------------------------------------- December 31, 2002 $292,500 ------------------------------------------------- March 31, 2003 $5,000,000 ------------------------------------------------- June 30, 2003 $5,000,000 ------------------------------------------------- September 30, 2003 $13,893,750 ------------------------------------------------- December 31, 2003 $13,893,750 ------------------------------------------------- March 31, 2004 $13,893,750 ------------------------------------------------- June 30, 2004 $13,893,750 ------------------------------------------------- September 30, 2004 $22,787,500 ------------------------------------------------- December 31, 2004 $22,787,500 ------------------------------------------------- TOTAL $117,000,000 =================================================
; provided that the scheduled installments of principal of the AXELs set forth above shall be reduced in connection with any voluntary or mandatory prepayments of the AXELs in accordance with subsection 2.4B(iii); and provided, further that the AXELs and all other amounts owed hereunder with respect to the AXELs shall be paid in full no later than December 31, 2004, and the final installment payable by Company in respect of the AXELs on such date shall be in an amount, if such amount is different from that specified above, sufficient to repay all amounts owing by Company under this Agreement with respect to the AXELs. B. Prepayments. (i) Voluntary Prepayments. (a) Notice of Prepayment. Company may, upon not less than one Business Day's prior written or telephonic notice, in the case of Base Rate AXELs, and three Business Days' prior written or telephonic notice, in the case of Eurodollar Rate AXELs, in each case given to Administrative Agent by 12:00 Noon (New York City time) on the date required and, if given by telephone, promptly confirmed in writing to Administrative Agent (which AXEL CREDIT AGREEMENT EXECUTION 45 52 original written or telephonic notice Administrative Agent will promptly transmit by telefacsimile or telephone to each Lender), at any time and from time to time prepay any AXELs on any Business Day in whole or in part in an aggregate minimum amount of $1,000,000 and integral multiples of $500,000 in excess of that amount. Notice of prepayment having been given as aforesaid, the principal amount of the AXELs specified in such notice shall become due and payable on the prepayment date specified therein. Any such voluntary prepayment shall be applied as specified in subsection 2.4B(iii). (b) Prepayment Fees. If any portion of the AXELs is prepaid (1) pursuant to clause (a) of subsection 2.4B(i) or (2) pursuant to clause (a), (b) or (c) of subsection 2.4B(ii), in each case on or prior to the date that is 18 months after the Closing Date, Company shall pay to Administrative Agent, for distribution to the holders of the AXELs so prepaid in accordance with their Pro Rata Shares, a fee equal to (x) 1.5% of the principal amount of AXELs so prepaid during the period commencing on the Closing Date and ending on the day prior to the first anniversary of the Closing Date and (y) 0.75% of the principal amount of AXELs so prepaid during the period commencing on the first anniversary of the Closing Date and ending 18 months after the Closing Date. (ii) Mandatory Prepayments. The AXELs shall be prepaid in the amounts and under the circumstances set forth below, all such prepayments to be applied as set forth below or as more specifically provided in subsection 2.4B(iii): (a) Prepayments From Unreinvested Asset Sale Proceeds. No later than the first Business Day following the date on which any Net Asset Sale Proceeds become Unreinvested Asset Sale Proceeds, Company shall prepay the AXELs in an aggregate amount equal to such Unreinvested Asset Sale Proceeds; provided, further that, with respect to an Asset Sale of any asset owned by a Foreign Subsidiary, the Unreinvested Asset Sale Proceeds in respect thereof shall be applied (i) first, to the extent such Unreinvested Net Asset Sale Proceeds may be repatriated to the United States without in the reasonable judgment of the Company resulting in a material tax liability to Company in relation to the amount of proceeds to be repatriated, to prepay the AXELs as set forth above in this subsection 2.4B(ii)(a), (ii) second, to the extent of any remaining portion of such Unreinvested Asset Sale Proceeds, to finance the general corporate purposes of such Foreign Subsidiary so long as the aggregate of all such amounts so applied by all Foreign Subsidiaries with respect to Asset Sales consummated after the Closing Date does not exceed $5,000,000, and (iii) third, to the extent of any remaining portion of such Unreinvested Asset Sale Proceeds, to prepay the AXELs as set forth above in this subsection 2.4B(ii)(a). Concurrently with any determination by Company that any portion of any Unreinvested Asset Sale Proceeds of any AXEL CREDIT AGREEMENT EXECUTION 46 53 Foreign Subsidiary will be applied as described in clause (ii) of the immediately preceding proviso, Company shall deliver to Agent an Officers' Certificate (w) certifying that such Unreinvested Asset Sale Proceeds cannot be repatriated to the United States without resulting in a material tax liability to Company and the reasons therefor, (y) specifying the amount of Unreinvested Asset Sale Proceeds to be retained by such Foreign Subsidiary as described in said clause (ii) and the cumulative aggregate amount of all such Unreinvested Asset Sale Proceeds so retained by all Foreign Subsidiaries since the date of this Agreement and (z) demonstrating the derivation of the Unreinvested Asset Sale Proceeds of the correlative Asset Sale from the gross sales price thereof. (b) Prepayments from Net Insurance/Condemnation Proceeds. No later than the first Business Day following the date of receipt by Administrative Agent or by Company or any of its Subsidiaries of any Net Insurance/Condemnation Proceeds that are required to be applied to prepay the AXELs pursuant to the provisions of subsection 5.4C, Company shall prepay the AXELs in an aggregate amount equal to the amount of such Net Insurance/Condemnation Proceeds. (c) Prepayments Due to Issuance of Debt or Equity Securities. On the date of receipt by Company or any of its Subsidiaries of the Cash proceeds (any such proceeds, net of underwriting discounts and commissions and other reasonable costs and expenses associated therewith, including reasonable legal fees and expenses, being "Net Securities Proceeds") from the issuance of any debt (other than debt permitted by Section 6.1) or equity Securities of Company or any of its Subsidiaries to any Person other than Company or any of its Subsidiaries (and excluding any private issuances of Company Common Stock after the Closing Date to the extent such funds would not be required to prepay any other Indebtedness of the Company and its Subsidiaries) after the Closing Date, Company shall prepay the AXELs in an aggregate amount equal to such Net Securities Proceeds. (d) Prepayments and Reductions from Consolidated Excess Cash Flow. In the event that there shall be Consolidated Excess Cash Flow for any Fiscal Year (commencing with Fiscal Year 1998), Company shall, no later than 90 days after the end of such Fiscal Year, prepay the AXELs in an aggregate amount equal to 75% of such Consolidated Excess Cash Flow; provided that for any Fiscal Year in which the Consolidated Leverage Ratio as of the end of any such Fiscal Year is less than 3.75:1, such percentage of Consolidated Excess Cash Flow applied to prepay the AXELs shall be reduced to 50%. AXEL CREDIT AGREEMENT EXECUTION 47 54 (e) Calculations of Net Proceeds Amounts; Additional Prepayments Based on Subsequent Calculations. Concurrently with any prepayment of the AXELs pursuant to subsections 2.4B(ii)(a)-(e), Company shall deliver to Administrative Agent an Officers' Certificate demonstrating the calculation of the amount (the "Net Proceeds Amount") of the applicable Unreinvested Asset Sale Proceeds or Net Insurance/Condemnation Proceeds, the applicable Net Securities Proceeds (as such term is defined in subsection 2.4B(ii)(c)) or the applicable Consolidated Excess Cash Flow, as the case may be, that gave rise to such prepayment. In the event that Company shall subsequently determine that the actual Net Proceeds Amount was greater than the amount set forth in such Officers' Certificate, Company shall promptly make an additional prepayment of the AXEL in an amount equal to the amount of such excess, and Company shall concurrently therewith deliver to Administrative Agent an Officers' Certificate demonstrating the derivation of the additional Net Proceeds Amount resulting in such excess. (iii) Application of Prepayments. (a) Application of Voluntary Prepayments. Any voluntary prepayments pursuant to subsection 2.4B(i) shall be applied to reduce the scheduled installments of principal of the AXELs set forth in subsections 2.4A on a pro rata basis. (b) Application of Mandatory Prepayments. Any mandatory prepayments of the AXELs pursuant to subsection 2.4B(ii) shall be applied to reduce the scheduled installments of principal of the AXELs set forth in subsection 2.4A on a pro rata basis. (c) Application of Prepayments to Base Rate AXELs and Eurodollar Rate AXELs. Any prepayment of the AXELs shall be applied first to Base Rate AXELs to the full extent thereof before application to Eurodollar Rate AXELs, in a manner which minimizes the amount of any payments required to be made by Company pursuant to subsection 2.6D. C. General Provisions Regarding Payments. (i) Manner and Time of Payment. All payments by Company of principal, interest, fees and other Obligations hereunder and under the AXEL Notes shall be made in Dollars in same day funds, without defense, setoff or counterclaim, free of any restriction or condition, and delivered to Administrative Agent not later than 12:00 Noon (New York City time) on the date due at the Funding and Payment Office for the account of Lenders; funds received by Administrative Agent after that time on such due date shall be deemed to have been paid by Company on the next succeeding Business Day. Company hereby authorizes Administrative Agent to AXEL CREDIT AGREEMENT EXECUTION 48 55 charge its accounts with Administrative Agent in order to cause timely payment to be made to Administrative Agent of all principal, interest, fees and expenses due hereunder (subject to sufficient funds being available in its accounts for that purpose). (ii) Application of Payments to Principal and Interest. All payments in respect of the principal amount of any AXEL shall include payment of accrued interest on the principal amount being repaid or prepaid, and all such payments shall be applied to the payment of interest before application to principal. (iii) Apportionment of Payments. Aggregate principal and interest payments shall be apportioned among all outstanding AXELs to which such payments relate, in each case proportionately to Lenders' respective Pro Rata Shares. Administrative Agent shall promptly distribute to each Lender, at its primary address set forth below its name on the appropriate signature page hereof or at such other address as such Lender may request, its Pro Rata Share of all such payments received by Administrative Agent. Notwithstanding the foregoing provisions of this subsection 2.4C(iii), if, pursuant to the provisions of subsection 2.6C, any Notice of Conversion/Continuation is withdrawn as to any Affected Lender or if any Affected Lender makes Base Rate AXELs in lieu of its Pro Rata Share of any Eurodollar Rate AXELs, Administrative Agent shall give effect thereto in apportioning payments received thereafter. (iv) Payments on Business Days. Whenever any payment to be made hereunder shall be stated to be due on a day that is not a Business Day, such payment shall be made on the next succeeding Business Day and such extension of time shall be included in the computation of the payment of interest hereunder or of the commitment fees hereunder, as the case may be. (v) Notation of Payment. Each AXEL Lender agrees that before disposing of any AXEL Note held by it, or any part thereof (other than by granting participations therein), that Lender will make a notation thereon of all AXELs evidenced by that AXEL Note and all principal payments previously made thereon and of the date to which interest thereon has been paid; provided that the failure to make (or any error in the making of) a notation of any AXEL made under such AXEL Note shall not limit or otherwise affect the obligations of Company hereunder or under such AXEL Note with respect to any AXEL or any payments of principal or interest on such AXEL Note. 2.5 Use of Proceeds. A. AXELs. The proceeds of the AXELs and the proceeds of the debt and equity capitalization of Company described in subsection 3.1D(ii), shall be applied by Company to fund the Recapitalization Financing Requirements. AXEL CREDIT AGREEMENT EXECUTION 49 56 B. Margin Regulations. No portion of the proceeds of any borrowing under this Agreement shall be used by Company or any of its Subsidiaries in any manner that might cause the borrowing or the application of such proceeds to violate Regulation G, Regulation U, Regulation T or Regulation X of the Board of Governors of the Federal Reserve System or any other regulation of such Board or to violate the Exchange Act, in each case as in effect on the date or dates of such borrowing and such use of proceeds. 2.6 Special Provisions Governing Eurodollar Rate AXELs. Notwithstanding any other provision of this Agreement to the contrary, the following provisions shall govern with respect to Eurodollar Rate AXELs as to the matters covered: A. Determination of Applicable Interest Rate. As soon as practicable after 10:00 A.M. (New York City time) on each Interest Rate Determination Date, Administrative Agent shall determine (which determination shall, absent manifest error, be final, conclusive and binding upon all parties) the interest rate that shall apply to the Eurodollar Rate AXELs for which an interest rate is then being determined for the applicable Interest Period and shall promptly give notice thereof (in writing or by telephone confirmed in writing) to Company and each Lender. B. Inability to Determine Applicable Interest Rate. In the event that Administrative Agent shall have determined (which determination shall be final and conclusive and binding upon all parties hereto), on any Interest Rate Determination Date with respect to any Eurodollar Rate AXELs, that by reason of circumstances affecting the Eurodollar market adequate and fair means do not exist for ascertaining the interest rate applicable to such Eurodollar Rate AXELs on the basis provided for in the definition of Adjusted Eurodollar Rate, Administrative Agent shall on such date give notice (by telefacsimile or by telephone confirmed in writing) to Company and each Lender of such determination, whereupon (i) no AXELs may be converted to Eurodollar Rate AXELs until such time as Administrative Agent notifies Company and Lenders that the circumstances giving rise to such notice no longer exist and (ii) any Notice of Conversion/Continuation given by Company with respect to the AXELs in respect of which such determination was made shall be deemed to be rescinded by Company. C. Illegality or Impracticability of Eurodollar Rate AXELs. In the event that on any date any Lender shall have determined (which determination shall be final and conclusive and binding upon all parties hereto but shall be made only after consultation with Company and Administrative Agent) that the making, maintaining or continuation of its Eurodollar Rate AXELs (i) has become unlawful as a result of compliance by such Lender in good faith with any law, treaty, governmental rule, regulation, guideline or order (or would conflict with any such treaty, governmental rule, regulation, guideline or order not having the force of law even though the failure to comply therewith would not be unlawful) or (ii) has become impracticable, or would cause such Lender material hardship, as a result of contingencies occurring after the date of this Agreement which materially and adversely AXEL CREDIT AGREEMENT EXECUTION 50 57 affect the Eurodollar market or the position of such Lender in that market, then, and in any such event, such Lender shall be an "Affected Lender" and it shall on that day give notice (by telefacsimile or by telephone confirmed in writing) to Company and Administrative Agent of such determination (which notice Administrative Agent shall promptly Transmit to each other Lender). Thereafter (a) the obligation of the Affected Lender to convert AXELs to Eurodollar Rate AXELs shall be suspended until such notice shall be withdrawn by the Affected Lender, (b) to the extent such determination by the Affected Lender relates to a Eurodollar Rate AXEL then being requested by Company pursuant to a Notice of Conversion/Continuation, the Affected Lender shall convert such AXEL to a Base Rate AXEL, (c) the Affected Lender's obligation to maintain its outstanding Eurodollar Rate AXELs (the "Affected Loans") shall be terminated at the earlier to occur of the expiration of the Interest Period then in effect with respect to the Affected Loans or when required by law, and (d) the Affected Loans shall automatically convert into Base Rate AXELs on the date of such termination. Notwithstanding the foregoing, to the extent a determination by an Affected Lender as described above relates to a Eurodollar Rate AXEL then being requested by Company pursuant to a Notice of Conversion/Continuation, Company shall have the option, subject to the provisions of subsection 2.6D, to rescind such Notice of Conversion/Continuation as to all Lenders by giving notice (by telefacsimile or by telephone confirmed in writing) to Administrative Agent of such rescission on the date on which the Affected Lender gives notice of its determination as described above (which notice of rescission Administrative Agent shall promptly transmit to each other Lender). Except as provided in the immediately preceding sentence, nothing in this subsection 2.6C shall affect the obligation of any Lender other than an Affected Lender to maintain AXELs as, or to convert AXELs to, Eurodollar Rate AXELs in accordance with the terms of this Agreement. D. Compensation For Breakage or Non-Commencement of Interest Periods. Company shall compensate each Lender, upon written request by that Lender (which request shall set forth the basis for requesting such amounts), for all reasonable losses, expenses and liabilities (including any interest paid by that Lender to lenders of funds borrowed by it to make or carry its Eurodollar Rate AXELs and any loss, expense or liability sustained by that Lender in connection with the liquidation or re-employment of such funds) which that Lender may sustain: (i) if for any reason (other than a default by that Lender) a borrowing of any Eurodollar Rate AXEL does not occur on a date specified therefor in a Notice of Borrowing or a telephonic request for borrowing, or a conversion to or continuation of any Eurodollar Rate AXEL does not occur on a date specified therefor in a Notice of Conversion/Continuation or a telephonic request for conversion or continuation, (ii) if any prepayment (including any prepayment pursuant to subsection 2.4B(i)) or other principal payment or any conversion of any of its Eurodollar Rate AXELs occurs on a date prior to the last day of an Interest Period applicable to that AXEL, (iii) if any prepayment of any of its Eurodollar Rate AXELs is not made on any date specified in a notice of prepayment given by Company, or (iv) as a consequence of any other default by Company in the repayment of its Eurodollar Rate AXELs when required by the terms of this Agreement. AXEL CREDIT AGREEMENT EXECUTION 51 58 E. Booking of Eurodollar Rate AXELs. Any Lender may make, carry or transfer Eurodollar Rate AXELs at, to, or for the account of any of its branch offices or the office of an Affiliate of that Lender. F. Assumptions Concerning Funding of Eurodollar Rate AXELs. Calculation of all amounts payable to a Lender under this subsection 2.6 and under subsection 2.7A shall be made as though that Lender had actually funded each of its relevant Eurodollar Rate AXELs through the purchase of a Eurodollar deposit bearing interest at the rate obtained pursuant to clause (i) of the definition of Adjusted Eurodollar Rate in an amount equal to the amount of such Eurodollar Rate AXEL and having a maturity comparable to the relevant Interest Period and through the transfer of such Eurodollar deposit from an offshore office of that Lender to a domestic office of that Lender in the United States of America; provided, however, that each Lender may fund each of its Eurodollar Rate AXELs in any manner it sees fit and the foregoing assumptions shall be utilized only for the purposes of calculating amounts payable under this subsection 2.6 and under subsection 2.7A. G. Eurodollar Rate AXELs After Default. After the occurrence of and during the continuation of a Potential Event of Default or an Event of Default, (i) Company may not elect to have an AXEL be maintained as, or converted to, a Eurodollar Rate AXEL after the expiration of any Interest Period then in effect for that AXEL and (ii) subject to the provisions of subsection 2.6D, any Notice of Conversion/Continuation given by Company with respect to a requested conversion/continuation that has not yet occurred shall be deemed to be rescinded by Company. 2.7 Increased Costs; Taxes; Capital Adequacy. A. Compensation for Increased Costs and Taxes. Subject to the provisions of subsection 2.7B (which shall be controlling with respect to the matters covered thereby and to the extent a Lender is not entitled to payment under the terms of Section 2.7B, it shall not be entitled to such payment pursuant to this subsection 2.7A), in the event that any Lender shall determine (which determination shall, absent manifest error, be final and conclusive and binding upon all parties hereto) that any law, treaty or governmental rule, regulation or order, or any change therein or in the interpretation, administration or application thereof (including the introduction of any new law, treaty or governmental rule, regulation or order), or any determination of a court or governmental authority, in each case that becomes effective after the date hereof, or compliance by such Lender with any guideline, request or directive issued or made after the date hereof by any central bank or other governmental or quasi-governmental authority (whether or not having the force of law): (i) subjects such Lender (or its applicable lending office) to any additional Tax (other than any Tax on the overall net income of such Lender) with respect to this Agreement or any of its obligations hereunder or any payments to such Lender AXEL CREDIT AGREEMENT EXECUTION 52 59 (or its applicable lending office) of principal, interest, fees or any other amount payable hereunder; (ii) imposes, modifies or holds applicable any reserve (including any marginal, emergency, supplemental, special or other reserve), special deposit, compulsory loan, FDIC insurance or similar requirement against assets held by, or deposits or other liabilities in or for the account of, or advances or loans by, or other credit extended by, or any other acquisition of funds by, any office of such Lender (other than any such reserve or other requirements with respect to Eurodollar Rate AXELs that are reflected in the definition of Adjusted Eurodollar Rate); or (iii) imposes any other condition (other than with respect to a Tax matter) on or affecting such Lender (or its applicable lending office) or its obligations hereunder or the Eurodollar market; and the result of any of the foregoing is to increase the cost to such Lender of agreeing to make, making or maintaining AXELs hereunder or to reduce any amount received or receivable by such Lender (or its applicable lending office) with respect thereto by an amount considered by the Lender to be material; then, in any such case, Company shall promptly pay to such Lender, upon receipt of the statement referred to in the next sentence, such additional amount or amounts (in the form of an increased rate of, or a different method of calculating, interest or otherwise as such Lender in its sole discretion shall determine) as may be necessary to compensate such Lender for any such increased cost or reduction in amounts received or receivable hereunder. Such Lender shall deliver to Company (with a copy to Administrative Agent) a written statement, setting forth in reasonable detail the basis for calculating the additional amounts owed to such Lender under this subsection 2.7A, which statement shall be conclusive and binding upon all parties hereto absent manifest error. B. Withholding of Taxes. (i) Payments to Be Free and Clear. All sums payable by Company under this Agreement and the other AXEL Loan Documents shall (except to the extent required by law) be paid free and clear of, and without any deduction or withholding on account of, any Tax (other than a Tax on the overall net income of any Lender) imposed, levied, collected, withheld or assessed by or within the United States of America or any political subdivision in or of the United States of America or any other jurisdiction from or to which a payment is made by or on behalf of Company or by any federation or organization of which the United States of America or any such jurisdiction is a member at the time of payment. (ii) Grossing-up of Payments. If Company or any other Person is required by law to make any deduction or withholding on account of any such Tax from any AXEL CREDIT AGREEMENT EXECUTION 53 60 sum paid or payable by Company to Administrative Agent or any Lender under any of the AXEL Loan Documents: (a) Company shall notify Administrative Agent of any such requirement or any change in any such requirement as soon as Company becomes aware of it; (b) Company shall pay any such Tax before the date on which penalties attach thereto, such payment to be made (if the liability to pay is imposed on Company) for its own account or (if that liability is imposed on Administrative Agent or such Lender, as the case may be) on behalf of and in the name of Administrative Agent or such Lender; (c) the sum payable by Company in respect of which the relevant deduction, withholding or payment is required shall be increased to the extent necessary to ensure that, after the making of that deduction, withholding or payment, Administrative Agent or such Lender, as the case may be, receives on the due date a net sum equal to what it would have received had no such deduction, withholding or payment been required or made; and (d) within 30 days after paying any sum from which it is required by law to make any deduction or withholding, and within 30 days after the due date of payment of any Tax which it is required by clause (b) above to pay, Company shall deliver to Administrative Agent evidence satisfactory to the other affected parties of such deduction, withholding or payment and of the remittance thereof to the relevant taxing or other authority; provided that no such additional amount shall be required to be paid to any Lender under clause (c) above except to the extent that any change after the date hereof (in the case of each Lender listed on the signature pages hereof) or after the date of the Assignment Agreement pursuant to which such Lender became a Lender (in the case of each other Lender) in any such requirement for a deduction, withholding or payment as is mentioned therein shall result in an increase in the rate of such deduction, withholding or payment from that in effect at the date of this Agreement or at the date of such Assignment Agreement, as the case may be, in respect of payments to such Lender. (iii) Evidence of Exemption from U.S. Withholding Tax. (a) Each Lender that is organized under the laws of any jurisdiction other than the United States or any state or other political subdivision thereof (for purposes of this subsection 2.7B(iii), a "Non-US Lender") shall deliver to Administrative Agent for transmission to Company, on or prior to the Closing Date (in the case of each Lender listed on the signature pages hereof) AXEL CREDIT AGREEMENT EXECUTION 54 61 or on or prior to the date of the Assignment Agreement pursuant to which it becomes a Lender (in the case of each other Lender), and at such other times as may be necessary in the determination of Company or Administrative Agent (each in the reasonable exercise of its discretion), (1) two original copies of Internal Revenue Service Form 1001 or 4224 (or any successor forms), properly completed and duly executed by such Lender, together with any other certificate or statement of exemption required under the Internal Revenue Code or the regulations issued thereunder to establish that such Lender is not subject to deduction or withholding of United States federal income tax with respect to any payments to such Lender of principal, interest, fees or other amounts payable under any of the AXEL Loan Documents or (2) if such Lender is not a "bank" or other Person described in Section 881(c)(3) of the Internal Revenue Code and cannot deliver either Internal Revenue Service Form 1001 or 4224 pursuant to clause (1) above, a Certificate re Non-Bank Status together with two original copies of Internal Revenue Service Form W-8 (or any successor form), properly completed and duly executed by such Lender, together with any other certificate or statement of exemption required under the Internal Revenue Code or the regulations issued thereunder to establish that such Lender is not subject to deduction or withholding of United States federal income tax with respect to any payments to such Lender of interest payable under any of the AXEL Loan Documents. (b) Each Lender required to deliver any forms, certificates or other evidence with respect to United States federal income tax withholding matters pursuant to subsection 2.7B(iii)(a) hereby agrees, from time to time after the initial delivery by such Lender of such forms, certificates or other evidence, whenever a lapse in time or change in circumstances renders such forms, certificates or other evidence obsolete or inaccurate in any material respect, that such Lender shall promptly (1) deliver to Administrative Agent for transmission to Company two new original copies of Internal Revenue Service Form 1001 or 4224, or a Certificate re Non-Bank Status and two original copies of Internal Revenue Service Form W-8, as the case may be, properly completed and duly executed by such Lender, together with any other certificate or statement of exemption required in order to confirm or establish that such Lender is not subject to deduction or withholding of United States federal income tax with respect to payments to such Lender under the AXEL Loan Documents or (2) notify Administrative Agent and Company of its inability to deliver any such forms, certificates or other evidence. (c) Company shall not be required to pay any additional amount to any Non-US Lender under clause (c) of subsection 2.7B(ii) if such Lender shall have failed to satisfy the requirements of clause (a) or (b)(1) of this subsection 2.7B(iii); provided that if such Lender shall have satisfied the requirements of subsection 2.7B(iii)(a) on the Closing Date (in the case of AXEL CREDIT AGREEMENT EXECUTION 55 62 each Lender listed on the signature pages hereof) or on the date of the Assignment Agreement pursuant to which it became a Lender (in the case of each other Lender), nothing in this subsection 2.7B(iii)(c) shall relieve Company of its obligation to pay any additional amounts pursuant to clause (c) of subsection 2.7B(ii) in the event that, as a result of any change in any applicable law, treaty or governmental rule, regulation or order, or any change in the interpretation, administration or application thereof, such Lender is no longer properly entitled to deliver forms, certificates or other evidence at a subsequent date establishing the fact that such Lender is not subject to withholding as described in subsection 2.7B(iii)(a). C. Capital Adequacy Adjustment. If any Lender shall have determined that the adoption, effectiveness, phase-in or applicability after the date hereof of any law, rule or regulation (or any provision thereof) regarding capital adequacy, or any change therein or in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Lender (or its applicable lending office) with any guideline, request or directive regarding capital adequacy (whether or not having the force of law) of any such governmental authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on the capital of such Lender or any corporation controlling such Lender as a consequence of, or with reference to, such Lender's AXELS or AXEL Commitments or other obligations hereunder with respect to the AXELs to a level below that which such Lender or such controlling corporation could have achieved but for such adoption, effectiveness, phase-in, applicability, change or compliance (taking into consideration the policies of such Lender or such controlling corporation with regard to capital adequacy) by an amount considered by the Lender to be material, then from time to time, within five Business Days after receipt by Company from such Lender of the statement referred to in the next sentence, Company shall pay to such Lender such additional amount or amounts as will compensate such Lender or such controlling corporation on an after-tax basis for such reduction. Such Lender shall deliver to Company (with a copy to Administrative Agent) a written statement, setting forth in reasonable detail the basis of the calculation of such additional amounts, which statement shall be conclusive and binding upon all parties hereto absent manifest error. 2.8 Obligation of Lenders to Mitigate. Each Lender agrees that, as promptly as practicable after the officer of such Lender responsible for administering the AXELs of such Lender becomes aware of the occurrence of an event or the existence of a condition that would cause such Lender to become an Affected Lender or that would entitle such Lender to receive payments under subsection 2.7, it will, to the extent not inconsistent with the internal policies of such Lender and any applicable legal or regulatory restrictions, use reasonable efforts (i) to make, fund or maintain the AXEL Commitments of such Lender or the affected AXELs of such Lender through another lending of such Lender, or (ii) take such other measures as such Lender AXEL CREDIT AGREEMENT EXECUTION 56 63 may deem reasonable, if as a result thereof the circumstances which would cause such Lender to be an Affected Lender would cease to exist or the additional amounts which would otherwise be required to be paid to such Lender pursuant to subsection 2.7 would be materially reduced and if, as determined by such Lender in its sole discretion, the making, funding or maintaining of such AXEL Commitments or AXELs through such other lending or in accordance with such other measures, as the case may be, would not otherwise materially adversely affect such AXEL Commitments or AXELs or the interests of such Lender; provided that such Lender will not be obligated to utilize such other lending pursuant to this subsection 2.8 unless Company agrees to pay all incremental expenses incurred by such Lender as a result of utilizing such other lending office as described in clause (i) above. A certificate as to the amount of any such expenses payable by Company pursuant to this subsection 2.8 (setting forth in reasonable detail the basis for requesting such amount) submitted by such Lender to Company (with a copy to Administrative Agent) shall be conclusive absent manifest error. 2.9 Removal or Replacement of a Lender. A. Anything contained in this Agreement to the contrary notwithstanding, in the event that: (i) (a) any Lender (an "Increased-Cost Lender") shall give notice to Company that such Lender is an Affected Lender or that such Lender is entitled to receive payments under subsection 2.7, (b) the circumstances which have caused such Lender to be an Affected Lender or which entitle such Lender to receive such payments shall remain in effect, and (c) such Lender shall fail to withdraw such notice within five Business Days after Company's request for such withdrawal; or (ii) (a) in connection with any proposed amendment, modification, termination, waiver or consent with respect to any of the provisions of this Agreement as contemplated by clauses (i) through (v) of the first proviso to subsection 9.6A, the consent of Requisite Lenders shall have been obtained but the consent of one or more of such other Lenders (each a "Non-Consenting Lender") whose consent is required shall not have been obtained, and (b) the failure to obtain Non-Consenting Lenders' consents does not result solely from the exercise of Non-Consenting Lenders' rights (and the withholding of any required consents by Non-Consenting Lenders) pursuant to the second proviso to subsection 9.6A; then, and in each such case, Company shall have the right, at its option, to remove or replace the applicable Increased-Cost Lender or Non-Consenting Lender (the "Terminated Lender") to the extent permitted by subsection 2.9B. B. Company may, by giving written notice to Administrative Agent and any Terminated Lender of its election to do so: AXEL CREDIT AGREEMENT EXECUTION 57 64 (i) elect to prepay on the date of such termination any outstanding AXELs made by such Terminated Lender, together with accrued and unpaid interest thereon and any other amounts payable to such Terminated Lender hereunder pursuant to subsection 2.6 or subsection 2.7 or otherwise; provided that, in the event such Terminated Lender has any AXELs outstanding at the time of such termination, the written consent of Administrative Agent and Requisite Lenders (which consent shall not be unreasonably withheld or delayed) shall be required in order for Company to make the election set forth in this clause (i); or (ii) elect to cause such Terminated Lender (and such Terminated Lender hereby irrevocably agrees) to assign its outstanding AXELs in full at par to one or more Eligible Assignees (each a "Replacement Lender") in accordance with the provisions of subsection 9.1B; provided that (a) on the date of such assignment, Company shall pay any amounts payable to such Terminated Lender pursuant to subsection 2.6 or subsection 2.7 or otherwise as if it were a prepayment and (b) in the event such Terminated Lender is a Non-Consenting Lender, each Replacement Lender shall consent, at the time of such assignment, to each matter in respect of which such Terminated Lender was a Non-Consenting Lender; provided that Company may not make either of the elections set forth in clauses (i) or (ii) above with respect to any Non-Consenting Lender unless Company also makes one of such elections with respect to each other Terminated Lender which is a Non-Consenting Lender. C. Upon the prepayment of all amounts owing to any Terminated Lender pursuant to clause (i) of subsection 2.9B, such Terminated Lender shall no longer constitute a "Lender" for purposes of this Agreement; provided that any rights of such Terminated Lender to indemnification under this Agreement (including under subsections 2.6D, 2.7, 9.2 and 9.3) shall survive as to such Terminated Lender. SECTION 3. CONDITIONS TO AXELs The obligations of Lenders to make AXELs hereunder are subject to the satisfaction of the following conditions. 3.1 Certain Conditions to AXELs. The obligations of Lenders to make the AXELs on the Closing Date are, in addition to the conditions precedent specified in subsection 3.2, subject to prior or concurrent satisfaction of the following conditions: A. Loan Party Documents. On or before the Closing Date, Company shall, and shall cause each other Loan Party to, deliver to Lenders (or to Administrative Agent for AXEL CREDIT AGREEMENT EXECUTION 58 65 Lenders with sufficient originally executed copies, where appropriate, for each Lender and its counsel) the following with respect to Company or such Loan Party, as the case may be, each, unless otherwise noted, dated the Closing Date: (i) Certified copies of the Certificate or Articles of Incorporation of such Person, together with a good standing certificate from the Secretary of State of its jurisdiction of incorporation and each other state in which such Person is qualified as a foreign corporation to do business and, to the extent generally available, a certificate or other evidence of good standing as to payment of any applicable franchise or similar taxes from the appropriate taxing authority of each of such jurisdictions, each dated a recent date prior to the Closing Date; (ii) Copies of the Bylaws of such Person, certified as of the Closing Date by such Person's corporate secretary or an assistant secretary; (iii) Resolutions of the Board of Directors of such Person approving and authorizing the execution, delivery and performance of the AXEL Loan Documents and Related Agreements to which it is a party, certified as of the Closing Date by the corporate secretary or an assistant secretary of such Person as being in full force and effect without modification or amendment; (iv) Signature and incumbency certificates of the officers of such Person executing the AXEL Loan Documents to which it is a party; (v) Executed originals of the AXEL Loan Documents to which such Person is a party; and (vi) Such other documents as Arranger or Administrative Agent may reasonably request. B. No Material Adverse Effect. Since December 31, 1996, no Material Adverse Effect (in the opinions of Arranger and Administrative Agent) shall have occurred. C. Corporate and Capital Structure, Ownership, Management, Etc. (i) Corporate Structure. The corporate organizational structure of Company and its Subsidiaries, both before and after giving effect to the Merger, shall be as set forth on Schedule 3.1C annexed hereto. (ii) Capital Structure and Ownership. The capital structure and ownership of Company, both before and after giving effect to the Merger, shall be as set forth on Schedule 3.1C annexed hereto. AXEL CREDIT AGREEMENT EXECUTION 59 66 (iii) Management; Employment Agreements. The management structure of Company after giving effect to the Merger shall be as set forth on Schedule 3.1C annexed hereto. Arranger and Administrative Agent shall have received duly executed copies of, and shall be satisfied with the form and substance of, the Employment Agreements as set forth on Schedule 3.1C annexed hereto. D. Proceeds of Debt and Equity Capitalization of Newco and Company. (i) Debt and Equity Capitalization of Company. On or before the Closing Date, Newco and Company shall have consummated the transactions contemplated under the Recapitalization Agreement, and in connection with such transactions, Company will have, following the Merger of Newco with and into Company, not less than $75,000,000 of equity financing, consisting of (i) approximately $7,500,000 in shares of Company retained by current shareholders, (ii) approximately $750,000 in cash common equity contributions by certain Management Investors (which contributions will be financed by Company and will be made following consummation of the Merger) and (iii) approximately $67,500,000 in equity financing from Newco, which equity financing shall have been contributed to Newco immediately prior to the Merger as follows: (x) an amount not less than $61,875,000 in cash by GSII, (y) approximately $4,500,000 of Old Management Shares (valued at the highest cash price offered to public shareholders in the Acquisition) contributed by a certain Management Investor in exchange for common stock of Newco which will be converted in the Merger into shares of Company Common Stock and (z) approximately $1,125,000 of restricted shares of common stock of Newco granted to a certain Management Investor which will be converted in the Merger into shares of Company Common Stock. On or before the Closing Date, Company shall have issued and sold not less than $110,000,000 in aggregate principal amount of Senior Subordinated Notes. (ii) Use of Proceeds by Company. Company shall have provided evidence satisfactory to Arranger and Administrative Agent that the proceeds of the debt and equity capitalization of Company described in the immediately preceding clause (i) have been contributed or irrevocably committed, prior to the application of the proceeds of the AXELs, to the payment of a portion of the Recapitalization Financing Requirements. E. Related Agreements. (i) Form of Senior Subordinated Note Indenture. The Senior Subordinated Note Indenture shall be in the form that has been approved by Arranger and Administrative Agent if the Senior Subordinated Notes were issued and outstanding at the time of any such change. AXEL CREDIT AGREEMENT EXECUTION 60 67 (ii) Approval of Certain Related Agreements. The Recapitalization Agreement, the Certificate of Merger, the Stockholders Agreement, the Voting Agreement, the Employment Agreements and the Tax Indemnification Agreement shall each be satisfactory in form and substance to Arranger and Administrative Agent. (iii) Related Agreements in Full Force and Effect. Arranger and Administrative Agent shall each have received a fully executed or conformed copy of each Related Agreement (including all schedules and exhibits thereto) and any material documents executed in connection therewith, and each Related Agreement shall be in full force and effect and no provision thereof shall have been modified or waived in any respect determined by Arranger or Administrative Agent to be material, in each case without the consent of Arranger and Administrative Agent. F. Matters Relating to Existing Indebtedness of Company and its Subsidiaries. (i) Termination of Existing Credit Agreements and Related Liens; Existing Letters of Credit. On the Closing Date, Company and its Subsidiaries shall have (a) repaid in full all Indebtedness outstanding under the Existing Credit Agreements as set forth on Schedule 3.1F (the aggregate principal amount of which Indebtedness shall not exceed $48,000,000), (b) terminated any commitments to lend or make other extensions of credit thereunder, (c) delivered to Arranger and Administrative Agent all documents or instruments necessary to release all Liens securing Indebtedness or other obligations of Company and its Subsidiaries thereunder, and (d) made arrangements satisfactory to Arranger and Administrative Agent with respect to the cancellation of any letters of credit outstanding thereunder or the issuance of Letters of Credit under the Revolving Credit Agreement to support the obligations of Company and its Subsidiaries with respect thereto. (ii) Existing Indebtedness to Remain Outstanding. Arranger and Administrative Agent shall have received an Officers' Certificate of Company stating that, after giving effect to the transactions described in this subsection 3.1F, the Indebtedness of Loan Parties (other than Indebtedness under the Loan Documents and the Senior Subordinated Notes) shall consist of (a) approximately $6,379,156 in aggregate principal amount of outstanding Indebtedness described in Part I of Schedule 6.1 annexed hereto and (b) Indebtedness in an aggregate amount not to exceed $4,643,679 in respect of Capital Leases described in Part II of Schedule 6.1 annexed hereto. The terms and conditions of all such Indebtedness shall be in form and in substance satisfactory to Arranger, Administrative Agent and Requisite Lenders. G. Necessary Governmental Authorizations and Consents; Expiration of Waiting Periods, Etc. Company shall have obtained all Governmental Authorizations and all consents of other Persons, in each case that are necessary or advisable in connection with AXEL CREDIT AGREEMENT EXECUTION 61 68 the Merger, the other transactions contemplated by the Loan Documents and the Related Agreements and the continued operation of the business conducted by Company and its Subsidiaries in substantially the same manner as conducted prior to the consummation of the Merger, and each of the foregoing shall be in full force and effect, in each case other than those the failure to obtain or maintain which, either individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect. All applicable waiting periods shall have expired without any action being taken or threatened by any competent authority which would restrain, prevent or otherwise impose adverse conditions on the Merger or the financing thereof. No action, request for stay, petition for review or rehearing, reconsideration, or appeal with respect to any of the foregoing shall be pending, and the time for any applicable agency to take action to set aside its consent on its own motion shall have expired. H. Consummation of Merger. (i) All conditions to the Merger set forth in the Recapitalization Agreement shall have been satisfied or the fulfillment of any such conditions shall have been waived with the consent of Arranger, Administrative Agent and Requisite Lenders; (ii) the Merger shall have become effective in accordance with the terms of the Recapitalization Agreement, the Certificate of Merger and the laws of the State of Delaware; (iii) Transaction Costs shall not exceed an amount previously agreed to by Arranger, and Arranger shall have received evidence to its satisfaction to such effect; and (iv) Arranger and Administrative Agent shall have received an Officers' Certificate of Company to the effect set forth in clauses (i)-(iii) above. I. Security Interests in Personal and Mixed Property. Collateral Agent shall have received evidence satisfactory to it that Company and Subsidiary Guarantors shall have taken or caused to be taken all such actions, executed and delivered or caused to be executed and delivered all such agreements, documents and instruments, and made or caused to be made all such filings and recordings (other than the filing or recording of items described in clauses (iii), (iv) and (v) below) that may be necessary or, in the opinion of Collateral Agent desirable in order to create in favor of Collateral Agent, for the benefit of Secured Parties, a valid and (upon such filing and recording) perfected First Priority security interest in the entire personal and mixed property Collateral. Such actions shall include the following: (i) Schedules to Collateral Documents. Delivery to Collateral Agent of accurate and complete schedules to all of the applicable Collateral Documents. AXEL CREDIT AGREEMENT EXECUTION 62 69 (ii) Stock Certificates and Instruments. Delivery to Collateral Agent of (a) certificates (which certificates shall be accompanied by irrevocable undated stock powers, duly endorsed in blank and otherwise satisfactory in form and substance to Collateral Agent) representing all capital stock pledged pursuant to the Company Pledge Agreement and the Subsidiary Pledge Agreements and (b) all promissory notes or other instruments (duly endorsed, where appropriate, in a manner satisfactory to Collateral Agent) evidencing any Collateral; (iii) Lien Searches and UCC Termination Statements. Delivery to Arranger and Administrative Agent of (a) the results of a recent search, by a Person satisfactory to Arranger and Administrative Agent, of all effective UCC financing statements and fixture filings and all judgment and tax lien filings which may have been made with respect to any personal or mixed property of any Loan Party, together with copies of all such filings disclosed by such search, and (b) UCC termination statements duly executed by all applicable Persons for filing in all applicable jurisdictions as may be necessary to terminate any effective UCC financing statements or fixture filings disclosed in such search (other than any such financing statements or fixture filings in respect of Liens permitted to remain outstanding pursuant to the terms of this Agreement). (iv) UCC Financing Statements and Fixture Filings. Delivery to Collateral Agent of UCC financing statements and, where appropriate, fixture filings, duly executed by each applicable Loan Party with respect to all personal and mixed property Collateral of such Loan Party, for filing in all jurisdictions as may be necessary or, in the reasonable opinion of Collateral Agent, desirable to perfect the security interests created in such Collateral pursuant to the Collateral Documents; (v) Auxiliary Pledge Agreements. Execution and delivery to Collateral Agent of Auxiliary Pledge Agreements with respect to the stock of all Foreign Subsidiaries organized under the laws of all jurisdictions with respect to which Collateral Agent deems an Auxiliary Pledge Agreement necessary or advisable to perfect or otherwise protect the First Priority Liens granted to Collateral Agent on behalf of Secured Parties in such stock, and the taking of all such other actions under the laws of such jurisdictions as Collateral Agent may deem necessary or advisable to perfect or otherwise protect such Liens; and (vi) Opinions of Local Counsel. Delivery to Arranger and Administrative Agent of (a) an opinion of counsel (which counsel shall be reasonably satisfactory to Arranger and Administrative Agent) under the laws of each state in the United States in which any personal or mixed property Collateral with an aggregate value in excess of $500,000 is located with respect to the creation and perfection of the security interests in favor of Collateral Agent in such Collateral and such other matters governed by the laws of such jurisdiction regarding such security interests as Arranger and Administrative Agent may reasonably request and (b) an opinion of AXEL CREDIT AGREEMENT EXECUTION 63 70 counsel (which counsel shall be reasonably satisfactory to Arranger and Administrative Agent) under the laws of Quebec, Canada and England as to the perfection of the pledge of stock of Foreign Subsidiaries organized in those jurisdictions, in each case in form and substance reasonably satisfactory to Arranger and Administrative Agent. J. Environmental Reports. Arranger and Administrative Agent shall have received such reports and other information, in form, scope and substance satisfactory to Arranger and Administrative Agent, as Arranger and Administrative Agent may reasonably require regarding environmental matters relating to Company and its Subsidiaries and the Facilities, which reports shall include (i) that certain Environmental Assessment dated October 7, 1997, prepared by Pilko & Associates, Inc. for Confetti Acquisitions, Inc. covering the Facilities located at Anaheim, California, Chester, New York, East Providence, Rhode Island, Harriman, New York, Louisville, Kentucky, Montreal (Kirkland), Quebec, Canada and Newburgh, New York, (the "Environmental Assessment Report"), and (ii) a letter from Pilko & Associates, Inc. in form and substance reasonably satisfactory to Administrative Agent allowing Arranger, Administrative Agent, Collateral Agent and the Lenders to rely on the Environmental Assessment Report to the same extent that Newco and Company may rely thereon. K. Financial Statements; Pro Forma Balance Sheet. On or before the Closing Date, Lenders shall have received from Company (i) audited financial statements of Company and its Subsidiaries for Fiscal Years ended December 31, 1994, 1995 and 1996, consisting of balance sheets and the related consolidated statements of income, stockholders' equity and cash flows for such Fiscal Years, (ii) unaudited financial statements of Company and its Subsidiaries as at September 30, 1997, consisting of a balance sheet and the related consolidated statements of income, stockholders' equity and cash flows for the nine-month period ending on such date, all in reasonable detail and certified by the chief financial officer of Company that they fairly present the financial condition of Company and its Subsidiaries as at the dates indicated and the results of their operations and their cash flows for the periods indicated, subject to changes resulting from audit and normal year-end adjustments, (iii) pro forma consolidated balance sheets of Company and its Subsidiaries as of November 30, 1997, prepared in accordance with GAAP and reflecting the consummation of the Merger, the related financings and the other transactions contemplated by the Loan Documents and the Related Agreements, which pro forma financial statements shall be in form and substance satisfactory to Lenders and (iv) pro forma financial statements (including consolidated balance sheets, statements of operations, stockholders' equity and cash flows) of Company and its Subsidiaries for the 10-year period commencing on the Closing Date, which pro forma financial statements shall be in form and substance satisfactory to Lenders. L. Solvency Assurances. On the Closing Date, Arranger, Administrative Agent and Lenders shall have received (i) a letter from Houlihan, Lokey, Howard & Zukin, dated the Closing Date and addressed to Arranger, Administrative Agent and Lenders, in form AXEL CREDIT AGREEMENT EXECUTION 64 71 and substance satisfactory to Arranger and Administrative Agent and with appropriate attachments, and (ii) a Financial Condition Certificate dated the Closing Date, substantially in the form of Exhibit IX annexed hereto and with appropriate attachments, in each case demonstrating that, after giving effect to the consummation of the Merger, the related financings and the other transactions contemplated by the Loan Documents and the Related Agreements, Company will be Solvent. M. Evidence of Insurance. Collateral Agent shall have received a certificate from Company's insurance broker or other evidence satisfactory to it that all insurance required to be maintained pursuant to subsection 5.4 is in full force and effect and that Collateral Agent on behalf of Secured Parties has been named as additional insured and/or loss payee thereunder to the extent required under subsection 5.4. N. Opinions of Counsel to Loan Parties. Lenders and their respective counsel shall have received (i) originally executed copies of one or more favorable written opinions of (a) Wachtell, Lipton, Rosen & Katz, special counsel for Loan Parties, in form and substance reasonably satisfactory to Administrative Agent and Arranger and its counsel, dated as of the Closing Date and setting forth substantially the matters in the opinions designated in Exhibit V-A annexed hereto and as to such other matters as Administrative Agent or Arranger and acting on behalf of Lenders may reasonably request and (b) Kurzman & Eisenberg, counsel for Loan Parties, in form and substance reasonably satisfactory to Administrative Agent and Arranger and its counsel, dated as of the Closing Date and setting forth substantially the matters in the opinions designated in Exhibit V-B annexed hereto and as to such other matters as Administrative Agent or Arranger and acting on behalf of Lenders may reasonably request, and (ii) evidence satisfactory to Arranger and Administrative Agent that Company has requested such counsel to deliver such opinions to Lenders. O. Opinions of Arranger and Administrative Agent's Counsel. Lenders shall have received originally executed copies of one or more favorable written opinions of O'Melveny & Myers LLP, counsel to Arranger and Administrative Agent, dated as of the Closing Date, substantially in the form of Exhibit VI annexed hereto and as to such other matters as Arranger and Administrative Agent may reasonably request. P. Fees. Company shall have paid to Arranger and Administrative Agent, for distribution (as appropriate) to Arranger, Administrative Agent and Lenders, the fees payable on the Closing Date referred to in subsection 2.3. Q. Representations and Warranties; Performance of Agreements. Company shall have delivered to Arranger and Administrative Agent an Officers' Certificate, in form and substance satisfactory to Arranger and Administrative Agent, to the effect that the representations and warranties in Section 4 hereof are true, correct and complete in all material respects on and as of the Closing Date to the same extent as though made on and as of that date (or, to the extent such representations and warranties specifically relate to AXEL CREDIT AGREEMENT EXECUTION 65 72 an earlier date, that such representations and warranties were true, correct and complete in all material respects on and as of such earlier date) and that Company shall have performed in all material respects all agreements and satisfied all conditions which this Agreement provides shall be performed or satisfied by it on or before the Closing Date except as otherwise disclosed to and agreed to in writing by Arranger, Administrative Agent and Requisite Lenders. R. Completion of Proceedings. All corporate and other proceedings taken or to be taken in connection with the transactions contemplated hereby and all documents incidental thereto not previously found acceptable by Administrative Agent, acting on behalf of Lenders, or Arranger and its counsel shall be satisfactory in form and substance to Administrative Agent and Arranger and such counsel, and Administrative Agent, Arranger and such counsel shall have received all such counterpart originals or certified copies of such documents as Administrative Agent or Arranger may reasonably request. S. Collateral Access Agreements. Company and each applicable Subsidiary Guarantor shall have used its reasonable good faith efforts to obtain, in the case of any Leasehold Property or any real property in which Company or any of its Subsidiaries owns or holds a fee interest and which is subject to a mortgage held by a third-party mortgagee holding inventory or equipment with an aggregate fair market value exceeding $500,000, a Collateral Access Agreement with respect thereto, in each case in form and substance reasonably satisfactory to Arranger and Administrative Agent. T. Revolving Credit Agreement. Arranger and Administrative Agent shall each have received a fully executed or conformed copy of the Revolving Credit Agreement satisfactory in form and substance to Arranger and Administrative Agent. The Revolving Credit Agreement shall be in full force and effect and the conditions to advances of the Revolving Loans thereunder shall have been satisfied or waived by the Revolving Credit Lenders. 3.2 Additional Conditions to AXELs. The obligations of Lenders to make AXELs on the Closing Date are subject to the following further conditions precedent: A. Administrative Agent shall have received before the Closing Date, in accordance with the provisions of subsection 2.1B, an originally executed Notice of Borrowing, in each case signed by the chief executive officer, the chief financial officer or the treasurer or corporate controller of Company or by any executive officer of Company designated by any of the above-described officers on behalf of Company in a writing delivered to Administrative Agent. AXEL CREDIT AGREEMENT EXECUTION 66 73 B. As of the Closing Date: (i) The representations and warranties contained herein and in the other AXEL Loan Documents shall be true, correct and complete in all material respects on and as of the Closing Date to the same extent as though made on and as of that date, except to the extent such representations and warranties specifically relate to an earlier date, in which case such representations and warranties shall have been true, correct and complete in all material respects on and as of such earlier date; (ii) No event shall have occurred and be continuing or would result from the consummation of the borrowing contemplated by such Notice of Borrowing that would constitute an Event of Default or a Potential Event of Default; (iii) Each Loan Party shall have performed in all material respects all agreements and satisfied all conditions which this Agreement provides shall be performed or satisfied by it on or before the Closing Date; (iv) No order, judgment or decree of any court, arbitrator or governmental authority shall purport to enjoin or restrain any Lender from making the AXELs to be made by it on the Closing Date; (v) The making of the AXELs requested on the Closing Date shall not violate any law including Regulation G, Regulation T, Regulation U or Regulation X of the Board of Governors of the Federal Reserve System; and (vi) There shall not be pending or, to the knowledge of Company, threatened, any action, suit, proceeding, governmental investigation or arbitration against or affecting Company or any of its Subsidiaries or any property of Company or any of its Subsidiaries that has not been disclosed by Company in writing prior to the execution of this Agreement), and there shall have occurred no development not so disclosed in any such action, suit, proceeding, governmental investigation or arbitration so disclosed, that, in either event, in the opinion of Administrative Agent or of Requisite Lenders, would be expected to have a Material Adverse Effect; and no injunction or other restraining order shall have been issued and no hearing to cause an injunction or other restraining order to be issued shall be pending or noticed with respect to any action, suit or proceeding seeking to enjoin or otherwise prevent the consummation of, or to recover any damages or obtain relief as a result of, the transactions contemplated by this Agreement or the making of AXELs hereunder. AXEL CREDIT AGREEMENT EXECUTION 67 74 SECTION 4. COMPANY'S REPRESENTATIONS AND WARRANTIES In order to induce Lenders to enter into this Agreement and to make the AXELs, Company represents and warrants to each Lender, on the date of this Agreement, that the following statements are true, correct and complete: 4.1 Organization, Powers, Qualification, Good Standing, Business and Subsidiaries. A. Organization and Powers. Each Loan Party is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation as specified in Schedule 4.1 annexed hereto as it may be supplemented pursuant to subsection 5.1(xvi). Each Loan Party has all requisite corporate power and authority to own and operate its properties, to carry on its business as now conducted and as proposed to be conducted, to enter into the AXEL Loan Documents and Related Agreements to which it is a party and to carry out the transactions contemplated thereby. B. Qualification and Good Standing. Each Loan Party is qualified to do business and in good standing in every jurisdiction where its assets are located and wherever necessary to carry out its business and operations, except in jurisdictions where the failure to be so qualified or in good standing has not had and could not reasonably be expected to have a Material Adverse Effect. C. Conduct of Business. Company and its Subsidiaries are engaged only in (i) the businesses engaged in by Company and its Subsidiaries on the Closing Date and similar or related businesses and (ii) such other lines of business as may be consented to be Requisite Lenders. D. Subsidiaries. All of the Subsidiaries of Company as of the Closing Date are identified in Schedule 4.1 annexed hereto, as said Schedule 4.1 may be supplemented from time to time pursuant to the provisions of subsection 5.1(xvi). The capital stock of each of the Subsidiaries of Company identified in Schedule 4.1 annexed hereto (as so supplemented) is duly authorized, validly issued, fully paid and nonassessable and none of such capital stock constitutes Margin Stock. Each of the Subsidiaries of Company identified in Schedule 4.1 annexed hereto (as so supplemented) is a corporation duly organized, validly existing and in good standing under the laws of its respective jurisdiction of incorporation set forth therein, has all requisite corporate power and authority to own and operate its properties and to carry on its business as now conducted and as proposed to be conducted, and is qualified to do business and in good standing in every jurisdiction where its assets are located and wherever necessary to carry out its business and operations, in each case except where failure to be so qualified or in good standing or a lack of such corporate power and authority has not had and could not reasonably be expected to have a Material Adverse Effect. Schedule 4.1 annexed hereto (as so supplemented) correctly sets forth, as of the AXEL CREDIT AGREEMENT EXECUTION 68 75 Closing Date, the ownership interest of Company and each of its Subsidiaries in each of the Subsidiaries of Company identified therein. 4.2 Authorization of Borrowing, etc. A. Authorization of Borrowing. The execution, delivery and performance of the Loan Documents and the Related Agreements have been duly authorized by all necessary corporate action on the part of each Loan Party that is a party thereto. B. No Conflict. The execution, delivery and performance by Loan Parties of the AXEL Loan Documents and the Related Agreements to which they are parties and the consummation of the transactions contemplated by the AXEL Loan Documents and such Related Agreements do not and will not (i) violate any provision of any law or any governmental rule or regulation applicable to Company or any of its Subsidiaries, the Certificate or Articles of Incorporation or Bylaws of Company or any of its Subsidiaries or any order, judgment or decree of any court or other agency of government binding on Company or any of its Subsidiaries, (ii) conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under any Contractual Obligation of Company or any of its Subsidiaries, except for any breach or default which could not reasonably be expected to have a Material Adverse Effect, (iii) result in or require the creation or imposition of any Lien upon any of the properties or assets of Company or any of its Subsidiaries (other than any Liens created under any of the AXEL Loan Documents in favor of Administrative Agent on behalf of Lenders), or (iv) require any approval of stockholders or any approval or consent of any Person under any Contractual Obligation of Company or any of its Subsidiaries, except for such approvals or consents which will be obtained on or before the Closing Date and disclosed in writing to Lenders and such consents the failure of which to receive could not reasonably be expected to have a Material Adverse Effect. C. Governmental Consents. The execution, delivery and performance by Loan Parties of the AXEL Loan Documents and the Related Agreements to which they are parties and the consummation of the transactions contemplated by the AXEL Loan Documents and such Related Agreements do not and will not require any registration with, consent or approval of, or notice to, or other action to, with or by, any federal, state or other governmental authority or regulatory body the failure of which to receive could not reasonably be expected to cause a Material Adverse Effect. D. Binding Obligation. Each of the AXEL Loan Documents and Related Agreements has been duly executed and delivered by each Loan Party that is a party thereto and is the legally valid and binding obligation of such Loan Party, enforceable against such Loan Party in accordance with its respective terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditors' rights generally or by equitable principles relating to enforceability. AXEL CREDIT AGREEMENT EXECUTION 69 76 E. Valid Issuance of Company Common Stock and Senior Subordinated Notes. (i) Company Common Stock. The Company Common Stock to be issued in the Merger on or before the Closing Date, when issued and delivered, will be duly and validly issued, fully paid and nonassessable. No stockholder of Company has or will have any preemptive rights to subscribe for any additional equity Securities of Company. The issuance and sale of such Company Common Stock, upon such issuance and sale, will either (a) have been registered or qualified under applicable federal and state securities laws or (b) be exempt therefrom. (ii) Senior Subordinated Notes. Company has the corporate power and authority to issue the Senior Subordinated Notes. The Senior Subordinated Notes, when issued and paid for, will be the legally valid and binding obligations of Company, enforceable against Company in accordance with their respective terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditors' rights generally or by equitable principles relating to enforceability. The subordination provisions of the Senior Subordinated Notes will be enforceable against the holders thereof and the AXELs and all other monetary Obligations hereunder are and will be within the definition of "Senior Debt" included in such provisions. The Senior Subordinated Notes, when issued and sold, will either (a) have been registered or qualified under applicable federal and state securities laws or (b) be exempt therefrom. 4.3 Financial Condition. Company has heretofore delivered to Lenders, at Lenders' request, the following financial statements and information: (i) the audited consolidated balance sheets of Company and its Subsidiaries as at December 31, 1996 and the related consolidated statements of income, stockholders' equity and cash flows of Company and its Subsidiaries for the Fiscal Year then ended and (ii) the unaudited consolidated balance sheets of Company and its Subsidiaries as at September 30, 1997 and the related unaudited consolidated statements of income, stockholders' equity and cash flows of Company and its Subsidiaries for the nine-months then ended. All such statements were prepared in conformity with GAAP and fairly present, in all material respects, the financial position (on a consolidated basis) of the entities described in such financial statements as at the respective dates thereof and the results of operations and cash flows (on a consolidated basis) of the entities described therein for each of the periods then ended, subject, in the case of any such unaudited financial statements, to changes resulting from audit and normal year-end adjustments. Company does not (and will not following the funding of the initial AXELs) have any Guarantee, contingent liability or liability for taxes, long-term lease or unusual forward or long-term commitment that is not reflected in the foregoing financial statements or the notes thereto and which in any such case is material in relation to the business, operations, properties, assets, condition (financial or otherwise) or prospects of Company or any of its Subsidiaries. AXEL CREDIT AGREEMENT EXECUTION 70 77 4.4 No Material Adverse Change; No Restricted Payments. Since December 31, 1996, no event or change has occurred that has caused or evidences, either in any case or in the aggregate, a Material Adverse Effect. Other than with respect to the Recapitalization Consideration and the repayment of debt outstanding prior to the effectiveness of the Merger, neither Company nor any of its Subsidiaries has directly or indirectly declared, ordered, or set apart any sum or property which has not yet been paid for, any Restricted Payment or agreed to do so except as permitted by subsection 6.3. 4.5 Title to Properties; Liens; Real Property. A. Title to Properties; Liens. Except for Permitted Encumbrances and Liens permitted under subsection 6.2, Company and its Subsidiaries have (i) good, sufficient and legal title to (in the case of fee interests in real property), (ii) valid leasehold interests in (in the case of leasehold interests in real or personal property), or (iii) good title to (in the case of all other personal property), all of their respective properties and assets reflected in the financial statements referred to in subsection 4.3 or in the most recent financial statements delivered pursuant to subsection 5.1, in each case except for assets disposed of since the date of such financial statements in the ordinary course of business or as otherwise permitted under subsection 6.5. All such properties and assets are free and clear of Liens other than Permitted Encumbrances and other Liens permitted under this Agreement. B. Real Property. As of the Closing Date, Schedule 4.5 annexed hereto contains a true, accurate and complete list of (i) all Fee Properties and (ii) all leases, subleases or assignments of leases (together with all amendments, modifications, supplements, renewals or extensions of any thereof) affecting each Real Property Asset of any Loan Party, regardless of whether such Loan Party is the landlord or tenant (whether directly or as an assignee or successor in interest) under such lease, sublease or assignment. As of the Closing Date, except as specified in Schedule 4.5 annexed hereto, each agreement listed in clause (ii) of the immediately preceding sentence is in full force and effect and Company does not have knowledge of any material default that has occurred and is continuing thereunder, and each such agreement constitutes the legally valid and binding obligation of each applicable Loan Party, enforceable against such Loan Party in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditors' rights generally or by equitable principles. 4.6 Litigation; Adverse Facts. Except as set forth in Schedule 4.6 annexed hereto, there are no actions, suits, proceedings, arbitrations or governmental investigations (whether or not purportedly on behalf of Company or any of its Subsidiaries) at law or in equity, or before or by any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign (including any Environmental Claims) that AXEL CREDIT AGREEMENT EXECUTION 71 78 are pending or, to the knowledge of Company, threatened against or affecting Company or any of its Subsidiaries or any property of Company or any of its Subsidiaries and that, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect. Neither Company nor any of its Subsidiaries (i) is in violation of any applicable laws (including Environmental Laws) that, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect, or (ii) is subject to or in default with respect to any final judgments, writs, injunctions, decrees, rules or regulations of any court or any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, that, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect. 4.7 Payment of Taxes. Except to the extent permitted by subsection 5.3, all material tax returns and reports of Company and its Subsidiaries required to be filed by any of them have been timely filed, and all taxes shown on such tax returns to be due and payable and all assessments, fees and other governmental charges upon Company and its Subsidiaries and upon their respective properties, assets, income, businesses and franchises which are due and payable have been paid when due and payable. Company knows of no proposed material tax assessment against Company or any of its Subsidiaries which is not being actively contested by Company or such Subsidiary in good faith and by appropriate proceedings; provided that such reserves or other appropriate provisions, if any, as shall be required in conformity with GAAP shall have been made or provided therefor. 4.8 Performance of Agreements; Materially Adverse Agreements; Material Contracts. A. Neither Company nor any of its Subsidiaries is in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any of its Contractual Obligations, and no condition exists that, with the giving of notice or the lapse of time or both, would constitute such a default, except where the consequences, direct or indirect, of such default or defaults, if any, would not have a Material Adverse Effect. B. Neither Company nor any of its Subsidiaries is a party to or is otherwise subject to any agreements or instruments or any charter or other internal restrictions which, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect. C. Schedule 4.8 contains a true, correct and complete list of all the Material Contracts in effect on the Closing Date. Except as described on Schedule 4.8, all such Material Contracts are in full force and effect and no defaults currently exist thereunder other than any such defaults or failure to be in force and effect which could not reasonably be expected to result in a Material Adverse Effect. AXEL CREDIT AGREEMENT EXECUTION 72 79 4.9 Governmental Regulation. Neither Company nor any of its Subsidiaries is subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act, the Interstate Commerce Act or the Investment Company Act of 1940 or under any other federal or state statute or regulation which may limit its ability to incur Indebtedness or which may otherwise render all or any portion of the Obligations unenforceable. 4.10 Securities Activities. A. Neither Company nor any of its Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying any Margin Stock. B. Following application of the proceeds of each AXEL and the Revolving Loan under the Revolving Credit Agreement, not more than 25% of the value of the assets (either of Company only or of Company and its Subsidiaries on a consolidated basis) subject to the provisions of subsection 6.2 or 6.5 or subject to any restriction contained in any agreement or instrument, between Company and any Lender or any Affiliate of any Lender, relating to Indebtedness and within the scope of subsection 7.2, will be Margin Stock. 4.11 Employee Benefit Plans. A. Company, each of its Subsidiaries and each of their respective ERISA Affiliates are in compliance with all applicable provisions and requirements of ERISA and the regulations and published interpretations thereunder with respect to each Employee Benefit Plan, and have performed all their obligations under each Employee Benefit Plan. Each Employee Benefit Plan which is intended to qualify under Section 401(a) of the Internal Revenue Code is so qualified. B. No ERISA Events have occurred or are reasonably expected to occur which could reasonably be expected to result in liabilities to the Company or any of its Subsidiaries in excess of $1,000,000 in the aggregate. C. As of the most recent valuation date for any Pension Plan, the excess of (1) the actuarial present value (determined on the basis of reasonable assumptions employed by the independent actuary for each Pension Plan for purposes of Section 412 of the Internal Revenue Code or Section 302 of ERISA) of benefit liabilities (as defined in Section 4001(a)(16) of ERISA), over (2) the fair market value of the assets of such Pension Plan, individually or in the aggregate for all Pension Plans (excluding for purposes of such computation any Pension Plans with respect to which assets exceed benefit liabilities), does not exceed $5,000,000. AXEL CREDIT AGREEMENT EXECUTION 73 80 D. As of the most recent valuation date for each Multiemployer Plan for which the actuarial report is available, the potential liability of Company, its Subsidiaries and their respective ERISA Affiliates for a complete withdrawal from such Multiemployer Plan (within the meaning of Section 4203 of ERISA), when aggregated with such potential liability for a complete withdrawal from all Multiemployer Plans, based on information available pursuant to Section 4221(e) of ERISA, does not exceed $5,000,000. 4.12 Certain Fees. Except as described in the Confidential Information Memorandum, no broker's or finder's fee or commission will be payable with respect to this Agreement or any of the transactions contemplated hereby, and Company hereby indemnifies Lenders against, and agrees that it will hold Lenders harmless from, any claim, demand or liability for any such broker's or finder's fees alleged to have been incurred in connection herewith or therewith and any expenses (including reasonable fees, expenses and disbursements of counsel) arising in connection with any such claim, demand or liability. 4.13 Environmental Protection. Except as set forth in Schedule 4.13 annexed hereto: (i) neither Company nor any of its Subsidiaries nor any of their respective Facilities or operations are subject to any outstanding written order, consent decree or settlement agreement with any Person relating to (a) any Environmental Law, (b) any Environmental Claim, or (c) any Hazardous Materials Activity; (ii) neither Company nor any of its Subsidiaries has received any letter or request for information under Section 104 of the Comprehensive Environmental Response, Compensation, and Liability Act (42 U.S.C. ss. 9604) or any comparable state law; (iii) there are and, to Company's knowledge, have been no conditions, occurrences, or Hazardous Materials Activities which could reasonably be expected to form the basis of an Environmental Claim against Company or any of its Subsidiaries; (iv) neither Company nor any of its Subsidiaries nor, to Company's knowledge, any predecessor of Company or any of its Subsidiaries has filed any notice under any Environmental Law indicating past or present treatment of Hazardous Materials at any Facility, and none of Company's or any of its Subsidiaries' operations involves the generation, transportation, treatment, storage or disposal of hazardous waste, as defined under 40 C.F.R. Parts 260-270 or any state equivalent; AXEL CREDIT AGREEMENT EXECUTION 74 81 (v) compliance with all current or reasonably foreseeable future requirements pursuant to or under Environmental Laws will not, individually or in the aggregate, have a reasonable possibility of giving rise to a Material Adverse Effect. Notwithstanding anything in this subsection 4.13 to the contrary, no event or condition has occurred or is occurring with respect to Company or any of its Subsidiaries relating to any Environmental Law, any Release of Hazardous Materials, or any Hazardous Materials Activity, including any matter disclosed on Schedule 4.13 annexed hereto, which individually or in the aggregate has had or could reasonably be expected to have a Material Adverse Effect. 4.14 Employee Matters. There is no strike or work stoppage in existence or threatened involving Company or any of its Subsidiaries that could reasonably be expected to have a Material Adverse Effect. 4.15 Solvency. Each Loan Party is and, upon the incurrence of any Obligations by such Loan Party on any date on which this representation is made, will be, Solvent. 4.16 Matters Relating to Collateral. A. Creation, Perfection and Priority of Liens. The execution and delivery of the Collateral Documents by Loan Parties, together with (i) the actions taken on or prior to the date hereof pursuant to subsections 3.1I, 5.8 and 5.9 and (ii) the delivery to Collateral Agent of any Pledged Collateral not delivered to Collateral Agent at the time of execution and delivery of the applicable Collateral Document (all of which Pledged Collateral has been so delivered) are effective to create in favor of Collateral Agent for the benefit of Secured Parties, as security for the respective Secured Obligations (as defined in the applicable Collateral Document in respect of any Collateral), a valid and perfected First Priority Lien on all of the Collateral, and all filings and other actions necessary or desirable to perfect and maintain the perfection and First Priority status of such Liens have been duly made or taken and remain in full force and effect, other than the filing of any UCC financing statements delivered to Collateral Agent for filing (but not yet filed) and the periodic filing of UCC continuation statements in respect of UCC financing statements filed by or on behalf of Collateral Agent. B. Governmental Authorizations. No authorization, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for either (i) the pledge or grant by any Loan Party of the Liens purported to be created in favor of Collateral Agent pursuant to any of the Collateral Documents or (ii) the exercise by Collateral Agent of any rights or remedies in respect of any Collateral (whether AXEL CREDIT AGREEMENT EXECUTION 75 82 specifically granted or created pursuant to any of the Collateral Documents or created or provided for by applicable law), except for filings or recordings contemplated by subsection 4.16A and except as may be required, in connection with the disposition of any Pledged Collateral, by laws generally affecting the offering and sale of securities. C. Absence of Third-Party Filings. Except such as may have been filed in favor of Collateral Agent as contemplated by subsection 4.16A, no effective UCC financing statement, fixture filing or other instrument similar in effect covering all or any part of the Collateral is on file in any filing or recording office. D. Margin Regulations. The pledge of the Pledged Collateral pursuant to the Collateral Documents does not violate Regulation G, T, U or X of the Board of Governors of the Federal Reserve System. E. Information Regarding Collateral. All information supplied to Collateral Agent by or on behalf of any Loan Party with respect to any of the Collateral (in each case taken as a whole with respect to any particular Collateral) is accurate and complete in all material respects. 4.17 Related Agreements. A. Delivery of Related Agreements. Company has delivered to Lenders complete and correct copies of each Related Agreement and of all exhibits and schedules thereto. B. Warranties of Company. Except to the extent otherwise set forth herein or in the schedules hereto, each of the representations and warranties given by Company in the Recapitalization Agreement is true and correct in all material respects as of the date hereof (or as of any earlier date to which such representation and warranty specifically relates) and will be true and correct in all material respects as of the Closing Date (or as of such earlier date, as the case may be), in each case subject to the qualifications set forth in the schedules to the Recapitalization Agreement. C. Survival. Notwithstanding anything in the Recapitalization Agreement to the contrary, the representations and warranties of Company set forth in subsection 4.17B shall, solely for purposes of this Agreement, survive the Closing Date for the benefit of Lenders. 4.18 Disclosure. No representation or warranty of Company or any of its Subsidiaries contained in the Confidential Information Memorandum or in any Loan Document or in any other document, certificate or written statement furnished to Lenders by or on behalf of Company or any of its Subsidiaries for use in connection with the transactions contemplated by this Agreement contains any untrue statement of a material fact or omits to state a material fact (known to Company, in the case of any document not furnished by it) necessary in order to AXEL CREDIT AGREEMENT EXECUTION 76 83 make the statements contained herein or therein not misleading in light of the circumstances in which the same were made. Any projections and pro forma financial information contained in such materials are based upon good faith estimates and assumptions believed by Company to be reasonable at the time made, it being recognized by Lenders that such projections as to future events are not to be viewed as facts and that actual results during the period or periods covered by any such projections may differ from the projected results. There are no facts known (or which should upon the reasonable exercise of diligence be known) to Company (other than matters of a general economic nature) that, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect and that have not been disclosed herein or in such other documents, certificates and statements furnished to Lenders for use in connection with the transactions contemplated hereby. 4.19 Revolving Credit Agreement. A. Delivery of Revolving Credit Agreement. Company has delivered to Lenders complete and correct copies of the Revolving Credit Agreement and of all exhibits and schedules thereto. B. Warranties of Company. Except to the extent otherwise set forth herein or in the schedule hereto, each of the representations and warranties given by Company in the Revolving Credit Agreement is true and correct in all material respects as of the date hereof (or as of any earlier date to which such representation and warranty specifically relates) and will be true and correct in all material respects as of the Closing Date (or as of such earlier date, as the case may be), in each case subject to the qualifications set forth in the schedules to the Revolving Credit Agreement. SECTION 5. COMPANY'S AFFIRMATIVE COVENANTS Company covenants and agrees that, so long as any of the AXEL Commitments hereunder shall remain in effect and until payment in full of all of the AXELs and other Obligations unless Requisite Lenders shall otherwise give prior written consent, Company shall perform, and shall cause each of its Subsidiaries to perform, all covenants in this Section 5. 5.1 Financial Statements and Other Reports. Company will maintain, and cause each of its Subsidiaries to maintain, a system of accounting established and administered in accordance with sound business practices to permit preparation of financial statements in conformity with GAAP. Company will deliver to Administrative Agent and Lenders: (i) Monthly Financials: as soon as available and in any event within 30 days after the end of each month ending after the Closing Date (or within 45 days AXEL CREDIT AGREEMENT EXECUTION 77 84 after the end of each month which ends a Fiscal Quarter), the consolidated balance sheets of Company and its Subsidiaries as at the end of such month and the related consolidated statements of income, stockholders' equity and cash flows of Company and its Subsidiaries for such month and for the period from the beginning of the then current Fiscal Year to the end of such month, setting forth in each case in comparative form the corresponding figures for the corresponding periods of the previous Fiscal Year and the corresponding figures from the Financial Plan for the current Fiscal Year, to the extent prepared on a monthly basis, all in reasonable detail and certified by the chief financial officer of Company that they fairly present, in all material respects, the financial condition of Company and its Subsidiaries as at the dates indicated and the results of their operations and their cash flows for the periods indicated, subject to changes resulting from audit and normal year-end adjustments, for such month and for the period from the beginning of the then current Fiscal Year to the end of such month; (ii) Quarterly Financials: as soon as available and in any event within 45 days after the end of each of first three Fiscal Quarters of each year, (a) the consolidated balance sheets of Company and its Subsidiaries as at the end of such Fiscal Quarter and the related consolidated statements of income, stockholders' equity and cash flows of Company and its Subsidiaries for such Fiscal Quarter and for the period from the beginning of the then current Fiscal Year to the end of such Fiscal Quarter, setting forth in each case in comparative form the corresponding figures for the corresponding periods of the previous Fiscal Year and the corresponding figures from the Financial Plan for the current Fiscal Year, all in reasonable detail and certified by the chief financial officer of Company that they fairly present, in all material respects, the financial condition of Company and its Subsidiaries as at the dates indicated and the results of their operations and their cash flows for the periods indicated, subject to changes resulting from audit and normal year-end adjustments, and (b) a narrative report describing the operations of Company and its Subsidiaries in the form of the MD&A, which is prepared by the Company for public filing for such Fiscal Quarter and for the period from the beginning of the then current Fiscal Year to the end of such Fiscal Quarter; (iii) Year-End Financials: as soon as available and in any event within 90 days after the end of each Fiscal Year, (a) the consolidated balance sheets of Company and its Subsidiaries as at the end of such Fiscal Year and the related consolidated statements of income, stockholders' equity and cash flows of Company and its Subsidiaries for such Fiscal Year, setting forth in each case in comparative form the corresponding figures for the previous Fiscal Year and the corresponding figures from the Financial Plan for the Fiscal Year covered by such financial statements, all in reasonable detail and certified by the chief financial officer of Company that they fairly present, in all material respects, the financial condition of Company and its Subsidiaries as at the dates indicated and the results of their operations and their cash flows for the periods indicated, (b) a narrative report AXEL CREDIT AGREEMENT EXECUTION 78 85 describing the operations of Company and its Subsidiaries in the form prepared for presentation to senior management for such Fiscal Year, and (c) a report thereon of independent certified public accountants of recognized national standing selected by Company and satisfactory to Administrative Agent, which report shall be unqualified, shall express no doubts about the ability of Company and its Subsidiaries to continue as a going concern, and shall state that such consolidated financial statements fairly present, in all material respects, the consolidated financial position of Company and its Subsidiaries as at the dates indicated and the results of their operations and their cash flows for the periods indicated in conformity with GAAP applied on a basis consistent with prior years (except as otherwise disclosed in such financial statements) and that the examination by such accountants in connection with such consolidated financial statements has been made in accordance with generally accepted auditing standards; (iv) Officers' and Compliance Certificates: together with each delivery of financial statements of Company and its Subsidiaries pursuant to subdivisions (ii) and (iii) above, (a) an Officers' Certificate of Company stating that the signers have reviewed the terms of this Agreement and have made, or caused to be made under their supervision, a review in reasonable detail of the transactions and condition of Company and its Subsidiaries during the accounting period covered by such financial statements and that such review has not disclosed the existence during or at the end of such accounting period, and that the signers do not have knowledge of the existence as at the date of such Officers' Certificate, of any condition or event that constitutes an Event of Default or Potential Event of Default, or, if any such condition or event existed or exists, specifying the nature and period of existence thereof and what action Company has taken, is taking and proposes to take with respect thereto; and (b) a Compliance Certificate demonstrating in reasonable detail (1) compliance during and at the end of the applicable accounting periods with the restrictions contained in Section 6, in each case to the extent compliance with such restrictions is required to be tested at the end of the applicable accounting period and (2) with respect to any Net Asset Sale Proceeds received by Company or any of its Subsidiaries during the second Fiscal Quarter immediately preceding the Fiscal Quarter in which the applicable accounting period ends, whether or not all or any portion of such Net Asset Sale Proceeds shall have become Unreinvested Asset Sale Proceeds; (v) Reconciliation Statements: if, as a result of any change in accounting principles and policies from those used in the preparation of the audited financial statements referred to in subsection 4.3, the consolidated financial statements of Company and its Subsidiaries delivered pursuant to subdivisions (ii), (iii) or (xiii) of this subsection 5.1 will differ in any material respect from the consolidated financial statements that would have been delivered pursuant to such subdivisions had no such change in accounting principles and policies been made, then (a) together with the first delivery of financial statements pursuant to subdivision (ii), (iii) or (xiii) of this AXEL CREDIT AGREEMENT EXECUTION 79 86 subsection 5.1 following such change, consolidated financial statements of Company and its Subsidiaries for (y) the current Fiscal Year to the effective date of such change and (z) the two full Fiscal Years immediately preceding the Fiscal Year in which such change is made, in each case prepared on a pro forma basis as if such change had been in effect during such periods, and (b) together with each delivery of financial statements pursuant to subdivision (ii), (iii) or (xiii) of this subsection 5.1 following such change, a written statement of the chief accounting officer or chief financial officer of Company setting forth the differences which would have resulted if such financial statements had been prepared without giving effect to such change; (vi) Accountants' Certification: together with each delivery of consolidated financial statements of Company and its Subsidiaries pursuant to subdivision (iii) above, a written statement by the independent certified public accountants giving the report thereon (a) stating that their audit examination has included a review of the terms of this Agreement and the other AXEL Loan Documents as they relate to accounting matters, (b) stating whether, in connection with their audit examination, any condition or event that constitutes an Event of Default or Potential Event of Default has come to their attention and, if such a condition or event has come to their attention, specifying the nature and period of existence thereof; provided that such accountants shall not be liable by reason of any failure to obtain knowledge of any such Event of Default or Potential Event of Default that would not be disclosed in the course of their audit examination, and (c) stating that based on their audit examination nothing has come to their attention that causes them to believe either or both that the information contained in the certificates delivered therewith pursuant to subdivision (iv) above is not correct or that the matters set forth in the Compliance Certificates delivered therewith pursuant to clause (b) of subdivision (iv) above for the applicable Fiscal Year are not stated in accordance with the terms of this Agreement; (vii) Accountants' Reports: promptly upon receipt thereof (unless restricted by applicable professional standards), copies of all reports submitted to Company by independent certified public accountants in connection with each annual, interim or special audit of the financial statements of Company and its Subsidiaries made by such accountants, including any comment letter submitted by such accountants to management in connection with their annual audit; (viii) SEC Filings and Press Releases: promptly upon their becoming available, copies of (a) all financial statements, reports, notices and proxy statements sent or made available generally by Company to its security holders or by any Subsidiary of Company to its security holders other than Company or another Subsidiary of Company, (b) all regular and periodic reports and all registration statements (other than on Form S-8 or a similar form) and prospectuses, if any, filed by Company or any of its Subsidiaries with any securities exchange or with the Securities and Exchange Commission or any governmental or private regulatory authority, and AXEL CREDIT AGREEMENT EXECUTION 80 87 (c) all press releases and other statements made available generally by Company or any of its Subsidiaries to the public concerning material developments in the business of Company or any of its Subsidiaries; (ix) Events of Default, etc.: promptly upon any officer of Company obtaining knowledge (a) of any condition or event that constitutes an Event of Default or Potential Event of Default, or becoming aware that any Lender has given any notice (other than to Administrative Agent) or taken any other action with respect to a claimed Event of Default or Potential Event of Default, (b) that any Person has given any notice to Company or any of its Subsidiaries or taken any other action with respect to a claimed default or event or condition of the type referred to in subsection 7.2, (c) of any condition or event that would be required to be disclosed in a current report filed by Company with the Securities and Exchange Commission on Form 8-K (Items 1, 2, 4, 5 and 6 of such Form as in effect on the date hereof) if Company were required to file such reports under the Exchange Act, or (d) of the occurrence of any event or change that has caused or evidences, either in any case or in the aggregate, a Material Adverse Effect, an Officers' Certificate specifying the nature and period of existence of such condition, event or change, or specifying the notice given or action taken by any such Person and the nature of such claimed Event of Default, Potential Event of Default, default, event or condition, and what action Company has taken, is taking and proposes to take with respect thereto; (x) Litigation or Other Proceedings: (a) promptly upon any officer of Company obtaining knowledge of (X) the institution of, or non-frivolous threat of, any action, suit, proceeding (whether administrative, judicial or otherwise), governmental investigation or arbitration against or affecting Company or any of its Subsidiaries or any property of Company or any of its Subsidiaries (collectively, "Proceedings") not previously disclosed in writing by Company to Lenders or (Y) any material development in any Proceeding that, in any case: (1) if adversely determined, has a reasonable possibility of giving rise to a Material Adverse Effect; or (2) seeks to enjoin or otherwise prevent the consummation of, or to recover any damages or obtain relief as a result of, the transactions contemplated hereby; written notice thereof together with such other information as may be reasonably available to Company to enable Lenders and their counsel to evaluate such matters; and (b) within twenty days after the end of each Fiscal Quarter, a schedule of all Proceedings involving an alleged liability of, or claims against or affecting, Company or any of its Subsidiaries equal to or greater than $500,000, and promptly after request by Administrative Agent such other information as may be reasonably AXEL CREDIT AGREEMENT EXECUTION 81 88 requested by Administrative Agent to enable Administrative Agent and its counsel to evaluate any of such Proceedings; (xi) ERISA Events: promptly upon becoming aware of the occurrence of or forthcoming occurrence of any ERISA Event, a written notice specifying the nature thereof, what action Company, any of its Subsidiaries or any of their respective ERISA Affiliates has taken, is taking or proposes to take with respect thereto and, when known, any action taken or threatened by the Internal Revenue Service, the Department of Labor or the PBGC with respect thereto; (xii) ERISA Notices: with reasonable promptness, copies of (a) each Schedule B (Actuarial Information) to the annual report (Form 5500 Series) filed by Company, any of its Subsidiaries or any of their respective ERISA Affiliates with the Internal Revenue Service with respect to each Pension Plan; (b) all notices received by Company or any of its Subsidiaries from a Multiemployer Plan sponsor concerning an ERISA Event; and (c) copies of such other documents or governmental reports or filings relating to any Employee Benefit Plan as Administrative Agent shall reasonably request; (xiii) Financial Plans: as soon as practicable and in any event no later than 30 days prior to the beginning of each Fiscal Year, a consolidated plan and financial forecast for such Fiscal Year and each succeeding Fiscal Year through the date of the last scheduled payment relating to the AXELs (the "Financial Plan" for such Fiscal Years), including (a) forecasted consolidated balance sheets and forecasted consolidated statements of income and cash flows of Company and its Subsidiaries for each such Fiscal Year, together with pro forma Compliance Certificates for each such Fiscal Year and an explanation of the assumptions on which such forecasts are based, (b) forecasted consolidated statements of income and cash flows of Company and its Subsidiaries for each month of the first such Fiscal Year, together with an explanation of the assumptions on which such forecasts are based, and (c) such other information and projections as any Lender may reasonably request; (xiv) Insurance: as soon as practicable and in any event by the last day of each Fiscal Year, a report in form and substance satisfactory to Administrative Agent outlining all material insurance coverage maintained as of the date of such report by Company and its Subsidiaries and all material insurance coverage planned to be maintained by Company and its Subsidiaries in the immediately succeeding Fiscal Year; (xv) Board of Directors: with reasonable promptness, written notice of any change in the Board of Directors of Company; (xvi) New Subsidiaries: promptly upon any Person becoming a Subsidiary of Company, a written notice setting forth with respect to such Person (a) the date AXEL CREDIT AGREEMENT EXECUTION 82 89 on which such Person became a Subsidiary of Company and (b) all of the data required to be set forth in Schedule 4.1 annexed hereto with respect to all Subsidiaries of Company (it being understood that such written notice shall be deemed to supplement Schedule 4.1 annexed hereto for all purposes of this Agreement); (xvii) Material Contracts: promptly, and in any event within ten Business Days after any Material Contract of Company or any of its Subsidiaries is terminated or amended in a manner that is materially adverse to Company or such Subsidiary, as the case may be, or any new Material Contract is entered into, a written statement describing such event with copies of such material amendments or new contracts, and an explanation of any actions being taken with respect thereto; and (xviii) Other Information: with reasonable promptness, such other information and data with respect to Company or any of its Subsidiaries as from time to time may be reasonably requested by any Lender. 5.2 Corporate Existence, etc. Except as permitted under subsection 6.5, Company will, and will cause each of its Subsidiaries to, at all times preserve and keep in full force and effect its corporate existence and all rights and franchises material to its business; provided, however that neither Company nor any of its Subsidiaries shall be required to preserve any such right or franchise if the Board of Directors of Company or such Subsidiary shall determine that the preservation thereof is no longer desirable in the conduct of the business of Company or such Subsidiary, as the case may be, and that the loss thereof is not disadvantageous in any material respect to Company, such Subsidiary or Lenders. 5.3 Payment of Taxes and Claims; Tax Consolidation. A. Company will, and will cause each of its Subsidiaries to, pay all material taxes, assessments and other governmental charges imposed upon it or any of its properties or assets or in respect of any of its income, businesses or franchises before any penalty accrues thereon, and all claims (including claims for labor, services, materials and supplies) for sums that have become due and payable and that by law have or may become a Lien upon any of its properties or assets, prior to the time when any penalty or fine shall be incurred with respect thereto; provided that no such charge or claim need be paid if it is being contested in good faith by appropriate proceedings promptly instituted and diligently conducted, so long as (1) such reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made therefor and (2) in the case of a charge or claim which has or may become a Lien against any of the Collateral, such contest proceedings conclusively operate to stay the sale of any portion of the Collateral to satisfy such charge or claim. AXEL CREDIT AGREEMENT EXECUTION 83 90 B. Company will not, nor will it permit any of its Subsidiaries to, file or consent to the filing of any consolidated income tax return with any Person (other than Company or any of its Subsidiaries). 5.4 Maintenance of Properties; Insurance; Application of Net Insurance/Condemnation Proceeds. A. Maintenance of Properties. Company will, and will cause each of its Subsidiaries to, maintain or cause to be maintained in good repair, working order and condition, ordinary wear and tear excepted, all material properties used or useful in the business of Company and its Subsidiaries (including all Intellectual Property) and from time to time will make or cause to be made all appropriate repairs, renewals and replacements thereof except where the failure to maintain such properties could not reasonably be expected in any individual case or in the aggregate to have a Material Adverse Effect. B. Insurance. Company will maintain or cause to be maintained, with financially sound and reputable insurers, such public liability insurance, third party property damage insurance, business interruption insurance and casualty insurance with respect to liabilities, losses or damage in respect of the assets, properties and businesses of Company and its Subsidiaries as may customarily be carried or maintained under similar circumstances by corporations of established reputation engaged in similar businesses, in each case in such amounts (giving effect to self-insurance), with such deductibles, covering such risks and otherwise on such terms and conditions as shall be customary for corporations similarly situated in the industry. Without limiting the generality of the foregoing, Company will maintain or cause to be maintained (i) flood insurance with respect to each Flood Hazard Property that is located in a community that participates in the National Flood Insurance Program, in each case in compliance with any applicable regulations of the Board of Governors of the Federal Reserve System, and (ii) replacement value casualty insurance on the Collateral under such policies of insurance, with such insurance companies, in such amounts, with such deductibles, and covering such risks as are at all times satisfactory to Administrative Agent in its commercially reasonable judgment. Each such policy of insurance shall (a) name Collateral Agent for the benefit of Secured Parties as an additional insured thereunder as its interests may appear and (b) in the case of each business interruption and casualty insurance policy, contain a loss payable clause or endorsement, satisfactory in form and substance to Collateral Agent, that names Collateral Agent for the benefit of Secured Parties as the loss payee thereunder for any covered loss in excess of $1,500,000 and provides for at least 30 days prior written notice to Administrative Agent of any modification or cancellation of such policy. C. Application of Net Insurance/Condemnation Proceeds. (i) Business Interruption Insurance. Upon receipt by Company or any of its Subsidiaries of any business interruption insurance proceeds constituting Net Insurance/Condemnation Proceeds, (a) so long as no Event of Default shall have AXEL CREDIT AGREEMENT EXECUTION 84 91 occurred and be continuing, Company or such Subsidiary may retain and apply such Net Insurance/Condemnation Proceeds for working capital purposes, and (b) if an Event of Default shall have occurred and be continuing, Company shall apply an amount equal to such Net Insurance/Condemnation Proceeds to prepay the AXELs as provided in subsection 2.4B(ii)(b); (ii) Casualty Insurance/Condemnation Proceeds. Upon receipt by Company or any of its Subsidiaries of any Net Insurance/Condemnation Proceeds other than from business interruption insurance, (a) so long as no Event of Default shall have occurred and be continuing, Company shall, or shall cause one or more of its Subsidiaries to, (1) subject to clause (iv) below, promptly and diligently and in any event within six months of receipt apply such Net Insurance/Condemnation Proceeds to pay or reimburse the costs of repairing, restoring or replacing the assets in respect of which such Net Insurance/Condemnation Proceeds were received or, (2) to the extent not so applied, or applied pursuant to clause (iv) below within six months of receipt by Company or any of its Subsidiaries to prepay the AXELs as provided in subsection 2.4B(ii)(b), and (b) if an Event of Default shall have occurred and be continuing, Company shall apply an amount equal to such Net Insurance/Condemnation Proceeds to prepay the AXELs as provided in subsection 2.4B(ii)(b). (iii) Net Insurance/Condemnation Proceeds Received by Collateral Agent. Upon receipt by Collateral Agent of any Net Insurance/Condemnation Proceeds as loss payee, such loss proceeds shall be held and applied in accordance with the terms of the Intercreditor Agreement. (iv) Reinvestment of Insurance Proceeds. So long as no Event of Default or Potential Event of Default shall have occurred and be continuing Company and its Subsidiaries may reinvest in the business of Company and its Subsidiaries up to $1,000,000 per year of Net Insurance/Condemnation Proceeds recovered by the Company or any of its Subsidiaries provided that such funds are reinvested within six months of receipt by Company or any of its Subsidiaries. 5.5 Inspection Rights; Lender Meeting. A. Inspection Rights. Company shall, and shall cause each of its Subsidiaries to, permit any authorized representatives designated by any Lender to visit and inspect any of the properties of Company or of any of its Subsidiaries, to inspect, copy and take extracts from its and their financial and accounting records, and to discuss its and their affairs, finances and accounts with its and their officers and independent public accountants (provided that Company may, if it so chooses, be present at or participate in any such discussion), all upon reasonable notice and at such reasonable times during normal business hours and as often as may reasonably be requested. AXEL CREDIT AGREEMENT EXECUTION 85 92 B. Lender Meeting. Company will, upon the request of Arranger, Administrative Agent or Requisite Lenders, participate in a meeting of Administrative Agent and Lenders once during each Fiscal Year to be held at Company's corporate offices (or at such other location as may be agreed to by Company and Administrative Agent) at such time as may be agreed to by Company and Administrative Agent. 5.6 Compliance with Laws, etc. Company shall comply, and shall cause each of its Subsidiaries and all other Persons on or occupying any Facilities to comply, with the requirements of all applicable laws, rules, regulations and orders of any governmental authority (including all Environmental Laws), noncompliance with which could reasonably be expected to cause, individually or in the aggregate, a Material Adverse Effect. 5.7 Environmental Review and Investigation, Disclosure, Etc.; Company's Actions Regarding Hazardous Materials Activities, Environmental Claims and Violations of Environmental Laws. A. Environmental Review and Investigation. Company agrees that Administrative Agent may, from time to time and in its reasonable discretion, (i) retain, at Company's expense, an independent professional consultant to review any environmental audits, investigations, analyses and reports relating to Hazardous Materials prepared by or for Company and (ii) conduct its own investigation of any Facility; provided that, in the case of any Facility no longer owned, leased, operated or used by Company or any of its Subsidiaries, Company shall only be obligated to use its good faith and reasonable efforts to obtain permission for Administrative Agent's professional consultant to conduct an investigation of such Facility. For purposes of conducting such a review and/or investigation, Company hereby grants to Administrative Agent and its agents, employees, consultants and contractors the right to enter into or onto any Facilities currently owned, leased, operated or used by Company or any of its Subsidiaries and to perform such tests on such property (including taking samples of soil, groundwater and suspected asbestoscontaining materials) as are reasonably necessary in connection therewith. Any such investigation of any Facility shall be conducted, unless otherwise agreed to by Company and Administrative Agent, during normal business hours and, to the extent reasonably practicable, shall be conducted so as not to interfere with the ongoing operations at such Facility or to cause any damage or loss to any property at such Facility. Company and Administrative Agent hereby acknowledge and agree that any report of any investigation conducted at the request of Administrative Agent pursuant to this subsection 5.7A will be obtained and shall be used by Administrative Agent and Lenders for the purposes of Lenders' internal credit decisions, to monitor and police the AXELs and to protect Lenders' security interests, if any, created by the AXEL Loan Documents. Administrative Agent agrees to deliver a copy of any such report to Company with the understanding that Company acknowledges and agrees that (x) it will indemnify and hold harmless Administrative Agent and each Lender from any costs, losses or liabilities relating to AXEL CREDIT AGREEMENT EXECUTION 86 93 Company's use of or reliance on such report, (y) neither Administrative Agent nor any Lender makes any representation or warranty with respect to such report, and (z) by delivering such report to Company, neither Administrative Agent nor any Lender is requiring or recommending the implementation of any suggestions or recommendations contained in such report. B. Environmental Disclosure. Company will deliver to Administrative Agent and Lenders: (i) Environmental Audits and Reports. As soon as practicable following receipt thereof, copies of all environmental audits, investigations, analyses and reports of any kind or character, whether prepared by personnel of Company or any of its Subsidiaries or by independent consultants, governmental authorities or any other Persons, with respect to significant environmental matters at any Facility or with respect to any Environmental Claims; (ii) Notice of Certain Releases, Remedial Actions, Etc. Promptly upon the occurrence thereof, written notice describing in reasonable detail (a) any Release required to be reported by Company or any of its Subsidiaries to any federal, state or local governmental or regulatory agency under any applicable Environmental Laws, (b) any remedial action taken by Company or any of its Subsidiaries or any other Person of which Company has knowledge in response to (1) any Hazardous Materials Activities the existence of which has a reasonable possibility of resulting in one or more Environmental Claims having, individually or in the aggregate, a Material Adverse Effect, or (2) any Environmental Claims that, individually or in the aggregate, have a reasonable possibility of resulting in a Material Adverse Effect, and (c) Company's discovery of any occurrence or condition on any real property adjoining or in the vicinity of any Facility that could reasonably be expected to cause such Facility or any part thereof to be subject to any material restrictions on the ownership, occupancy, transferability or use thereof under any Environmental Laws. (iii) Written Communications Regarding Environmental Claims, Releases, Etc. As soon as practicable following the sending or receipt thereof,by Company or any of its Subsidiaries, a copy of any and all written communications with respect to (a) any Environmental Claims that, individually or in the aggregate, are reasonably expected to have a Material Adverse Effect, (b) any Release required to be reported by Company or any of its Subsidiaries to any federal, state or local governmental or regulatory agency, and (c) any request made to Company or any of its Subsidiaries for information from any governmental agency that suggests such agency is investigating whether Company or any of its Subsidiaries may be potentially responsible for any Hazardous Materials Activity. (iv) Notice of Certain Proposed Actions Having Environmental Impact. Prompt written notice describing in reasonable detail (a) any proposed acquisition AXEL CREDIT AGREEMENT EXECUTION 87 94 of stock, assets, or property by Company or any of its Subsidiaries that could reasonably be expected to (1) expose Company or any of its Subsidiaries to, or result in, Environmental Claims that would have, individually or in the aggregate, a Material Adverse Effect or (2) result in Company or any of its Subsidiaries failing to maintain in full force and effect all material Governmental Authorizations required under any Environmental Laws for their respective operations and (b) any proposed action to be taken by Company or any of its Subsidiaries to modify current operations in a manner that could reasonably be expected to subject Company or any of its Subsidiaries to any additional obligations or requirements under any Environmental Laws. (v) Other Information. With reasonable promptness, such other documents and information as from time to time may be reasonably requested by Administrative Agent in relation to any matters disclosed pursuant to this subsection 5.7. C. Company's Actions Regarding Hazardous Materials Activities, Environmental Claims and Violations of Environmental Laws. (i) Remedial Actions Relating to Hazardous Materials Activities. Company shall promptly undertake, and shall cause each of its Subsidiaries promptly to undertake, any and all investigations, studies, sampling, testing, abatement, cleanup, removal, remediation or other response actions necessary to remove, remediate, clean up or abate any Hazardous Materials Activity on, under or about any Facility that is in violation of any Environmental Laws or that presents a material risk of giving rise to an Environmental Claim. In the event Company or any of its Subsidiaries undertakes any such action with respect to any Hazardous Materials, Company or such Subsidiary shall conduct and complete such action in compliance with all applicable Environmental Laws and in accordance with the policies, orders and directives of all federal, state and local governmental authorities except when, and only to the extent that, Company's or such Subsidiary's liability with respect to such Hazardous Materials Activity is being contested in good faith by Company or such Subsidiary. (ii) Actions with Respect to Environmental Claims and Violations of Environmental Laws. Company shall promptly take, and shall cause each of its Subsidiaries promptly to take, any and all actions necessary to (i) cure any violation of applicable Environmental Laws by Company or its Subsidiaries and (ii) make an appropriate response to any Environmental Claim against Company or any of its Subsidiaries and discharge any obligations it may have to any Person thereunder. AXEL CREDIT AGREEMENT EXECUTION 88 95 5.8 Execution of Subsidiary Guaranty and Personal Property Collateral Documents by Certain Subsidiaries and Future Subsidiaries. A. Execution of Subsidiary Guaranty and Personal Property Collateral Documents. In the event that any Domestic Subsidiary existing on the Closing Date that has not previously executed the Subsidiary Guaranty hereafter owns or acquires assets with an aggregate fair market value (without netting such fair market value against any liability of such Subsidiary) exceeding $500,000, or in the event that any Person becomes a Material Domestic Subsidiary after the date hereof, Company will promptly notify Collateral Agent of that fact and cause such Subsidiary to execute and deliver to Collateral Agent a counterpart of the Subsidiary Guaranty and a Subsidiary Pledge Agreement and a Subsidiary Security Agreement and to take all such further actions and execute all such further documents and instruments (including actions, documents and instruments comparable to those described in subsection 3.1I) as may be necessary or, in the opinion of Collateral Agent, desirable to create in favor of Collateral Agent, for the benefit of Secured Parties, a valid and perfected First Priority Lien on all of the personal and mixed property assets of such Subsidiary described in the applicable forms of Collateral Documents. B. Subsidiary Charter Documents, Legal Opinions, Etc. Company shall deliver to Collateral Agent, together with such AXEL Loan Documents, (i) certified copies of such Subsidiary's Certificate or Articles of Incorporation, together with a good standing certificate from the Secretary of State of the jurisdiction of its incorporation and each other state in which such Person is qualified as a foreign corporation to do business and, to the extent generally available, a certificate or other evidence of good standing as to payment of any applicable franchise or similar taxes from the appropriate taxing authority of each of such jurisdictions, each to be dated a recent date prior to their delivery to Collateral Agent, (ii) a copy of such Subsidiary's Bylaws, certified by its corporate secretary or an assistant secretary as of a recent date prior to their delivery to Collateral Agent, (iii) a certificate executed by the secretary or an assistant secretary of such Subsidiary as to (a) the fact that the attached resolutions of the Board of Directors of such Subsidiary approving and authorizing the execution, delivery and performance of such AXEL Loan Documents are in full force and effect and have not been modified or amended and (b) the incumbency and signatures of the officers of such Subsidiary executing such AXEL Loan Documents, and (iv) a favorable opinion of counsel to such Subsidiary, in form and substance satisfactory to Collateral Agent and its counsel, as to (a) the due organization and good standing of such Subsidiary, (b) the due authorization, execution and delivery by such Subsidiary of such AXEL Loan Documents, (c) the enforceability of such AXEL Loan Documents against such Subsidiary, (d) such other matters (including matters relating to the creation and perfection of Liens in any Collateral pursuant to such AXEL Loan Documents) as Collateral Agent may reasonably request, all of the foregoing to be satisfactory in form and substance to Administrative Agent and its counsel. AXEL CREDIT AGREEMENT EXECUTION 89 96 C. Foreign Subsidiary Loan Documents. In the event that any Foreign Subsidiary existing on the Closing Date whose shares have not been pledged pursuant to an Auxiliary Pledge Agreement owns or acquires assets with an aggregate fair market value (without netting such fair market value against any liability of such Subsidiary) exceeding $1,500,000, or in the event that any person becomes a Foreign Subsidiary which owns assets with an aggregate fair market value (without netting such fair market value against any liability of such Subsidiary) exceeding $1,500,000, Company will promptly notify Collateral Agent of that fact and shall or cause the applicable subsidiary which owns equity in such Foreign Subsidiary to execute and deliver to Collateral Agent an Auxiliary Pledge Agreement in form and substance satisfactory to Collateral Agent; to take all such further actions and execute such further documents and instruments as may be necessary or, in the opinion of Collateral Agent reasonably desirable, to perfect a Lien on the equity interests of such Foreign Subsidiary for the benefit of Secured Parties and to deliver to Collateral Agent an opinion of counsel (which counsel shall be reasonably acceptable to Collateral Agent) as to the enforceability of the Auxiliary Pledge Agreement under the laws of such Foreign Subsidiary's jurisdiction of organization and such other matters as Collateral Agent may reasonably request (including as to the perfection of liens on such equity interests) D. If at any time JCS Realty acquires any personal property assets with an aggregate fair market value (without netting such fair market value against any liability of JCS Realty) in excess of $500,000, Company will promptly notify Collateral Agent of that fact and cause JCS Realty to execute and deliver all documents and to take all such further actions as may be necessary or, in the opinion of Collateral Agent, desirable to create in favor of Collateral Agent, for the benefit of Secured Parties, a valid and perfected First Priority Lien on such property in all relevant jurisdictions. 5.9 Conforming Leasehold Interests; Matters Relating to Real Property Collateral. A. Conforming Leasehold Interests. If Company or any of its Subsidiaries acquires any Leasehold Property, Company shall, or shall cause such Subsidiary to, use its reasonable and good faith efforts (without requiring Company or such Subsidiary to relinquish any material rights or incur any material obligations or to expend more than a nominal amount of money over and above the reimbursement, if required, of the Landlord's reasonable out-of-pocket costs, including attorneys' fees) to cause such Leasehold Property to be a Conforming Leasehold Interest. B. Mortgages, Etc. From and after the Closing Date, in the event that (i) Company or any Subsidiary Guarantor acquires any fee interest in real property or any Material Leasehold Property, (ii) with respect to any Material Leasehold Property or any real property in which Company has a fee interest in on or prior to the Closing Date, any first priority mortgage existing on or prior to the Closing Date on such property is removed or (iii) at the time any Person becomes a Subsidiary Guarantor, such Person owns or holds any fee interest in real property or any Material Leasehold Property, in all cases excluding any such Real Property Asset the encumbrancing of which requires the consent of any AXEL CREDIT AGREEMENT EXECUTION 90 97 applicable lessor or (in the case of clause (iii) above) then-existing senior lienholder, where Company and its Subsidiaries are unable to obtain such lessor's or senior lienholder's consent (any such non-excluded Real Property Asset described in the foregoing clause (i), (ii) or (iii) being a "Mortgaged Property"), Company or such Subsidiary Guarantor shall promptly notify Collateral Agent, and shall deliver upon Collateral Agent's written request, as soon as practicable after such Person acquires such Mortgaged Property or becomes a Subsidiary Guarantor, as the case may be, the following: (i) Mortgage. A fully executed and notarized Mortgage duly recorded in all appropriate places in all applicable jurisdictions, encumbering the interest of such Loan Party in such Mortgaged Property; (ii) Opinions of Counsel. (a) A favorable opinion of counsel to such Loan Party, in form and substance satisfactory to Collateral Agent and its counsel, as to the due authorization, execution and delivery by such Loan Party of such Mortgage and such other matters as Collateral Agent may reasonably request, and (b) if required by Collateral Agent, an opinion of counsel (which counsel shall be reasonably satisfactory to Collateral Agent) in the state in which such Mortgaged Property is located with respect to the enforceability of such Mortgage and such other matters (including any matters governed by the laws of such state regarding personal property security interests in respect of any Collateral) as Collateral Agent may reasonably request, in each case in form and substance reasonably satisfactory to Collateral Agent; (iii) Landlord Consent and Estoppel; Recorded Leasehold Interest. In the case of a Mortgaged Property consisting of a Leasehold Property, (a) if such Leasehold Property is holding or will hold inventory or equipment with an aggregate fair market value exceeding $500,000, a Landlord Consent and Estoppel provided that Company shall only be required to use reasonable and good faith efforts to obtain such Landlord Consent and Estoppel and in no event shall Company be obligated to pay any fee, charge or other consideration to any landlord in order to obtain such Landlord Consent and Estoppel, other than, if required, the landlord's reasonable out-of-pocket costs, including attorneys' fees and (b) if such Leasehold Property is a Recorded Leasehold Interest, evidence to that effect (iv) Title Insurance. (a) If reasonably requested by Collateral Agent, an ALTA mortgagee title insurance policy or an unconditional commitment therefor (a "Mortgage Policy") issued by the Title Company with respect to such Mortgaged Property, in an amount satisfactory to Collateral Agent, insuring fee simple title to, or a valid leasehold interest in, such Mortgaged Property vested in such Loan Party and assuring Collateral Agent that such Mortgage creates a valid and enforceable First Priority mortgage Lien on such Mortgaged Property, subject only to, if available in the state in which such Mortgaged Property is located, a standard survey exception and to Permitted Encumbrances, which Mortgage Policy (1) shall include, if available AXEL CREDIT AGREEMENT EXECUTION 91 98 in the state in which such Mortgaged Property is located, an endorsement for mechanics' liens, for future advances under this Agreement and for any other matters reasonably requested by Collateral Agent and (2) shall provide for such affirmative insurance and such reinsurance as Collateral Agent may reasonably request, all of the foregoing in form and substance reasonably satisfactory to Collateral Agent; and (b) evidence satisfactory to Collateral Agent that such Loan Party has (i) delivered to the Title Company all certificates and affidavits customarily required by the Title Company in connection with the issuance of the Mortgage Policy and (ii) paid to the Title Company or to the appropriate governmental authorities all expenses and premiums of the Title Company in connection with the issuance of the Mortgage Policy and all recording and stamp taxes (including mortgage recording and intangible taxes) payable in connection with recording the Mortgage in the appropriate real estate records; provided however, that Administrative Agent shall allow for such reasonable revisions to the applicable mortgage and shall otherwise take such steps as are reasonable and customary to minimize recording, mortgage recording, stamp, documentary and intangible taxes, at Company's cost; (v) Title Report. If no Mortgage Policy is required with respect to such Mortgaged Property, a title report issued by the Title Company with respect thereto, dated not more than 30 days prior to the date such Mortgage is to be recorded and satisfactory in form and substance to Collateral Agent; (vi) Copies of Documents Relating to Title Exceptions. Copies of all recorded documents listed as exceptions to title or otherwise referred to in the Mortgage Policy or title report delivered pursuant to clause (iv) or (v) above; (vii) Matters Relating to Flood Hazard Properties. (a) Evidence, which may be in the form of a letter from an insurance broker or a municipal engineer, as to (1) whether such Mortgaged Property is a Flood Hazard Property and (2) if so, whether the community in which such Flood Hazard Property is located is participating in the National Flood Insurance Program, (b) if such Mortgaged Property is a Flood Hazard Property, such Loan Party's written acknowledgement of receipt of written notification from Collateral Agent (1) that such Mortgaged Property is a Flood Hazard Property and (2) as to whether the community in which such Flood Hazard Property is located is participating in the National Flood Insurance Program, and (c) in the event such Mortgaged Property is a Flood Hazard Property that is located in a community that participates in the National Flood Insurance Program, evidence that Company has obtained flood insurance in respect of such Flood Hazard Property to the extent required under the applicable regulations of the Board of Governors of the Federal Reserve System; and (viii) Environmental Audit. If required by Collateral Agent, reports and other information, in form, scope and substance satisfactory to Collateral Agent and prepared by environmental consultants satisfactory to Collateral Agent, concerning AXEL CREDIT AGREEMENT EXECUTION 92 99 any environmental hazards or liabilities to which Company or any of its Subsidiaries may be subject with respect to such Mortgaged Property. C. Real Estate Appraisals. Company shall, and shall cause each of its Subsidiaries to, permit an independent real estate appraiser satisfactory to Collateral Agent, upon reasonable notice, to visit and inspect any Additional Mortgaged Property for the purpose of preparing an appraisal of such Mortgaged Property satisfying the requirements of any applicable laws and regulations (in each case to the extent required under such laws and regulations as determined by Collateral Agent in its discretion). 5.10 Interest Rate Protection. At all times after the date which is 45 days after the Closing Date, Company shall maintain in effect one or more Interest Rate Agreements with respect to the AXELs and the Revolving Loans, each such Interest Rate Agreement to be for a term of not less than three years from the Closing Date and in form and substance reasonably satisfactory to Administrative Agent, which Interest Rate Agreements shall effectively limit the Unadjusted Eurodollar Rate Component (as hereinafter defined) of the interest costs to Company (i) with respect to an aggregate notional principal amount of not less than 25% of the aggregate principal amount of the AXELs outstanding on the Closing Date (based on the assumption that such notional principal amount was a Eurodollar Rate AXEL with an Interest Period of three months) to a rate equal to not more than 9% per annum and (ii) with respect to an aggregate notional principal amount of not less than 25% of the aggregate principal amount of the AXELs outstanding on the Closing Date (based on the assumption that such notional principal amount was a Eurodollar Rate AXEL with an Interest Period of three months) to a rate equal to not more than 10% per annum. For purposes of this subsection 5.10, the term "Unadjusted Eurodollar Rate Component" means that component of the interest costs to Company in respect of a Eurodollar Rate AXEL that is based upon the rate obtained pursuant to the definition of Adjusted Eurodollar Rate (without giving effect to the last paragraph thereof). 5.11 Cash Management System. Company shall establish and thereafter maintain a cash management system for the Loan Parties in form and substance reasonably satisfactory to the Arranger and the Administrative Agent. The terms and conditions of such cash management system shall be as set forth in Schedule 5.11 annexed hereto. 5.12 Trademarks and Patents. If Company or any of its Subsidiaries acquires any material patents, trademarks or copyrights, Company shall promptly notify the Collateral Agent of that fact and, if requested by Administrative Agent, Company shall, or cause the applicable Subsidiary to, execute and deliver to Collateral Agent supplemental security agreements and take such other actions AXEL CREDIT AGREEMENT EXECUTION 93 100 as the Collateral Agent may reasonably request to create in favor of Collateral Agent, for the benefit of Secured Parties a valid and perfected First Priority Lien on such patents, trademarks or copyrights. SECTION 6. COMPANY'S NEGATIVE COVENANTS Company covenants and agrees that, so long as any of the AXEL Commitments hereunder shall remain in effect and until payment in full of all of the AXELs and other Obligations unless Requisite Lenders shall otherwise give prior written consent, Company shall perform, and shall cause each of its Subsidiaries to perform, all covenants in this Section 6. 6.1 Indebtedness and Issuance of Disqualified Stock. Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, create, incur, assume or guaranty, or otherwise become or remain directly or indirectly liable with respect to, (collectively, "incur" and correlatively, an "incurrence" of) any Indebtedness (including Acquired Debt) and that the Company will not issue any Disqualified Stock; provided, however, that the Company may incur Indebtedness (including Acquired Debt) or issue shares of Disqualified Stock if the Fixed Charge Coverage Ratio for the Company for the most recent four full fiscal quarters for which internal financial statements are available at the time of such incurrence would have been at least 2.0 to 1.0, determined on a pro forma basis (including a pro forma application of the net proceeds therefrom), as if the additional Indebtedness had been incurred or the Disqualified Stock had been issued, as the case may be, and the application of the proceeds therefrom had occurred at the beginning of such four-quarter period. The foregoing provision will not apply to: (i) the incurrence by the Company (and the Guarantee thereof by the Guarantors) of Obligations under this Agreement; (ii) the incurrence by Company (and the Guarantee thereof by the Guarantors) of Indebtedness under the Revolving Credit Agreement and the issuance of letters of credit under the Revolving Credit Agreement (with letters of credit being deemed to have a principal amount equal to the aggregate maximum amount available to be drawn thereunder, assuming compliance with all conditions for drawing) up to an aggregate principal amount of $50,000,000 outstanding at any one time, less permanent commitment reductions with respect to Revolving Loans and letters of credit under the Revolving Credit Agreement (in each case, other than in connection with an amendment, refinancing, refunding, replacement, renewal or modification) made after the date hereof; AXEL CREDIT AGREEMENT EXECUTION 94 101 (iii) the incurrence by the Company or any of its Restricted Subsidiaries of any Existing Indebtedness; (iv) the incurrence by the Company or any of its Restricted Subsidiaries of Indebtedness represented by the Senior Subordinated Notes (but, with respect to this clause (iv), only up to the aggregate principal amount thereof issued on the Closing Date); (v) Indebtedness (including Acquired Debt) incurred by the Company or any of its Restricted Subsidiaries to finance the purchase, lease or improvement of property (real or personal), assets or equipment (whether through the direct purchase of assets or the Capital Stock of any Person owning such assets), in an aggregate principal amount not to exceed $15,000,000 plus 5% of the increase in Total Assets since the Closing Date; (vi) Indebtedness incurred by the Company or any of its Restricted Subsidiaries constituting reimbursement obligations with respect to letters of credit issued in the ordinary course of business, including, without limitation, letters of credit in respect of workers' compensation claims or self-insurance, or other Indebtedness with respect to reimbursement type obligations regarding workers' compensation claims; (vii) intercompany Indebtedness between or among the Company and any of its Restricted Subsidiaries and Guarantees by the Company of Indebtedness of any Restricted Subsidiary of the Company or by a Restricted Subsidiary of the Company of Indebtedness of any other Restricted Subsidiary of the Company or the Company; provided that (a) all such intercompany Indebtedness shall be evidenced by promissory notes subject to a first priority perfected pledge in favor of Lenders, (b) all such intercompany Indebtedness owed by Company to or in respect of any of its Subsidiaries and all such Guarantees shall be subordinated in right of payment to the payment in full of the Obligations pursuant to the terms of the applicable promissory notes or an intercompany subordination agreement and (c) any payment by any Subsidiary of Company under any guaranty of the Obligations shall result in a pro tanto reduction of the amount of any intercompany Indebtedness owed by such Subsidiary to Company or to any of its Subsidiaries for whose benefit such payment is made; (viii) Hedging Obligations that are incurred (1) for the purpose of fixing or hedging interest rate or currency exchange rate risk with respect to any Indebtedness that is permitted by the terms of this Agreement to be outstanding or (2) for the purpose of fixing or hedging currency exchange rate risk with respect to any purchases or sales of goods or other transactions or expenditures made or to be made in the ordinary course of business and AXEL CREDIT AGREEMENT EXECUTION 95 102 consistent with past practices as to which the payment therefor or proceeds therefrom, as the case may be, are denominated in a currency other than U.S. dollars; (ix) obligations in respect of performance and surety bonds and completion guarantees provided by the Company or any Restricted Subsidiary in the ordinary course of business; (x) the incurrence by the Company or any of its Restricted Subsidiaries of Permitted Refinancing Indebtedness in exchange for, or the net proceeds of which are used to extend, refinance, renew, replace, defease or refund, Indebtedness that was permitted by this Agreement to be incurred; (xi) the incurrence by the Company's Unrestricted Subsidiaries of Non-Recourse Debt, provided, however, that if any such Indebtedness ceases to be Non-Recourse Debt of an Unrestricted Subsidiary, such event shall be deemed to constitute an incurrence of Indebtedness by a Restricted Subsidiary of the Company; and (xii) the incurrence by the Company of additional Indebtedness (including any increase in the AXEL Commitment under this Agreement or any increase in the Revolving Loan Commitment under the Revolving Credit Agreement) not otherwise permitted hereunder in an amount under this clause (xii) not to exceed $25,000,000 in aggregate principal amount (or accreted value, as applicable) outstanding at any one time. 6.2 Liens and Related Matters. A. Company shall not and shall not permit any of its Subsidiaries to directly or indirectly, create, incur, assume or suffer to exist any Lien that secures obligations under any Indebtedness on any asset or property now owned or hereafter acquired by the Company or any of its Subsidiaries, or on any income or profits therefrom, or assign or convey any right to receive income therefrom to secure any Indebtedness other than (i) Permitted Encumbrances, (ii) Liens securing (a) purchase money Indebtedness incurred to finance the purchase price of specific assets and Capital Leases, so long as, upon default, the holder of such Indebtedness may seek recourse or payment against Company and its Subsidiaries only through the return or sale of the assets financed thereby or (b) Indebtedness assumed or acquired in connection with any acquisition to the extent attaching only to assets acquired and so long as the Indebtedness secured thereby is recourse only to the Person acquired or acquiring such assets provided in each case that the aggregate amount of Indebtedness secured by such Liens does not exceed $10,000,000 in the aggregate and (iii) any other Liens permitted under subsection 7.2A of the Revolving Credit Agreement (as in effect on the date hereof) other than clause (iv) thereof. AXEL CREDIT AGREEMENT EXECUTION 96 103 B. If the Company or any of its Subsidiaries shall create or assume any Lien upon any of its properties or assets, whether now owned or hereafter acquired, other than as permitted under subsection 6.2A, it shall make or cause to be made effective provision whereby the obligations of the Company and the Subsidiaries under the AXEL Loan Documents will be secured by such Lien equally and ratably with any and all other Indebtedness secured thereby as long as any such Indebtedness shall be so secured; provided that, notwithstanding the foregoing, this provision shall not be construed as a consent by the Lenders to the creation or assumption of any Lien other than Liens permitted under subsection 6.2A. 6.3 Restricted Payments. A. Company shall not, and shall not permit any of its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay any dividend or make any other payment or distribution on account of the Company's or any of its Restricted Subsidiaries' Equity Interests (other than dividends or distributions payable in Equity Interests (other than Disqualified Stock) of the Company or dividends or distributions payable to the Company or any Restricted Subsidiary of the Company); (ii) purchase, redeem, defease or otherwise acquire or retire for value any Equity Interests of the Company; (iii) make any payment on or with respect to, or purchase, redeem, defease or otherwise acquire or retire for value any Subordinated Indebtedness, except for a payment of principal or interest at Stated Maturity; or (iv) make any Restricted Investment (all such payments and other actions set forth in clauses (i) through (iv) above being collectively referred to as "Restricted Payments"), unless, at the time of and after giving effect to such Restricted Payment: (a) no Potential Event of Default or Event of Default shall have occurred and be continuing or would occur as a consequence thereof; (b) the Company would, at the time of such Restricted Payment and immediately after giving pro forma effect thereto as if such Restricted Payment had been made at the beginning of the applicable four-quarter period, have been permitted to incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in subsection 6.1; and (c) such Restricted Payment, together with the aggregate of all other Restricted Payments made by the Company and its Restricted Subsidiaries permitted by clause (i) of the next succeeding paragraph, but excluding all other Restricted Payments permitted by the next succeeding paragraph), is less than the sum of (i) 50% of the Consolidated Net Income of the Company for the period (taken as one accounting period) from the beginning of the first fiscal quarter commencing after the date hereof to the end of the Company's most recently ended fiscal quarter for which internal financial statements are available at the time of such Restricted Payment (or, if such Consolidated Net Income for such period is a deficit, less 100% of such deficit), plus (ii) 100% of the aggregate net cash proceeds and the fair AXEL CREDIT AGREEMENT EXECUTION 97 104 market value, as determined in good faith by the Board of Directors, of marketable securities received by the Company from the issue or sale since the date hereof of Equity Interests (including Retired Capital Stock (as defined below)) of the Company (except in connection with the Merger) or of debt securities of the Company that have been converted into such Equity Interests (other than Refunding Capital Stock (as defined below) or Equity Interests or convertible debt securities of the Company sold to a Restricted Subsidiary of the Company and other than Disqualified Stock or debt securities that have been converted into Disqualified Stock), plus (iii) 100% of the aggregate amounts contributed to the common equity capital of the Company since the date hereof, (except amounts contributed to finance the Merger), plus (iv) 100% of the aggregate amounts received in cash and the fair market value of marketable securities (other than Restricted Investments) received from (x) the sale or other disposition of Restricted Investments made by the Company and its Restricted Subsidiaries since the date hereof or (y) the sale of the stock of an Unrestricted Subsidiary or the sale of all or substantially all of the assets of an Unrestricted Subsidiary to the extent that a liquidating dividend is paid to the Company or any Subsidiary from the proceeds of such sale, plus (v) 100% of any dividends received by the Company or a Wholly Owned Restricted Subsidiary of the Company after the date hereof from an Unrestricted Subsidiary of the Company, plus (vi) $10,000,000. The foregoing provisions will not prohibit: (i) the payment of any dividend within 60 days after the date of declaration thereof, if at the date of declaration such payment would have complied with the provisions of this Agreement; (ii) the redemption, repurchase, retirement or other acquisition of any Equity Interests of the Company or any Restricted Subsidiary (the "Retired Capital Stock") or any Subordinated Indebtedness, in each case, in exchange for, or out of the proceeds of the substantially concurrent sale (other than to a Restricted Subsidiary of the Company) of Equity Interests of the Company (other than any Disqualified Stock) (the "Refunding Capital Stock"); provided that the amount of any such net cash proceeds that are utilized for any such redemption, repurchase, retirement or other acquisition shall be excluded from clause (c)(ii) of the immediately preceding paragraph; (iii) the defeasance, redemption or repurchase of Subordinated Indebtedness with the net cash proceeds from an incurrence of Permitted Refinancing Indebtedness; (iv) the redemption, repurchase or other acquisition or retirement for value of any Equity Interests of the Company or any Restricted Subsidiary of the Company held by any member of the Company's (or any of its Subsidiaries') management AXEL CREDIT AGREEMENT EXECUTION 98 105 pursuant to any management equity subscription agreement or stock option or similar agreement; provided that the aggregate price paid for all such repurchased, redeemed, acquired or retired Equity Interests shall not exceed the sum of $5,000,000 in any twelve-month period plus the aggregate cash proceeds received by the Company during such twelve-month period from any issuance of Equity Interests by the Company to members of management of the Company and its Subsidiaries; provided that the amount of any such net cash proceeds that are utilized for any such redemption, repurchase, retirement or other acquisition shall be excluded from clause (c)(ii) of the immediately preceding paragraph; (v) Investments in Unrestricted Subsidiaries or in Joint Ventures having an aggregate fair market value, taken together with all other Investments made pursuant to this clause (v) that are at that time outstanding, not to exceed $15,000,000 plus 5% of the increase in Total Assets since the Closing Date at the time of such Investment (with the fair market value of each Investment being measured at the time made and without giving effect to subsequent changes in value); (vi) repurchase of Equity Interests deemed to occur upon exercise or conversion of stock options, warrants, convertible securities or other similar Equity Interests if such Equity Interests represent a portion of the exercise or conversion price of such options, warrants, convertible securities or other similar Equity Interests; (vii) any dividend or distribution payable on or in respect of any class of Equity Interests issued by a Restricted Subsidiary of the Company; provided that such dividend or distribution is paid on a pro rata basis to all of the holders of such Equity Interests in accordance with their respective holdings of such Equity Interests; provided, further, that at the time of, and after giving effect to, any Restricted Payment permitted under clauses (iv) or (v) above, no Potential Event of Default or Event of Default shall have occurred and be continuing or would occur as a consequence thereof. The amount of all Restricted Payments (other than cash) shall be the fair market value on the date of the Restricted Payment of the asset(s) proposed to be transferred by the Company or such Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment. 6.4 Dividends and Other Payment Restrictions Affecting Subsidiaries. Company shall not, and shall not permit any of its Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any encumbrance or restriction on the ability of any Restricted Subsidiary to (i) (a) pay dividends or make any other distributions to the Company or any of its Restricted Subsidiaries (1) on its Capital Stock or (2) with respect to any other interest or participation AXEL CREDIT AGREEMENT EXECUTION 99 106 in, or measured by, its profits, or (b) pay any Indebtedness owed to the Company or any of its Restricted Subsidiaries, (ii) make loans or advances to the Company or any of its Restricted Subsidiaries or (iii) sell, lease or transfer any of its properties or assets to the Company or any of its Restricted Subsidiaries, except for such encumbrances or restrictions existing under or by reason of (a) Existing Indebtedness as in effect on the date hereof, (b) this Agreement or the Revolving Credit Agreement and any amendments, modifications, restatements, renewals, increases, supplements, refundings, replacements or refinancings thereof, provided that this Agreement and the Revolving Credit Agreement and any amendments, modifications, restatements, renewals, increases, supplements, refundings, replacement or refinancings thereof are no more restrictive taken as a whole with respect to such dividend and other payment restrictions than those terms included in this Agreement and the Revolving Credit Agreement, as applicable, on the date hereof, (c) the Senior Subordinated Note Indenture and the Senior Subordinated Notes, (d) applicable law, (e) any instrument governing Indebtedness or Capital Stock of a Person acquired by the Company or any of its Restricted Subsidiaries as in effect at the time of such acquisition (except to the extent such Indebtedness was incurred in connection with or in contemplation of such acquisition), which encumbrance or restriction is not applicable to any Person, or the properties or assets of any Person, other than the Person, or the property or assets of the Person, so acquired, provided that, in the case of Indebtedness, such Indebtedness was permitted by the terms of this Agreement to be incurred, (f) customary non-assignment or net worth provisions in leases and other agreements entered into in the ordinary course of business and consistent with past practices, (g) purchase money obligations for property acquired in the ordinary course of business that impose restrictions of the nature described in clause (iii) above on the property so acquired, (h) Permitted Refinancing Indebtedness, provided that the restrictions contained in the agreements governing such Permitted Refinancing Indebtedness are no more restrictive than those contained in the agreements governing the Indebtedness being refinanced, (i) any Mortgage Financing or Mortgage Refinancing that imposes restrictions on the real property securing such Indebtedness, (j) any Permitted Investment, (k) contracts for the sale of assets, including, without limitation customary restrictions with respect to a Restricted Subsidiary of the Company pursuant to an agreement that has been entered into for the sale or disposition of all or substantially all of the Capital Stock or assets of such Restricted Subsidiary or (1) customary provisions in joint venture agreements and other similar agreements. 6.5 Restrictions on Fundamental Changes; Asset Sales. Company shall not consolidate or merge with or into (whether or not the Company is the surviving corporation), or sell, assign, transfer,lease, convey or otherwise dispose of all or substantially all of its properties or assets in one or more related transactions, to another Person unless (i) the Company is the surviving corporation or the Person formed by or surviving any such consolidation or merger (if other than the Company) or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made is a corporation organized or existing under the laws of the United States, any state thereof or the District of Columbia; (ii) the Person formed by or surviving any such consolidation AXEL CREDIT AGREEMENT EXECUTION 100 107 or merger (if other than the Company) or Person to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made assumes all the obligations of the Company under this Agreement pursuant to documentation in form and substance satisfactory to Administrative Agent; (iii) immediately after such transaction no Potential Event of Default or Event of Default exists; and (iv) except in the case of a merger of the Company with or into a Wholly Owned Restricted Subsidiary of the Company, the Company or the Person formed by or surviving any such consolidation or merger (if other than the Company), or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made will, at the time of such transaction and after giving pro forma effect thereto as if such transaction had occurred at the beginning of the applicable four-quarter period, be permitted to incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in subsection 6.1. Notwithstanding the foregoing clauses (iii) and (iv), (a) any Restricted Subsidiary may consolidate with, merge into or transfer all or part of its properties and assets to the Company and (b) the Company may merge with an Affiliate incorporated solely for the purpose of reincorporating the Company in another jurisdiction. 6.6 Transactions with Affiliates. Company shall not, and shall not permit any of its Restricted Subsidiaries to, make any payment to, or sell, lease, transfer or otherwise dispose of any of its properties or assets to, or purchase any property or assets from, or enter into or make or amend any contract, agreement, understanding, loan, advance or guarantee with, or for the benefit of, any Affiliate (each of the foregoing, an "Affiliate Transaction"), unless (i) such Affiliate Transaction is on terms that are no less favorable to the Company or the relevant Restricted Subsidiary than those that would have been obtained in a comparable transaction by the Company or such Restricted Subsidiary with an unrelated Person and (ii) the Company delivers to the Administrative Agent (a) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $5,000,000, a resolution of the Board of Directors set forth in an Officers' Certificate certifying that such Affiliate Transaction complies with clause (i) above and (if there are any disinterested members of the Board of Directors) that such Affiliate Transaction has been approved by a majority of the disinterested members of the Board of Directors and (b) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $10,000,000, or with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $5,000,000 as to which there are no disinterested members of the Board of Directors, an opinion as to the fairness of such Affiliate Transaction (as required by the Senior Subordinated Note Indenture) from a financial point of view issued by an accounting, appraisal or investment banking firm of national standing. The foregoing provisions will not apply to the following: (i) transactions between or among the Company and/or any of its Restricted Subsidiaries; (ii) Restricted Payments or Permitted Investments permitted under subsection 6.3; (iii) the payment of all fees, expenses AXEL CREDIT AGREEMENT EXECUTION 101 108 and other amounts as disclosed in the Offering Circular relating to the Merger; (iv) the payment of reasonable and customary regular fees to, and indemnity provided on behalf of, officer, directors, employees or consultants of the Company or any Restricted Subsidiary of the Company; (v) the transfer or provision of inventory, goods or services by the Company or any Restricted Subsidiary of the Company in the ordinary course of business to any Affiliate of the Company on terms that are customary in the industry or consistent with past practices, including with respect to price and volume discounts; (vi) the execution of, or the performance by the Company or any of its Restricted Subsidiaries of its obligations under the terms of, any financial advisory, financing, underwriting or placement agreement or any other agreement relating to investment banking or financing activities with Goldman, Sachs & Co. or any of its Affiliates including, without limitation, in connection with acquisitions or divestitures, in each case to the extent that such agreement was approved by a majority of the disinterested members of the Board of Directors in good faith; (vii) payments, advances or loans to employees that are approved by a majority of the disinterested members of the Board of Directors of the Company in good faith; (viii) the performance of any agreement as in effect as of the date hereof or any transaction contemplated thereby (including pursuant to any amendment thereto so long as any such amendment is not disadvantageous to the Lenders in any material respect); (ix) the existence of, or the performance by the Company or any of its Restricted Subsidiaries of its obligations under the terms of, any stockholders agreement (including any registration rights agreement or purchase agreement related thereto) to which it is a party as of the date hereof and any similar agreements which it may enter into thereafter, provided, however, that the existence of, or the performance by the Company or any of its Restricted Subsidiaries of obligations under, any future amendment to any such existing agreement or under any similar agreement entered into after the date hereof shall only be permitted by this clause (ix) to the extent that the terms of any such amendment or new agreement are not otherwise disadvantageous to the Lenders in any material respect; (x) transactions permitted by, and complying with, the provisions of the covenant described under subsection 6.5; and (xi) transactions with suppliers or other purchases or sales of goods or services, in each case in the ordinary course of business (including, without limitation, pursuant to joint venture agreements) and otherwise in compliance with the terms of this Agreement which are fair to the Company or its Restricted Subsidiaries, in the reasonable determination of a majority of the disinterested members of the Board of Directors of the Company or an executive officer thereof, or are on terms at least as favorable as might reasonably have been obtained at such time from an unaffiliated party. 6.7 Asset Sales. Company shall not, and shall not permit any of its Restricted Subsidiaries to, cause, make or suffer to exist an Asset Sale unless (i) the Company (or the Restricted Subsidiary, as the case may be) received consideration at the time of such Asset Sale at least equal to the fair market value (evidenced by a resolution of the Board of Directors set forth in an Officers' Certificate delivered to the Trustee (as defined in the Indenture as in effect as of the date hereof)) of the assets or Equity Interests issued or sold or otherwise disposed of and (ii) at least 80% of the consideration therefor received by Company or such Restricted Subsidiary is in the form of cash or Cash Equivalents; provided AXEL CREDIT AGREEMENT EXECUTION 102 109 that the amount of (x) any liabilities (as shown on Company's or such Restricted Subsidiary's most recent balance sheet) of Company or any Restricted Subsidiary (other than contingent liabilities and liabilities that are by their terms subordinated to the Senior Subordinated Notes or any guarantee thereof) that are assumed by the transferee of any such assets pursuant to a customary novation agreement that releases Company or such Restricted Subsidiary from further liability, (y) any Excludable Current Liabilities and (z) any notes or other obligations received by the Company or any such Restricted Subsidiary from such transferee that are immediately converted by the Company or such Restricted Subsidiary into cash (to the extent of the cash received), shall be deemed to be cash for purposes of this provision. 6.8 Amendments of Documents Relating to Subordinated Indebtedness. Company shall not, and shall not permit any of its Subsidiaries to, amend or otherwise change the terms of any Subordinated Indebtedness, or make any payment consistent with an amendment thereof or change thereto, if the effect of such amendment or change is to increase the interest rate on such Subordinated Indebtedness, change (to earlier dates) any dates upon which payments of principal or interest are due thereon, change any event of default or condition to an event of default with respect thereto (other than to eliminate any such event of default or increase any grace period related thereto), change the redemption, prepayment or defeasance provisions thereof, change the subordination provisions of such Subordinated Indebtedness (or of any guaranty thereof), or change any collateral therefor (other than to release such collateral), or if the effect of such amendment or change, together with all other amendments or changes made, is to increase materially the obligations of the obligor thereunder or to confer any additional rights on the holders of such Subordinated Indebtedness (or a trustee or other representative on their behalf) which would be adverse to Company or Lenders. SECTION 7. EVENTS OF DEFAULT If any of the following conditions or events ("Events of Default") shall occur: 7.1 Failure to Make Payments When Due. Failure by Company to pay any installment of principal of any AXEL when due, and payable whether at stated maturity, by acceleration, by notice of voluntary prepayment, by mandatory prepayment or otherwise; or failure by Company to pay any interest on any fee or any other amount due under this Agreement within three days after the date due; or AXEL CREDIT AGREEMENT EXECUTION 103 110 7.2 Default in Other Agreements. Failure of Company or any of its Subsidiaries to pay when due any principal of or interest on or any other amount payable in respect of one or more items of Indebtedness (other than Indebtedness referred to in subsection 7.1) or Guarantees with an aggregate principal amount of $5,000,000 or more, in each case beyond the end of any grace period provided therefor; or (ii) breach or default by Company or any of its Subsidiaries with respect to any other material term of (a) one or more items of Indebtedness or Guarantees in the individual or aggregate principal amounts referred to in clause (i) above or (b) any loan agreement (including the Revolving Credit Agreement), mortgage, indenture or other agreement relating to such item(s) of Indebtedness or Guarantee(s), if the effect of such breach or default is to cause, or to permit the holder or holders of that Indebtedness or Guarantee(s) (or a trustee on behalf of such holder or holders) to cause, that Indebtedness or Guarantee(s) to become or be declared due and payable prior to its stated maturity or the stated maturity of any underlying obligation, as the case may be (upon the giving or receiving of notice, lapse of time, both, or otherwise) and in either case such breach or default shall continue for 20 days beyond any applicable grace period; or 7.3 Breach of Certain Covenants. The Company fails, and such failure continues for 30 days after notice from the Administrative Agent or Lenders holding at least 25% in principal amount of the then outstanding AXELs, to observe or perform any covenant, condition or agreement on the part of the Company to be observed or performed pursuant to Sections 6.1, 6.3 and 6.5 hereof; or 7.4 Breach of Warranty. Any representation, warranty, certification or other statement made by Company or any of its Subsidiaries in any AXEL Loan Document or in any statement or certificate at any time given by Company or any of its Subsidiaries in writing pursuant hereto or thereto or in connection herewith or therewith shall be false in any material respect on the date as of which made; or 7.5 Other Defaults under AXEL Loan Documents. The Company fails, and such failure continues for 60 days after notice from the Administrative Agent or Lenders holding at least 25% in principal amount of the then outstanding AXELs, to comply with any of its other agreements or covenants in, or provisions of, this Agreement or any other AXEL Loan Document; or 7.6 Judgments. AXEL CREDIT AGREEMENT EXECUTION 104 111 The Company or any of its Restricted Subsidiaries fails to pay final judgments aggregating in excess of $15,000,000, which judgments are not paid, discharged or stayed for a period of 60 days; or 7.7 Bankruptcy; Appointment of Custodian. A. The Company or any of its Restricted Subsidiaries pursuant to or within the meaning of any Bankruptcy Law: (i) commences a voluntary case, (ii) consents to the entry of an order for relief against it in an involuntary case, (iii) consents to the appointment of a receiver, trustee, assignee, liquidator or similar official under any Bankruptcy Law (each, a "Custodian"), (iv) makes a general assignment for the benefit of its creditors, or (v) admits in writing its inability to pay is debts as they become due. B. A court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (i) is for relief against the Company or any Restricted Subsidiary in an involuntary case, (ii) appoints a Custodian of the Company or any Restricted Subsidiary or for all or substantially all of the property of the Company or any Restricted Subsidiary, or (iii) orders the liquidation of the Company or any Restricted Subsidiary, and the order or decree remains unstayed and in effect for 60 consecutive days; or 7.8 Invalidity of Subsidiary Guaranty. Except as otherwise permitted under the provisions of this Agreement or the Intercreditor Agreement, the Subsidiary Guaranty is held in any judicial proceeding to be unenforceable or invalid or ceases for any reason to be in full force and effect (except by its terms) or any Subsidiary Guarantor, or any Person acting on behalf of any Subsidiary Guarantor, denies or disaffirms such Subsidiary Guarantor's obligations under the Subsidiary Guaranty; or AXEL CREDIT AGREEMENT EXECUTION 105 112 7.9 Change in Control. If (i) prior to a Qualified Public Offering GSII together with any Affiliates of GSII shall cease to beneficially own and control 51% or more of the combined voting power of all Securities of the Company, (ii) following consummation of a Qualified Public Offering any Person or any two or more Persons acting in concert shall have acquired beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Exchange Act), directly or indirectly, of Securities of Company (or other Securities convertible into such Securities) representing more of the combined voting power of all Securities of Company than is owned by GSII and its Affiliates at such time or (iii) a "Change of Control" as defined in the Senior Subordinated Notes Indenture occurs; THEN (i) upon the occurrence of any Event of Default described in subsection 7.7, each of (a) the unpaid principal amount of and accrued interest on the AXELs, and (b) all other Obligations shall automatically become immediately due and payable, without presentment, demand, protest or other requirements of any kind, all of which are hereby expressly waived by Company, and (ii) upon the occurrence and during the continuation of any other Event of Default, Administrative Agent shall, upon the written request or with the written consent of Requisite Lenders, by written notice to Company, declare all or any portion of the amounts described in clauses (a) and (b) above to be, and the same shall forthwith become, immediately due and payable. Notwithstanding anything contained in the preceding paragraph, if at any time within 60 days after an acceleration of the AXELs pursuant to clause (ii) of such paragraph Company shall pay all arrears of interest and all payments on account of principal which shall have become due otherwise than as a result of such acceleration (with interest on principal and, to the extent permitted by law, on overdue interest, at the rates specified in this Agreement) and all Events of Default and Potential Events of Default (other than non-payment of the principal of and accrued interest on the AXELS, in each case which is due and payable solely by virtue of acceleration) shall be remedied or waived pursuant to subsection 9.6, then Requisite Lenders, by written notice to Company, may at their option rescind and annul such acceleration and its consequences; but such action shall not affect any subsequent Event of Default or Potential Event of Default or impair any right consequent thereon. The provisions of this paragraph are intended merely to bind Lenders to a decision which may be made at the election of Requisite Lenders and are not intended, directly or indirectly, to benefit Company, and such provisions shall not at any time be construed so as to grant Company the right to require Lenders to rescind or annul any acceleration hereunder or to preclude Administrative Agent or Lenders from exercising any of the rights or remedies available to them under any of the AXEL Loan Documents, even if the conditions set forth in this paragraph are met. AXEL CREDIT AGREEMENT EXECUTION 106 113 SECTION 8. AGENTS 8.1 Appointment. A. Appointment of Agents. GSCP is hereby appointed Arranger and Syndication Agent hereunder, and each Lender hereby authorizes Arranger and Syndication Agent to act as its agent in accordance with the terms of this Agreement and the other AXEL Loan Documents. Fleet is hereby appointed Administrative Agent hereunder and under the other AXEL Loan Documents and each Lender hereby authorizes Administrative Agent to act as its agent in accordance with the terms of this Agreement and the other Loan Documents. Fleet is also being appointed Collateral Agent under the Intercreditor Agreement and each Lender hereby authorizes Collateral Agent to act as its agent in accordance with the terms of the Intercreditor Agreement and the other AXEL Loan Documents. Each Agent hereby agrees to act upon the express conditions contained in this Agreement and the other AXEL Loan Documents, as applicable. The provisions of this Section 8 are solely for the benefit of Agents and Lenders and Company shall have no rights as a third party beneficiary of any of the provisions thereof. In performing its functions and duties under this Agreement, each Agent shall act solely as an agent of Lenders and does not assume and shall not be deemed to have assumed any obligation towards or relationship of agency or trust with or for Company or any of its Subsidiaries. Each of Arranger and Syndication Agent, without consent of or notice to any party hereto, may assign any and all of its rights or obligations hereunder to any of its Affiliates. As of the Closing Date, all obligations of Arranger and Syndication Agent hereunder shall terminate. B. Appointment of Supplemental Collateral Agents. It is the purpose of this Agreement and the other AXEL Loan Documents that there shall be no violation of any law of any jurisdiction denying or restricting the right of banking corporations or associations to transact business as agent or trustee in such jurisdiction. It is recognized that in case of litigation under this Agreement or any of the other AXEL Loan Documents, and in particular in case of the enforcement of any of the AXEL Loan Documents, or in case Administrative Agent deems that by reason of any present or future law of any jurisdiction it may not exercise any of the rights, powers or remedies granted herein or in any of the other AXEL Loan Documents or take any other action which may be desirable or necessary in connection therewith, it may be necessary that Administrative Agent appoint an additional individual or institution as a separate trustee, co-trustee, collateral agent or collateral co-agent (any such additional individual or institution being referred to herein individually as a "Supplemental Collateral Agent" and collectively as "Supplemental Collateral Agents"). In the event that Administrative Agent appoints a Supplemental Collateral Agent with respect to any Collateral, (i) each and every right, power, privilege or duty expressed or intended by this Agreement or any of the other AXEL Loan Documents to be exercised by or vested in or conveyed to Administrative Agent with respect to such Collateral shall AXEL CREDIT AGREEMENT EXECUTION 107 114 be exercisable by and vest in such Supplemental Collateral Agent to the extent, and only to the extent, necessary to enable such Supplemental Collateral Agent to exercise such rights, powers and privileges with respect to such Collateral and to perform such duties with respect to such Collateral, and every covenant and obligation contained in the AXEL Loan Documents and necessary to the exercise or performance thereof by such Supplemental Collateral Agent shall run to and be enforceable by either Agent or such Supplemental Collateral Agent, and (ii) the provisions of this Section 8 and of subsections 9.2 and 9.3 that refer to Administrative Agent shall inure to the benefit of such Supplemental Collateral Agent and all references therein to Administrative Agent shall be deemed to be references to Administrative Agent and/or such Supplemental Collateral Agent, as the context may require. Should any instrument in writing from Company or any other Loan Party be required by any Supplemental Collateral Agent so appointed by Administrative Agent for more fully and certainly vesting in and confirming to him or it such rights, powers, privileges and duties, Company shall, or shall cause such Loan Party to, execute, acknowledge and deliver any and all such instruments promptly upon request by Administrative Agent. In case any Supplemental Collateral Agent, or a successor thereto, shall die, become incapable of acting, resign or be removed, all the rights, powers, privileges and duties of such Supplemental Collateral Agent, to the extent permitted by law, shall vest in and be exercised by Administrative Agent until the appointment of a new Supplemental Collateral Agent. 8.2 Powers and Duties; General Immunity. A. Powers; Duties Specified. Each Lender irrevocably authorizes each Agent to take such action on such Lender's behalf and to exercise such powers, rights and remedies hereunder and under the other AXEL Loan Documents as are specifically delegated or granted to such Agent by the terms hereof and thereof, together with such powers, rights and remedies as are reasonably incidental thereto. Each Agent shall have only those duties and responsibilities that are expressly specified in this Agreement and the other AXEL Loan Documents. Each Agent may exercise such powers, rights and remedies and perform such duties by or through its agents or employees. No Agent shall have, by reason of this Agreement or any of the other AXEL Loan Documents, a fiduciary relationship in respect of any Lender; and nothing in this Agreement or any of the other AXEL Loan Documents, expressed or implied, is intended to or shall be so construed as to impose upon any Agent any obligations in respect of this Agreement or any of the other AXEL Loan Documents except as expressly set forth herein or therein. B. No Responsibility for Certain Matters. No Agent shall be responsible to any Lender for the execution, effectiveness, genuineness, validity, enforceability, collectibility or sufficiency of this Agreement or any other AXEL Loan Document or for any representations, warranties, recitals or statements made herein or therein or made in any written or oral statements or in any financial or other statements, instruments, reports or certificates or any other documents furnished or made by any of Agent to Lenders or by or AXEL CREDIT AGREEMENT EXECUTION 108 115 on behalf of Company to any Agent or any Lender in connection with the AXEL Loan Documents and the transactions contemplated thereby or for the financial condition or business affairs of Company or any other Person liable for the payment of any Obligations, nor shall any Agent be required to ascertain or inquire as to the performance or observance of any of the terms, conditions, provisions, covenants or agreements contained in any of the AXEL Loan Documents or as to the use of the proceeds of the AXELs or as to the existence or possible existence of any Event of Default or Potential Event of Default. Anything contained in this Agreement to the contrary notwithstanding, Administrative Agent shall not have any liability arising from confirmations of the amount of outstanding AXELs. C. Exculpatory Provisions. None of Agents nor any of their respective officers, partners, directors, employees or agents shall be liable to Lenders for any action taken or omitted by any Agent under or in connection with any of the AXEL Loan Documents except to the extent caused by such Agent's gross negligence or willful misconduct. Each Agent shall be entitled to refrain from any act or the taking of any action (including the failure to take an action) in connection with this Agreement or any of the other Loan Documents or from the exercise of any power, discretion or authority vested in it hereunder or thereunder unless and until such Agent shall have received instructions in respect thereof from Requisite Lenders (or such other Lenders as may be required to give such instructions under subsection 9.6) and, upon receipt of such instructions from Requisite Lenders (or such other Lenders, as the case may be), such Agent shall be entitled to act or (where so instructed) refrain from acting, or to exercise such power, discretion or authority, in accordance with such instructions. Without prejudice to the generality of the foregoing, (i) each Agent shall be entitled to rely, and shall be fully protected in relying, upon any communication, instrument or document believed by it to be genuine and correct and to have been signed or sent by the proper person or persons, and shall be entitled to rely and shall be protected in relying on opinions and judgments of attorneys (who may be attorneys for Company and its Subsidiaries), accountants, experts and other professional advisors selected by it; and (ii) no Lender shall have any right of action whatsoever against any Agent as a result of such Agent acting or (where so instructed) refraining from acting under this Agreement or any of the other AXEL Loan Documents in accordance with the instructions of Requisite Lenders (or such other Lenders as may be required to give such instructions under subsection 9.6). D. Agent Entitled to Act as Lender. The agency hereby created shall in no way impair or affect any of the rights and powers of, or impose any duties or obligations upon, any Agent in its individual capacity as a Lender hereunder. With respect to its participation in the AXELs, each Agent shall have the same rights and powers hereunder as any other Lender and may exercise the same as though it were not performing the duties and functions delegated to it hereunder, and the term "Lender" or "Lenders" or any similar term shall, unless the context clearly otherwise indicates, include each Agent in its individual capacity. Any Agent and its Affiliates may accept deposits from, lend money to and generally engage in any kind of banking, trust, financial advisory or other business with Company or any of its Affiliates as if it were not performing the duties specified herein, and AXEL CREDIT AGREEMENT EXECUTION 109 116 may accept fees and other consideration from Company for services in connection with this Agreement and otherwise without having to account for the same to Lenders. 8.3 Representations and Warranties; No Responsibility For Appraisal of Creditworthiness. Each Lender represents and warrants that it has made its own independent investigation of the financial condition and affairs of Company and its Subsidiaries in connection with the making of the AXELs hereunder and that it has made and shall continue to make its own appraisal of the creditworthiness of Company and its Subsidiaries. No Agent shall have any duty or responsibility, either initially or on a continuing basis, to make any such investigation or any such appraisal on behalf of Lenders or to provide any Lender with any credit or other information with respect thereto, whether coming into its possession before the making of the AXELs or at any time or times thereafter, and no Agent shall have any responsibility with respect to the accuracy of or the completeness of any information provided to Lenders. 8.4 Right to Indemnity. Each Lender, in proportion to its Pro Rata Share, severally agrees to indemnify each Agent, to the extent that such Agent shall not have been reimbursed by Company, for and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses (including counsel fees and disbursements) or disbursements of any kind or nature whatsoever which may be imposed on, incurred by or asserted against such Agent in exercising its powers, rights and remedies or performing its duties hereunder or under the other AXEL Loan Documents or otherwise in its capacity as such Agent in any way relating to or arising out of this Agreement or the other AXEL Loan Documents; provided that no Lender shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from such Agent's gross negligence or willful misconduct and provided further that any such indemnification of the Collateral Agent shall be on the terms described in section 6(c) of the Intercreditor Agreement. If any indemnity furnished to any Agent for any purpose shall, in the opinion of such Agent, be insufficient or become impaired, such Agent may call for additional indemnity and cease, or not commence, to do the acts indemnified against until such additional indemnity is furnished (excluding any indemnity for its gross negligence or will misconduct). 8.5 Successor Administrative Agent. Successor Administrative Agent. Administrative Agent may resign at any time by giving 30 days' prior written notice thereof to Lenders and Company, and Administrative Agent may be removed at any time with or without cause by an instrument or concurrent instruments in writing delivered to Company and Administrative Agent and signed by Requisite Lenders. Upon any such notice of resignation or any such removal, AXEL CREDIT AGREEMENT EXECUTION 110 117 Requisite Lenders shall have the right, upon five Business Days' notice to Company, to appoint a successor Administrative Agent. If no successor Administrative Agent shall have been so appointed by Requisite Lenders and shall have accepted such appointment within 30 days after the notice of the intent of the Administrative Agent to resign, then the retiring Administrative Agent may, on behalf of the Lenders, appoint a successor Administrative Agent. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor Administrative Agent, that successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring or removed Administrative Agent and the retiring or removed Administrative Agent shall be discharged from its duties and obligations under this Agreement. After any retiring or removed Administrative Agent's resignation or removal hereunder as Administrative Agent, the provisions of this Section 8 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. 8.6 Collateral Documents and Guaranties. Each Lender hereby further authorizes Administrative Agent, on behalf of and for the benefit of Lenders, to enter into the Intercreditor Agreement and to appoint the Collateral Agent thereunder as agent for and representative of Lenders. Under the terms of the Intercreditor Agreement, the Collateral Agent is authorized to enter into each Collateral Document as secured party and to be the agent for and representative of Secured Parties under the Subsidiary Guaranty, and each Lender agrees to be bound by the terms of the Intercreditor Agreement, each Collateral Document and the Subsidiary Guaranty. Administrative Agent shall not enter into or consent to any material amendment, modification or termination of the Intercreditor Agreement without the prior consent of Requisite Lenders. Each Lender acknowledges that under the terms of the Intercreditor Agreement without further written consent or authorization from Lenders, Collateral Agent may execute any documents or instruments necessary to (a) release any Lien encumbering any item of Collateral that is the subject of a sale or other disposition of assets permitted by this Agreement or to which Requisite Lenders have otherwise consented or (b) release any Subsidiary Guarantor from the Subsidiary Guaranty if all of the capital stock of such Subsidiary Guarantor is sold to any Person (other than an Affiliate of Company) pursuant to a sale or other disposition permitted hereunder or to which Requisite Lenders or Lenders (as applicable) have otherwise consented. Anything contained in any of the AXEL Loan Documents to the contrary notwithstanding, Company, Administrative Agent and each Lender hereby agree that (X) no Lender shall have any right individually to realize upon any of the Collateral under any Collateral Document or to enforce the Subsidiary Guaranty, it being understood and agreed that all powers, rights and remedies under the Collateral Documents and the Subsidiary Guaranty may be exercised solely by Collateral Agent for the benefit of Secured Parties in accordance with the terms thereof, and (Y) in the event of a foreclosure by Collateral Agent on any of the Collateral pursuant to a public or private sale, Collateral Agent or any Secured Party may be the purchaser of any or all of such Collateral at any such sale and Collateral Agent, as agent for and representative of Secured Parties (but not any Secured Party or Secured Parties in its or their respective individual capacities AXEL CREDIT AGREEMENT EXECUTION 111 118 unless Requisite Lenders shall otherwise agree in writing) shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Collateral sold at any such public sale, to use and apply any of the Obligations as a credit on account of the purchase price for any collateral payable by Collateral Agent at such sale. The Lenders each further acknowledge and agree that pursuant to the Intercreditor Agreement and the Collateral Documents, Collateral Agent will act as the fonde de pouvoir (holder of the power of attorney) of the holders from time to time of Notes issued pursuant hereto to the extent necessary or desirable for the purposes of creating, maintaining or enforcing any Liens or guarantees created or established under any Collateral Documents contemplated hereby to be executed under the laws of the Province of Quebec, Canada including, without limiting the generality of the foregoing, entering into any such Collateral Documents and exercising all or any of the rights, powers, trusts or duties conferred upon the Collateral Agent therein and in the Intercreditor Agreement and each holder of Notes by receiving and holding same accepts and confirms the appointment of the Collateral Agent as fonde de pouvoir (holder of the power of attorney) of such holder for such purposes. SECTION 9. MISCELLANEOUS 9.1 Assignments and Participations in AXELs. A. General. Subject to subsection 9.1B, each Lender shall have the right at any time to (i) sell, assign or transfer to any Eligible Assignee, or (ii) sell participations to any Person in, all or any part of its AXEL Commitments or the AXEL or AXELs made by it or any other interest herein or in any other Obligations owed to it; provided that no such sale, assignment, transfer or participation shall, without the consent of Company, require Company to file a registration statement with the Securities and Exchange Commission or apply to qualify such sale, assignment, transfer or participation under the securities laws of any state; provided, further that no such sale, assignment or transfer described in clause (i) above shall be effective unless and until an Assignment Agreement effecting such sale, assignment or transfer shall have been accepted by Administrative Agent and recorded in the Register as provided in subsection 9.1B(ii). Except as otherwise provided in this subsection 9.1, no Lender shall, as between Company and such Lender, be relieved of any of its obligations hereunder as a result of any sale, assignment or transfer of, or any granting of participations in, all or any part of its AXEL Commitments or the AXELs, or the other Obligations owed to such Lender. B. Assignments. (i) Amounts and Terms of Assignments. Each AXEL Commitment, AXEL or other Obligation may (a) be assigned in any amount to another Lender, or to an Affiliate or a Related Fund of the assigning Lender or another Lender, with AXEL CREDIT AGREEMENT EXECUTION 112 119 the giving of notice to Company, Syndication Agent and Administrative Agent or (b) be assigned in an aggregate amount of not less than $5,000,000 (or such lesser amount as shall constitute the aggregate amount of the AXEL Commitments, AXEL, and other Obligations of the assigning Lender) to any other Eligible Assignee with the giving of notice to Company and with the consent of Administrative Agent and Syndication Agent (which consent shall not be unreasonably withheld or delayed). To the extent of any such assignment in accordance with either clause (a) or (b) above, the assigning Lender shall be relieved of its obligations with respect to its AXEL Commitments, AXELs, or other Obligations or the portion thereof so assigned. The parties to each such assignment shall execute and deliver to Administrative Agent, for its acceptance and recording in the Register, an Assignment Agreement, together with a processing and recordation fee of $500 if such assignment is to another Lender or an Affiliate or Related Fund of the assigning Lender, or $2,000, if such assignment is to any other Eligible Assignee, and such forms, certificates or other evidence, if any, with respect to United States federal income tax withholding matters as the assignee under such Assignment Agreement may be required to deliver to Administrative Agent pursuant to subsection 2.7B(iii)(a). Upon such execution, delivery, acceptance and recordation, from and after the effective date specified in such Assignment Agreement, (y) the assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment Agreement, shall have the rights and obligations of a Lender hereunder and (z) the assigning Lender thereunder shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment Agreement, relinquish its rights (other than any rights which survive the termination of this Agreement under subsection 9.9B) and be released from its obligations under this Agreement and, in the case of an Assignment Agreement covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto. The AXEL Commitments hereunder shall be modified to reflect the AXEL Commitment of such assignee and any remaining AXEL Commitment of such assigning Lender and, if any such assignment occurs after the issuance of the AXEL Notes hereunder, the assigning Lender shall, upon the effectiveness of such assignment or as promptly thereafter as practicable, surrender its applicable AXEL Notes to Administrative Agent for cancellation, and thereupon new AXEL Notes shall be issued to the assignee and/or to the assigning Lender, substantially in the form of Exhibit III annexed hereto with appropriate insertions, to reflect the new AXEL Commitments and/or outstanding AXELs, the case may be, of the assignee and/or the assigning Lender. (ii) Acceptance by Administrative Agent; Recordation in Register. Upon its receipt of an Assignment Agreement executed by an assigning Lender and an assignee representing that it is an Eligible Assignee, together with the processing and recordation fee referred to in subsection 9.1B(i) and any forms, certificates or other evidence with respect to United States federal income tax withholding matters that AXEL CREDIT AGREEMENT EXECUTION 113 120 such assignee may be required to deliver to Administrative Agent pursuant to subsection 2.7B(iii)(a), Administrative Agent shall, if Administrative Agent has consented to the assignment evidenced thereby (to the extent such consent is required pursuant to subsection 9.1B(i)), (a) accept such Assignment Agreement by executing a counterpart thereof as provided therein (which acceptance shall evidence any required consent of Administrative Agent to such assignment), (b) record the information contained therein in the Register, and (c) give prompt notice thereof to Company. Administrative Agent shall maintain a copy of each Assignment Agreement delivered to and accepted by it as provided in this subsection 9.1B(ii). C. Participations. The holder of any participation, other than an Affiliate of the Lender granting such participation, shall not be entitled to require such Lender to take or omit to take any action hereunder except action directly affecting (i) the extension of the regularly scheduled maturity of any portion of the principal amount of or interest on any AXEL allocated to such participation or (ii) a reduction of the principal amount of or the rate of interest payable on any AXEL allocated to such participation, and all amounts payable by Company hereunder (including amounts payable to such Lender pursuant to subsections 2.6D and 2.7) shall be determined as if such Lender had not sold such participation. Company and each Lender hereby acknowledge and agree that, solely for purposes of subsections 9.4 and 9.5, (a) any participation will give rise to a direct obligation of Company to the participant and (b) the participant shall be considered to be a "Lender". D. Assignments to Federal Reserve Banks. In addition to the assignments and participations permitted under the foregoing provisions of this subsection 9.1, any Lender may assign and pledge all or any portion of its AXELs, the other Obligations owed to such Lender, and its AXEL Notes to any Federal Reserve Bank as collateral security pursuant to Regulation A of the Board of Governors of the Federal Reserve System and any operating circular issued by such Federal Reserve Bank; provided that (i) no Lender shall, as between Company and such Lender, be relieved of any of its obligations hereunder as a result of any such assignment and pledge and (ii) in no event shall such Federal Reserve Bank be considered to be a "Lender" or be entitled to require the assigning Lender to take or omit to take any action hereunder. E. Information. Each Lender may furnish any information concerning Company and its Subsidiaries in the possession of that Lender from time to time to assignees and participants (including prospective assignees and participants), subject to subsection 9.19. F. Representations of Lenders. Each Lender listed on the signature pages hereof hereby represents and warrants (i) that it is an Eligible Assignee described in clause (A) of the definition thereof; (ii) that it has experience and expertise in the making of or investing in loans such as the AXELs; and (iii) that it will make its AXELs for its own account in the ordinary course of its business and without a view to distribution of such AXELs within the meaning of the Securities Act or the Exchange Act or other federal securities laws (it being understood that, subject to the provisions of this subsection 9.1, the disposition of such AXEL CREDIT AGREEMENT EXECUTION 114 121 AXELs or any interests therein shall at all times remain within its exclusive control). Each Lender that becomes a party hereto pursuant to an Assignment Agreement shall be deemed to agree that the representations and warranties of such Lender contained in Section 2(c) of such Assignment Agreement are incorporated herein by this reference. 9.2 Expenses. Whether or not the transactions contemplated hereby shall be consummated, Company agrees to pay promptly (i) all the actual and reasonable costs and expenses of preparation of the AXEL Loan Documents and any consents, amendments, waivers or other modifications thereto; (ii) all the costs of furnishing all opinions by counsel for Company (including any opinions requested by Lenders as to any legal matters arising hereunder) and of Company's performance of and compliance with all agreements and conditions on its part to be performed or complied with under this Agreement and the other AXEL Loan Documents including with respect to confirming compliance with environmental, insurance and solvency requirements; (iii) the reasonable fees, expenses and disbursements of counsel to Arranger and counsel to Administrative Agent (in each case including allocated costs of internal counsel) in connection with the negotiation, preparation, execution and administration of the AXEL Loan Documents and any consents, amendments, waivers or other modifications thereto and any other documents or matters requested by Company; (iv) all the actual costs and reasonable expenses of creating and perfecting Liens in favor of Collateral Agent on behalf of Secured Parties pursuant to any Collateral Document, including filing and recording fees, expenses and taxes, stamp or documentary taxes, search fees, title insurance premiums, and reasonable fees, expenses and disbursements of counsel to Arranger and counsel to Administrative Agent and of counsel providing any opinions that Arranger, Administrative Agent or Requisite Lenders may request in respect of the Collateral Documents or the Liens created pursuant thereto; (v) all the actual costs and reasonable expenses (including the reasonable fees, expenses and disbursements of any auditors, accountants or appraisers and any environmental or other consultants, advisors and agents employed or retained by Administrative Agent or Arranger and its counsel) of obtaining and reviewing any appraisals provided for under subsection 3.1L or 5.9C, any environmental audits or reports provided for under subsection 3.1M or 5.9B(viii) and any reports provided for under subsection 3.1K; (vi) all the actual costs and reasonable expenses (including the reasonable fees, expenses and disbursements of any consultants, advisors and agents employed or retained by Administrative Agent and its counsel) in connection with the custody or preservation of any of the Collateral; (vii) all other actual and reasonable costs and expenses incurred by Syndication Agent, Arranger or Administrative Agent in connection with the syndication of the AXEL Commitments and the negotiation, preparation and execution of the AXEL Loan Documents and any consents, amendments, waivers or other modifications thereto and the transactions contemplated thereby; and (viii) after the occurrence of an Event of Default, all costs and expenses, including reasonable attorneys' fees (including allocated costs of internal counsel) and costs of settlement, incurred by Arranger, Administrative Agent and Lenders in enforcing any Obligations of or in collecting any payments due from any Loan Party hereunder or under the other AXEL Loan AXEL CREDIT AGREEMENT EXECUTION 115 122 Documents by reason of such Event of Default (including in connection with the sale of, collection from, or other realization upon any of the Collateral or the enforcement of the Subsidiary Guaranty) or in connection with any refinancing or restructuring of the credit arrangements provided under this Agreement in the nature of a "work-out" or pursuant to any insolvency or bankruptcy proceedings. 9.3 Indemnity. In addition to the payment of expenses pursuant to subsection 9.2, whether or not the transactions contemplated hereby shall be consummated, Company agrees to defend (subject to Indemnitees' selection of counsel), indemnify, pay and hold harmless Agents and Lenders, and the officers, partners, directors, employees, agents and affiliates of any of Agents and Lenders (collectively called the "Indemnitees"), from and against any and all Indemnified Liabilities (as hereinafter defined); provided that Company shall not have any obligation to any Indemnitee hereunder with respect to any Indemnified Liabilities to the extent such Indemnified Liabilities arise solely from the gross negligence or willful misconduct of that Indemnitee as determined by a final, non-appealable judgment of a court of competent jurisdiction. As used herein, "Indemnified Liabilities" means, collectively, any and all liabilities, obligations, losses, damages (including natural resource damages), penalties, actions, judgments, suits, claims (including Environmental Claims), costs (including the costs of any investigation, study, sampling, testing, abatement, cleanup, removal, remediation or other response action necessary to remove, remediate, clean up or abate any Hazardous Materials Activity), expenses and disbursements of any kind or nature whatsoever (including the reasonable fees and disbursements of counsel for Indemnitees in connection with any investigative, administrative or judicial proceeding commenced or threatened by any Person, whether or not any such Indemnitee shall be designated as a party or a potential party thereto, and any fees or expenses incurred by Indemnitees in enforcing this indemnity), whether direct, indirect or consequential and whether based on any federal, state or foreign laws, statutes, rules or regulations (including securities and commercial laws, statutes, rules or regulations and Environmental Laws), on common law or equitable cause or on contract or otherwise, that may be imposed on, incurred by, or asserted against any such Indemnitee, in any manner relating to or arising out of (i) this Agreement or the other AXEL Loan Documents or the Related Agreements or the transactions contemplated hereby or thereby (including Lenders' agreement to make the AXELs hereunder or the use or intended use of the proceeds thereof or any enforcement of any of the AXEL Loan Documents (including any sale of, collection from, or other realization upon any of the Collateral or the enforcement of the Subsidiary Guaranty)), (ii) the statements contained in the commitment letter delivered by any Lender to Company with respect thereto, or (iii) any Environmental Claim or any Hazardous Materials Activity relating to or arising from, directly or indirectly, any past or present activity, operation, land ownership, or practice of Company or any of its Subsidiaries. AXEL CREDIT AGREEMENT EXECUTION 116 123 To the extent that the undertakings to defend, indemnify, pay and hold harmless set forth in this subsection 9.3 may be unenforceable in whole or in part because they are violative of any law or public policy, Company shall contribute the maximum portion that it is permitted to pay and satisfy under applicable law to the payment and satisfaction of all Indemnified Liabilities incurred by Indemnitees or any of them. 9.4 Set-Off; Security Interest in Deposit Accounts. In addition to any rights now or hereafter granted under applicable law and not by way of limitation of any such rights, upon the occurrence of any Event of Default each Lender is hereby authorized by Company at any time or from time to time, subject to the consent of Administrative Agent, without notice to Company or to any other Person (other than Administrative Agent), any such notice being hereby expressly waived, to set off and to appropriate and to apply any and all deposits (general or special, including Indebtedness evidenced by certificates of deposit, whether matured or unmatured, but not including trust accounts) and any other Indebtedness at any time held or owing by that Lender to or for the credit or the account of Company against and on account of the obligations and liabilities of Company to that Lender under this Agreement, and the other AXEL Loan Documents, including all claims of any nature or description arising out of or connected with this Agreement any other Loan Document, irrespective of whether or not (i) that Lender shall have made any demand hereunder or (ii) the principal of or the interest on the AXELs or any other amounts due hereunder shall have become due and payable pursuant to Section 7 and although said obligations and liabilities, or any of them, may be contingent or unmatured. Company hereby further grants to Collateral Agent and each Lender a security interest in all deposits and accounts maintained with Administrative Agent or such Lender as security for the Obligations. 9.5 Ratable Sharing. Lenders hereby agree among themselves that if any of them shall, whether by voluntary payment (other than a voluntary prepayment of AXELs made and applied in accordance with the terms of this Agreement), by realization upon security, through the exercise of any right of set-off or banker's lien, by counterclaim or cross action or by the enforcement of any right under the AXEL Loan Documents or otherwise, or as adequate protection of a deposit treated as cash collateral under the Bankruptcy Code, receive payment or reduction of a proportion of the aggregate amount of principal, interest, amounts payable in respect of, fees and other amounts then due and owing to that Lender hereunder or under the other AXEL Loan Documents (collectively, the "Aggregate Amounts Due" to such Lender) which is greater than the proportion received by any other Lender in respect of the Aggregate Amounts Due to such other Lender, then the Lender receiving such proportionately greater payment shall (i) notify Administrative Agent and each other Lender of the receipt of such payment and (ii) apply a portion of such payment to purchase participations (which it shall be deemed to have purchased from each seller of a participation simultaneously upon the receipt by such seller of its portion of such payment) AXEL CREDIT AGREEMENT EXECUTION 117 124 in the Aggregate Amounts Due to the other Lenders so that all such recoveries of Aggregate Amounts Due shall be shared by all Lenders in proportion to the Aggregate Amounts Due to them; provided that if all or part of such proportionately greater payment received by such purchasing Lender is thereafter recovered from such Lender upon the bankruptcy or reorganization of Company or otherwise, those purchases shall be rescinded and the purchase prices paid for such participations shall be returned to such purchasing Lender ratably to the extent of such recovery, but without interest. Company expressly consents to the foregoing arrangement and agrees that any holder of a participation so purchased may exercise any and all rights of banker's lien, set-off or counterclaim with respect to any and all monies owing by Company to that holder with respect thereto as fully as if that holder were owed the amount of the participation held by that holder. 9.6 Amendments and Waivers. A. No amendment, modification, termination or waiver of any provision of the AXEL Loan Documents, or consent to any departure by the Company therefrom, shall in any event be effective without the written concurrence of Requisite Lenders; provided that no such amendment, modification, termination, waiver or consent shall, without the consent of each Lender (with Obligations directly affected in the case of the following clause (i)): (i) extend the scheduled final maturity of any AXEL or AXEL Note, or extend the due date or reduce the amount of any scheduled principal payment in the case of AXELs or AXELs Notes, or reduce the rate of interest on any AXEL (other than any waiver of any increase in the interest rate applicable to any AXEL pursuant to subsection 2.2E) or any commitment fees payable hereunder, or extend the time for payment of any such interest or fees, or reduce the principal amount of any AXEL, (ii) amend, modify, terminate or waive any provision of this subsection 9.6, (iii) reduce the percentage specified in the definition of "Requisite Lenders" (it being understood that, with the consent of Requisite Lenders, additional extensions of credit pursuant to this Agreement may be included in the determination of "Requisite Lenders" on substantially the same basis as the AXEL Commitments and the AXELs Commitments Loans are included on the Closing Date), (iv) consent to the assignment or transfer by the Company of any of its rights and obligations under this Agreement or (v) release all or substantially all the Liens granted pursuant to the Collateral Documents (including Liens on real property) or release any Subsidiary from the Subsidiary Guaranty if such release would constitute a release of all or substantially all of the Collateral; provided, further that no such amendment, modification, termination or waiver shall (1) increase the AXEL Commitments of any Lender over the amount thereof then in effect without the consent of such Lender (it being understood that no amendment, modification or waiver of any condition precedent, covenant, Potential Event of Default or Event of Default shall constitute an increase in the AXEL Commitment of any Lender, and that no increase in the available portion of any AXEL Commitment of any Lender shall constitute an increase in such AXEL Commitment of such Lender); or (2) amend, modify, terminate or waive any provision of Section 8 as the same applies to any Agent, or any other provision of this Agreement as the same applies to the rights or obligations of any Agent, in each case without the consent of such Agent. AXEL CREDIT AGREEMENT EXECUTION 118 125 B. Administrative Agent may, but shall have no obligation to, with the concurrence of any Lender, execute amendments, modifications, waivers or consents on behalf of that Lender. Any waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. No notice to or demand on the Company in any case shall entitle Company to any other or further notice or demand in similar or other circumstances. Any amendment, modification, termination, waiver or consent effected in accordance with this subsection 9.6 shall be binding upon each Lender at the time outstanding, each future Lender and, if signed by Company, the Company. 9.7 Independence of Covenants. All covenants hereunder shall be given independent effect so that if a particular action or condition is not permitted by any of such covenants, the fact that it would be permitted by an exception to, or would otherwise be within the limitations of, another covenant shall not avoid the occurrence of an Event of Default or Potential Event of Default if such action is taken or condition exists. 9.8 Notices. Unless otherwise specifically provided herein, any notice or other communication herein required or permitted to be given shall be in writing and may be personally served, telexed or sent by telefacsimile or United States mail or courier service and shall be deemed to have been given when delivered in person or by courier service, upon receipt of telefacsimile or telex, or three Business Days after depositing it in the United States mail with postage prepaid and properly addressed; provided that notices to Arranger, Syndication Agent or Administrative Agent shall not be effective until received. For the purposes hereof, the address of each party hereto shall be as set forth under such party's name on the signature pages hereof or (i) as to Company and Administrative Agent, such other address as shall be designated by such Person in a written notice delivered to the other parties hereto and (ii) as to each other party, such other address as shall be designated by such party in a written notice delivered to Administrative Agent and Company. 9.9 Survival of Representations, Warranties and Agreements. A. All representations, warranties and agreements made herein shall survive the execution and delivery of this Agreement and the making of the AXELs hereunder. B. Notwithstanding anything in this Agreement or implied by law to the contrary, the agreements of Company set forth in subsections 2.6D, 2.7, 9.2, 9.3 and 9.4 and the agreements of Lenders set forth in subsections 8.2C, 8.4 and 9.5 shall survive the payment of the AXELs, and the termination of this Agreement. AXEL CREDIT AGREEMENT EXECUTION 119 126 9.10 Failure or Indulgence Not Waiver; Remedies Cumulative. No failure or delay on the part of Administrative Agent or any Lender in the exercise of any power, right or privilege hereunder or under any other AXEL Loan Document shall impair such power, right or privilege or be construed to be a waiver of any default or acquiescence therein, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other power, right or privilege. All rights and remedies existing under this Agreement and the other Loan Documents are cumulative to, and not exclusive of, any rights or remedies otherwise available. 9.11 Marshalling; Payments Set Aside. Neither Administrative Agent nor any Lender shall be under any obligation to marshal any assets in favor of Company or any other party or against or in payment of any or all of the Obligations. To the extent that Company makes a payment or payments to Administrative Agent or Lenders (or to Administrative Agent for the benefit of Lenders), or Administrative Agent or Lenders enforce any security interests or exercise their rights of setoff, and such payment or payments or the proceeds of such enforcement or setoff or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside and/or required to be repaid to a trustee, receiver or any other party under any bankruptcy law, any other state or federal law, common law or any equitable cause, then, to the extent of such recovery, the obligation or part thereof originally intended to be satisfied, and all Liens, rights and remedies therefor or related thereto, shall be revived and continued in full force and effect as if such payment or payments had not been made or such enforcement or setoff had not occurred. 9.12 Severability. In case any provision in or obligation under this Agreement or the AXEL Notes shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. 9.13 Obligations Several; Independent Nature of Lenders' Rights. The obligations of Lenders hereunder are several and no Lender shall be responsible for the obligations or AXEL Commitments of any other Lender hereunder. Nothing contained herein or in any other Loan Document, and no action taken by Lenders pursuant hereto or thereto, shall be deemed to constitute Lenders as a partnership, an association, a joint venture or any other kind of entity. The amounts payable at any time hereunder to each Lender shall be a separate and independent debt, and each Lender shall be entitled to protect and enforce its rights arising out of this Agreement and it shall not be necessary for any other Lender to be joined as an additional party in any proceeding for such purpose. AXEL CREDIT AGREEMENT EXECUTION 120 127 9.14 Headings. Section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect. 9.15 Applicable Law. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES. 9.16 Successors and Assigns. This Agreement shall be binding upon the parties hereto and their respective successors and assigns and shall inure to the benefit of the parties hereto and the successors and assigns of Lenders (it being understood that Lenders' rights of assignment are subject to subsection 9.1). Neither Company's rights or obligations hereunder nor any interest therein may be assigned or delegated by Company without the prior written consent of all Lenders. 9.17 Consent to Jurisdiction and Service of Process. ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST COMPANY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY OBLIGATIONS THEREUNDER, MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE, COUNTY AND CITY OF NEW YORK. BY EXECUTING AND DELIVERING THIS AGREEMENT, COMPANY, FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, IRREVOCABLY (I) ACCEPTS GENERALLY AND UNCONDITIONALLY THE NONEXCLUSIVE JURISDICTION AND VENUE OF SUCH COURTS; (II) WAIVES ANY DEFENSE OF FORUM NON CONVENIENS; (III) AGREES THAT SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDING IN ANY SUCH COURT MAY BE MADE BY REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO COMPANY AT ITS ADDRESS PROVIDED IN ACCORDANCE WITH SUBSECTION 9.8; AXEL CREDIT AGREEMENT EXECUTION 121 128 (IV) AGREES THAT SERVICE AS PROVIDED IN CLAUSE (III) ABOVE IS SUFFICIENT TO CONFER PERSONAL JURISDICTION OVER COMPANY IN ANY SUCH PROCEEDING IN ANY SUCH COURT, AND OTHERWISE CONSTITUTES EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT; (V) AGREES THAT LENDERS RETAIN THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO BRING PROCEEDINGS AGAINST COMPANY IN THE COURTS OF ANY OTHER JURISDICTION; AND (VI) AGREES THAT THE PROVISIONS OF THIS SUBSECTION 9.17 RELATING TO JURISDICTION AND VENUE SHALL BE BINDING AND ENFORCEABLE TO THE FULLEST EXTENT PERMISSIBLE UNDER NEW YORK GENERAL OBLIGATIONS LAW SECTION 5-1402 OR OTHERWISE. 9.18 Waiver of Jury Trial. EACH OF THE PARTIES TO THIS AGREEMENT HEREBY AGREES TO WAIVE ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY OF THE OTHER AXEL LOAN DOCUMENTS OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS LOAN TRANSACTION OR THE LENDER/BORROWER RELATIONSHIP THAT IS BEING ESTABLISHED. The scope of this waiver is intended to be all-encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including contract claims, tort claims, breach of duty claims and all other common law and statutory claims. Each party hereto acknowledges that this waiver is a material inducement to enter into a business relationship, that each has already relied on this waiver in entering into this Agreement, and that each will continue to rely on this waiver in their related future dealings. Each party hereto further warrants and represents that it has reviewed this waiver with its legal counsel and that it knowingly and voluntarily waives its jury trial rights following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING (OTHER THAN BY A MUTUAL WRITTEN WAIVER SPECIFICALLY REFERRING TO THIS SUBSECTION 9.18 AND EXECUTED BY EACH OF THE PARTIES HERETO), AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT OR ANY OF THE OTHER AXEL LOAN DOCUMENTS OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THE OBLIGATIONS MADE HEREUNDER. In the event of litigation, this Agreement may be filed as a written consent to a trial by the court. AXEL CREDIT AGREEMENT EXECUTION 122 129 9.19 Confidentiality. Each Lender shall hold all non-public information obtained pursuant to the requirements of this Agreement in accordance with such Lender's customary procedures for handling confidential information of this nature and in accordance with safe and sound banking practices (and any Lender without such customary procedures agrees to keep such information confidential), it being understood and agreed by Company that in any event a Lender may make disclosures to Affiliates or Related Funds of such Lender or disclosures reasonably required by any bona fide assignee, transferee or participant in connection with the contemplated assignment or transfer by such Lender of any AXELs (so long as such Persons agree in advance in writing to keep such information confidential) or disclosures required or requested by any governmental agency or representative thereof or pursuant to legal process; provided that, unless specifically prohibited by applicable law or court order, each Lender shall notify Company of any request by any governmental agency or representative thereof (other than any such request in connection with any examination of such Lender by such governmental agency) for disclosure of any such non-public information prior to disclosure of such information; and provided, further that in no event shall any Lender be obligated or required to return any materials furnished by Company or any of its Subsidiaries. 9.20 Counterparts; Effectiveness. This Agreement and any amendments, waivers, consents or supplements hereto or in connection herewith may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. This Agreement shall become effective upon the execution of a counterpart hereof by each of the parties hereto and receipt by Company and Administrative Agent of written or telephonic authorization of delivery thereof. [Remainder of page intentionally left blank] AXEL CREDIT AGREEMENT EXECUTION 123 130 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above. COMPANY: AMSCAN HOLDINGS, INC. By: /s/ Gerald C. Rittenberg --------------------------- Name: Title: Notice Address: Amscan Holdings, Inc. 80 Grasslands Road Elmsford, New York 10523 Attention: James M. Harrison Telecopy: (914) 345-2056 AXEL CREDIT AGREEMENT EXECUTION S-1 131 AGENTS AND LENDERS: GOLDMAN SACHS CREDIT PARTNERS L.P. individually and as Arranger and Syndication Agent By: /s/ --------------------------- Authorized Signatory Notice Address: Goldman Sachs Credit Partners L.P. 16th Floor 85 Broad Street New York, New York 10004 Attention: Stephen King (Credit) Telecopy: (212) 902-2417 With a copy to: Goldman Sachs Credit Partners L.P. 27th Floor 85 Broad Street New York, New York 10004 Attention: Kathy King (Operations) Telecopy: (212) 902-3757 AXEL CREDIT AGREEMENT EXECUTION S-2 132 FLEET NATIONAL BANK, as Administrative Agent By: /s/ Robert H. Dial --------------------------- Name: Title: Notice Address: Fleet National Bank One Federal Street, 5th Floor Mail Stop MAOFD05P Boston, Massachusetts 02110 Attention: John Mann Telecopy: (617) 346-4682 with a copy to: Fleet National Bank One Federal Street, 3rd Floor Mail Stop MAOFD03C Boston, Massachusetts 02110 Attention: Steve Curran Telecopy: (617) 346-5093 AXEL CREDIT AGREEMENT EXECUTION S-3 133 GENERAL ELECTRIC CAPITAL CORPORATION By: /s/ Murry K. Stegelmann --------------------------- Name: Murry K. Stegelmann Title: Duly Authorized Signatory Notice Address: GE Capital 201 High Ridge Road Stamford, Connecticut 06927-5100 Attention: Joseph Badini, Associate Telecopy: (203) 316-7978 With a copy to: GE Capital 201 High Ridge Road Stamford, Connecticut 06927-5100 Attention: Janet K. Williams, Senior Vice President Telecopy: (203) 316-7978 AXEL CREDIT AGREEMENT EXECUTION S-4 134 SOUTHERN PACIFIC BANK By: /s/ Charles D. Martorane --------------------------- Name: Charles D. Martorane Title: Senior Vice President Notice Address: Southern Pacific Bank 12300 Wilshire Blvd. Los Angeles, CA 90025 Attention: Chris Kelleher Telecopy: (310) 207-4067 With a copy to: Southern Pacific Bank 12300 Wilshire Blvd. Los Angeles, CA 90025 Attention: Chuck Martorano Telecopy: (310) 207-4067 AXEL CREDIT AGREEMENT EXECUTION S-5 135 TRANSAMERICA BUSINESS CREDIT CORPORATION By: /s/ Perry Vavcoles --------------------------- Name: Perry Vavcoles Title: Senior Vice President Notice Address: Transamerica Business Credit Corporation 555 Theodore Fremd Avenue, Suite C-301 Rye, New York 10580 Attention: Ron Walker (Credit) Telecopy: (914) 921-0110 With a copy to: Transamerica Business Credit Corporation 555 Theodore Fremd Avenue, Suite C-301 Rye, New York 10580 Attention: Maria Bellizzi Telecopy: (914) 925-7248 AXEL CREDIT AGREEMENT EXECUTION S-6 136 CREDIT AGRICOLE INDOSUEZ By: /s/ Kenneth Kencel --------------------------- Name: Kenneth Kencel Title: MD By: /s/ Francoise Berthelot --------------------------- Name: Francoise Berthelot Title: Vice President Notice Address: Credit Agricole Indosuez 1211 Avenue of the Americas New York, NY 10036-8701 Attention: Francoise Berthelot/ Isabelle Pradel (Credit) Telecopy: (212) 278-2254 With a copy to: Credit Agricole Indosuez 1211 Avenue of the Americas New York, NY 10036-8701 Attention: Raymond Wright/ Michelle Sciaraffo (Loans) Telecopy: (212) 278-2502 AXEL CREDIT AGREEMENT EXECUTION S-7 137 MERRILL LYNCH SENIOR FLOATING RATE FUND, INC. By: /s/ Anne McCarthy --------------------------- Name: Anne McCarthy Title: Authorized Signatory Notice Address: Merrill Lynch Senior Floating Rate Fund, Inc. 200 Scudders Mill Road - Area 1B Plainsboro, New Jersey 08536 Attention: AnnMarie Smith Telecopy: (609) 282-3542 With a copy to: Merrill Lynch Senior Floating Rate Fund, Inc. 200 Scudders Mill Road - Area 1B Plainsboro, New Jersey 08536 Attention: Colleen Wade Telecopy: (609) 282-3542 AXEL CREDIT AGREEMENT EXECUTION S-8 138 PILGRIM AMERICA PRIME RATE TRUST By: /s/ Thomas C. Hunt --------------------------- Name: Thomas C. Hunt Title: Assistant Portfolio Manager Notice Address: Pilgrim America Prime Rate Trust Two Renaissance Square 40 North Central Avenue Suite 1200 Phoenix, Arizona 85004-3444 Attention: Tim Hunt (Credit) Telecopy: (602) 417-8327 With a copy to: Pilgrim America Prime Rate Trust Two Renaissance Square 40 North Central Avenue Suite 1200 Phoenix, Arizona 85004-3444 Attention: Melina Dempsey Telecopy: (602) 417-8321 With a copy to: State Street Bank and Trust Company Alternative Structures Unit Boston, Massachusetts Attention: Wayne Elpus Reference: Pilgrim America Prime Rate Trust Telecopy: (617) 664-5366/5367/5368 AXEL CREDIT AGREEMENT EXECUTION S-9 139 CRESCENT/MACH I PARTNERS, L.P. by: TCW Asset Management Company, its Investment Manager By: /s/ Justin L. Driscoll --------------------------- Name: Justin L. Driscoll Title: Senior Vice President Notice Address: TCW Asset Management Company 200 Park Avenue, Suite 2200 New York, New York 10166-0228 Attention: Mark L Gold/Justin Driscoll Telecopy: (212) 297-4159 With a copy to: Crescent/Mach I Partners, L.P. c/o State Street Bank & Trust Co. Two International Place Boston, Massachusetts 02110 Attention: Howie Gorman Telecopy: (617) 664-5367 AXEL CREDIT AGREEMENT EXECUTION S-10 140 PRIME INCOME TRUST By: /s/ Rafael Scolari --------------------------- Name: Rafael Scolari Title: S.V.P. Portfolio Manager Notice Address: Prime Income Trust c/o Dean Witter InterCapital 2 World Trade Center - 72nd Floor New York, New York 10048 Attention: Louis Pistecchia (Credit) Telecopy: (212) 392-5345 With a copy to: Prime Income Trust c/o Dean Witter InterCapital 2 World Trade Center - 72nd Floor New York, New York 10048 Attention: April Chrysostomas (Administration) Telecopy: (212) 392-5709 AXEL CREDIT AGREEMENT EXECUTION S-11 141 BDC FINANCE LLC By: /s/ Richard Ehrlich --------------------------- Name: Richard Ehrlich Title: Senior Analyst Notice Address: BDC Finance LLC c/o Black Diamond Capital Market 100 Field Drive, Suite 330 Lake Forest, Illinois 60045 Attention: James J. Zenni (Credit) Telecopy: (847) 615-9064 With a copy to: BDC Finance LLC c/o Black Diamond Capital Market 100 Field Drive, Suite 330 Lake Forest, Illinois 60045 Attention: Jon Schmugge Telecopy: (847) 615-9064 AXEL CREDIT AGREEMENT EXECUTION S-12 EX-10.4 4 STOCKHOLDERS' AGREEMENT 1 Exhibit 10.4 STOCKHOLDERS' AGREEMENT STOCKHOLDERS' AGREEMENT, dated as of December 19, 1997 (the "Agreement"), by and among AMSCAN HOLDINGS, INC., a Delaware corporation (the "Company"), GS CAPITAL PARTNERS II, L.P., a Delaware limited partnership ("GSCP II"), GS CAPITAL PARTNERS II OFFSHORE, L.P., a Cayman Islands exempt limited partnership ("GSCP II Offshore"), GOLDMAN, SACHS & CO. VERWAL-TUNGS GMBH, a corporation recorded in the Commercial Register Frankfurt, as nominee for GS Capital Partners II Germany C.L.P. ("GSCP II Germany"), STONE STREET FUND 1997, L.P., a Delaware limited partnership ("Stone Street"), BRIDGE STREET FUND 1997, L.P., a Delaware limited partnership ("Bridge Street" and, together with GSCP II, GSCP II Offshore, GSCP II Germany and Stone Street, "GSCP") and each of the individuals and the Estate of John A. Svenningsen (the "Estate") listed on Schedule I hereto (collectively, including the Estate, the "Management Investors"). References herein to the Company shall mean the Company as the surviving corporation in the Merger (as defined below). Employees, directors, consultants and certain other Persons (as defined below) having significant business relationships with the Company and its Affiliates (as defined below) may be issued shares of Common Stock (as defined below) (or other equity securities of the Company) or securities convertible into or exchangeable for Common Stock (or other equity securities of the Company) subject to the terms of this Agreement and, if so issued, the Company, without the consent of any other party hereto, may amend this Agreement to allow any such Person the Company so chooses to become an additional Management Investor hereunder, subject to such Person becoming a signatory to this Agreement. The parties hereto (other than the Company) and any other Person who shall hereafter acquire shares of Common Stock of the Company (or other equity securities of the Company) or securities convertible into or exchangeable for Common Stock (or other equity securities of the Company) pursuant to the provisions of, and/or subject to the restrictions and rights set forth in, this Agreement (including through participation in certain Company stock or option plans) are sometimes hereinafter referred to individually as a "Stockholder" or collectively as the "Stockholders." RECITALS A. The Company, as of the Effective Date (as defined herein), will have an authorized capital stock consisting of 50,000,000 shares of Common Stock, par value $0.10 per share (the "Common Stock"), each share of which is entitled to one vote on all stockholder matters as more specifically provided 2 in the amended certificate of incorporation of the Company (the "Amended Certificate"), and of which 1,010 shares will be issued and outstanding immediately after the Effective Date. As used in this Agreement, Common Stock shall include any shares of Restricted Stock (as defined below) of the Company granted to Management Investors; provided, however, that to the extent the Transfer (as defined herein) thereof is otherwise prohibited or restricted, no rights to Transfer, including pursuant to Section 2.4 or Article III, shall be granted hereunder. In addition, the Company will have reserved, as of the Effective Date, 120 shares of Common Stock for issuance pursuant to the Company 1997 Stock Incentive Plan (the "Stock Incentive Plan"). B. An Agreement and Plan of Merger, dated August 10, 1997 (the "Merger Agreement"), has been executed by and among Confetti Acquisition, Inc., a Delaware corporation ("Confetti"), and the Company, pursuant to which Confetti was merged with and into the Company (the "Merger") with the Company as the surviving corporation in the Merger. C. In connection with the Merger, Confetti entered into employment and/or equity agreements with certain Management Investors (the "Employment Agreements") that provide for, among other things, the investment by such Management Investors in the Common Stock and the grant and/or rollover of Options to such Management Investors. As of or immediately following the Effective Date, the Company has executed or shall execute and become a party to the Employment Agreements. D. In connection with the Merger, Confetti entered into a Voting Agreement, dated August 10, 1997 (the "Voting Agreement"), by and among Confetti, the Estate and a certain individual. -2- 3 E. The individual holdings of Common Stock of each Stockholder, immediately after the closing of the transactions contemplated in the Merger Agreement and the Employment Agreements (not assuming the exercise of any Options) are as follows: Number of Shares of Common Stock Name Held After Closing ---- ------------------ GSCP II 517.6286775 GSCP II Offshore 205.7786775 GSCP II Germany 19.0926450 Stone Street 55.5348750 Bridge Street 26.9651250 Estate of John A. Svenningsen 100.0000000 Gerald C. Rittenberg 60.0000000 James M. Harrison 15.0000000 William Wilkey 6.6666667 Diane D. Spaar 1.3333333 Katherine A. Kusnierz 2.0000000 -------------------------- ------------- Total 1,010.0000000 F. The individual holdings of Options to purchase shares of Common Stock of each Stockholder, immediately after the closing of the transactions contemplated in the Merger Agreement and the Employment Agreements are as set forth as follows: Number of Shares of Common Stock Subject to Options Name Held After Closing ---- ------------------ Gerald C. Rittenberg 16.648 James M. Harrison 16.268 William S. Wilkey 16.441 Diane D. Spaar 11.827 Katherine A. Kusnierz 11.577 Morton Fisher 2.383 William Mark 1.280 Angelo Giummarra 2.477 Karen McKenzie 1.477 Keith Johnson 1.280 Howard Harding 1.280 Walter Thompson 1.144 Charles Phillips 0.478 Susan Scott 1.144 -3- 4 Rose Giagrande 1.238 Randy Harris 0.718 Eric Stollman 1.238 Kathleen Rooney 1.238 James Dotti 1.238 Vincent Anastasi 0.794 Michael A. Correale 2.570 Mark Irvine 0.555 Scott Lametto 0.999 Joseph Walter 0.555 Cheryl Considine 0.999 Patrick Venuti 0.555 Dallas Hartman 0.555 Robert Yedowitz 0.555 Nigel Keane 0.555 Connie Weckman 0.555 Ken Danforth 0.555 -------------------------- ----------- Total 101.179 G. The parties hereto desire to restrict the sale, assignment, transfer, encumbrance or other disposition of the Common Stock which the parties hereto own or may hereafter acquire, and to provide for certain rights and obligations in respect thereof as hereinafter provided. -4- 5 NOW, THEREFORE, in consideration of the premises and of the terms and conditions contained herein, the parties hereto agree as follows: ARTICLE I DEFINITIONS As used in this Agreement, the following terms shall have the meanings ascribed to them below: "Affected Holder" shall have the meaning ascribed to it in Section 5.10 hereof. "Affiliate" of a Person shall mean a Person directly or indirectly controlled by, controlling or under common control with such Person. "Agreement" shall have the meaning ascribed to it in the Introduction hereof. "Amended Certificate" shall have the meaning ascribed to it in the Recitals hereof. "Bridge Street" shall have the meaning ascribed to it in the Introduction hereof. "Buy-Out Note" shall mean an unsecured promissory note of the Company, or a direct or indirect subsidiary thereof, which shall have a stated maturity of five (5) years, shall accrue interest at seven (7) percent per annum, shall be prepayable at the option of the Company or such subsidiary at any time, in whole or in part, at its principal amount plus any accrued and unpaid interest, shall provide for the reimbursement of reasonable expenses incurred by the holder to enforce the note and shall accelerate upon the earlier of a Change of Control or the consummation of an IPO. "Change of Control" shall mean (1) the acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) other than GSCP and their Affiliates of a majority of the outstanding voting stock of the Company or (2) the sale of or other disposition (other than by way of merger or consolidation) of all or substantially all of the assets of the Company and its subsidiaries taken as a whole to any Person or group of Persons, other than to a Person (or group of Persons) a majority of the outstanding voting stock (or other interests) of which are beneficially owned by GSCP and their Affiliates. 6 "Claims" shall mean losses, claims, damages or liabilities, joint or several, actions or proceedings (whether commenced or threatened). "Common Stock" shall have the meaning ascribed to it in the Recitals hereof. "Company" shall have the meaning ascribed to it in the Introduction hereof. "Confetti" shall have the meaning ascribed to it in the Recitals hereof. "Demand Registration" shall have the meaning ascribed to it in Section 3.1(b) hereof. "Drag-Along Right" shall have the meaning ascribed to it in Section 2.5.1 hereof. "Drag-Along Seller" shall have the meaning ascribed to it in Section 2.5.2 hereof. "Effective Date" shall have the meaning ascribed to it in Section 5.1(a) hereof. "Employment Agreements" shall have the meaning ascribed to it in the Recitals hereof. "Estate" shall have the meaning ascribed to it in the Introduction hereof. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Fair Market Value" shall mean fair value as reasonably determined by Goldman Sachs in light of all circumstances including comparable recent bona fide third party sales. "Goldman Sachs" shall mean Goldman, Sachs & Co. "GSCP", "GSCP II", "GSCP II Germany" and "GSCP II Offshore" shall have the meanings ascribed to them in the Introduction hereof. "IPO" shall mean an underwritten initial public offering or public offerings (on a cumulative basis) of shares of Common Stock pursuant to a registration statement or registration statements under the Securities Act with aggregate gross proceeds to the Company of at least $50 million. -2- 7 "Management Investors" shall have the meaning ascribed to it in the Introduction hereof. "Merger" shall have the meaning ascribed to it in the Recitals hereof. "Merger Agreement" shall have the meaning ascribed to it in the Recitals hereof. "NASD" shall mean the National Association of Securities Dealers, Inc. "Nasdaq" shall mean The Nasdaq Stock Market, Inc. "New Cost Per Share" shall have the meaning ascribed to it in the Employment Agreement, by and between James M. Harrison and Confetti, dated as of August 10, 1997, as in effect on the date hereof. "Offer Shares" shall have the meaning ascribed to it in Section 2.4.1. "Offeree Stockholders" shall have the meaning ascribed to it in Section 2.4.1. "Options" shall mean options to purchase shares of Common Stock from the Company, whether granted pursuant to the Stock Incentive Plan or otherwise. "Permitted Transferee" shall have the meaning ascribed to it in Sections 2.3.3 and 2.3.4 hereof. "Person" shall mean an individual, corporation, partnership, joint venture, trust, unincorporated organization, government (or any department or agency thereof) or other entity. "Piggyback Notice" shall have the meaning ascribed to it in Section 3.1(a) hereof. "Piggyback Registration" shall have the meaning ascribed to it in Section 3.1(a) hereof. "Proposed Transferee" means a Person or group as defined in Section 13(d)(3) of the Exchange Act, other than any Stockholders or their Affiliates (whether any such Affiliate is such prior to or upon consummation of the proposed Transfer, but not solely by virtue of becoming a party to this Agreement), to whom Common Stock is proposed to be Transferred pursuant to the terms of Section 2.4.3(a) or 2.5 of this Agreement. -3- 8 "Registrable Securities" shall mean the shares of Common Stock; provided, however, as to any particular Registrable Securities, once issued such securities shall cease to be Registrable Securities when (i) a registration statement with respect to the sale of such securities shall have become effective under the Securities Act and such securities shall have been disposed of in accordance with such registration statement, (ii) such securities shall have been sold pursuant to Rule 144 (or any successor provision) under the Securities Act, (iii) such securities shall have been otherwise transferred and new certificates for such securities not bearing a legend restricting further transfer shall have been delivered by the Company, (iv) such securities shall have ceased to be outstanding (and, in the case of shares of Common Stock underlying options granted under the Stock Incentive Plan or underlying options or warrants granted otherwise, such shares of Common Stock shall have ceased to be outstanding after issuance pursuant to the exercise of such options or warrants), or (v) in the case of shares of Common Stock held by a Management Investor, such securities shall have been transferred to any Person other than a Management Investor or a Permitted Transferee. "Registration Expenses" shall mean any and all expenses incident to performance of or compliance with Article III of this Agreement, including without limitation, (i) all SEC and stock exchange or the NASD registration and filing fees, (ii) all fees and expenses of complying with securities or "blue sky" laws (including reasonable fees and disbursements of counsel for the underwriters in connection with "blue sky" qualifications of the Registrable Securities), (iii) all printing, messenger and delivery expenses, (iv) the fees and disbursements of counsel for the Company and of the Company's independent public accountants, including the expenses of any special audits and/or "cold comfort" letters required by or incident to such performance and compliance, (v) the reasonable fees and disbursements of one counsel retained by the Stockholders (if GSCP is one of the selling Stockholders, such counsel to be selected by GSCP) as a group in connection with each such registration, (vi) any fees and disbursements of underwriters customarily paid by issuers or sellers of securities and the reasonable fees and expenses of any special experts retained in connection with the requested registration, including any fee payable to a qualified independent underwriter within the meaning of the rules of the NASD, but excluding underwriting discounts and commissions and transfer taxes, if any, (vii) internal expenses of the Company (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties) and (viii) securities acts liability insurance (if the Company elects to obtain such insurance). -4- 9 "Restricted Stock" shall have the meaning ascribed to it in the Employment Agreements. "Rule 144" shall mean Rule 144 under the Securities Act. "Sale Notice" shall have the meaning ascribed to it is Section 2.4.1. "SEC" shall mean the Securities and Exchange Commission. "Section 3.1 Sale Number" shall have the meaning ascribed to it in Section 3.1(d) hereof. "Securities Act" shall mean the Securities Act of 1933, as amended. "Stock Incentive Plan" shall have the meaning ascribed to it in the Recitals hereof. "Stone Street" shall have the meaning ascribed to it in the Introduction hereof. "Subsidiary Dividend" shall have the meaning ascribed to it in Section 4.1 hereof. "Tag-Along Right" shall have the meaning ascribed to it in Section 2.4.3(a) hereof. "Tag-Along Seller" shall have the meaning ascribed to it in Section 2.4.3(b) hereof. "Tag-Along Shares" shall have the meaning ascribed to it in Section 2.4.2 hereof. "Transfer" shall mean to sell, assign, pledge or encumber or otherwise transfer, directly or indirectly, whether or not for consideration. "Transferee" shall mean any Person to whom a Transfer is made, regardless of the method of Transfer. "Transferor" shall mean any Person by whom a Transfer is made, regardless of the method of Transfer. "Violation" shall have the meaning ascribed to it in Section 3.3(a) hereof. "Voting Agreement" shall have the meaning ascribed to it in the Recitals hereof. -5- 10 ARTICLE II RESTRICTIONS ON TRANSFERS OF STOCK 2.1 General Prohibition on Transfers. (a) Prohibition on Transfers Generally. No Management Investor shall, at any time prior to an IPO, Transfer any shares of Common Stock, unless such Transfer is made in accordance with Section 2.3, 2.4 or 2.5 or pursuant to a Piggyback Registration, and any Transfer by any Management Investor of any shares of Common Stock owned as of the date hereof or hereafter acquired not in accordance with such provisions shall be null and void. (b) Recordation. The Company shall not record upon its books any Transfer of shares of Common Stock held or owned by any of the Management Investors to any other Person except Transfers in accordance with this Agreement. (c) Obligations of Transferees. No Transfer of shares of Common Stock by a Management Investor otherwise permitted pursuant to this Agreement (other than pursuant to a Piggyback Registration or pursuant to a Tag-Along Right or Drag-Along Right) shall be effective unless (x) the Transferee (including a Permitted Transferee pursuant to Section 2.3) shall have executed an appropriate document in form and substance reasonably satisfactory to the Company confirming that (i) the Transferee takes such shares subject to all the terms and conditions of this Agreement to the same extent as its Transferor was bound by and entitled to the benefits of such provisions and (ii) the shares shall bear legends, substantially in the forms required by Section 2.6, and (y) such document shall have been delivered to and approved (as described above) by the Company prior to such Transferee's acquisition of shares of Common Stock. (d) Transfers to Competitors. Notwithstanding anything to the contrary in this Agreement, no Management Investor shall, at any time, directly or indirectly, Transfer any shares of Common Stock to any Person who is a competitor of the Company or to any Affiliate of such a competitor (other than Transfers to the Company and its Affiliates), unless such Transfer (i) is made in connection with the exercise of a Tag-Along Right pursuant to Section 2.4 or in connection with the exercise of a Drag-Along Right pursuant to Section 2.5, in which event such sale may be effected only in accordance with such Section 2.4 or Section 2.5, as applicable, or (ii) is made -6- 11 in accordance with the terms of this Agreement and is made pursuant to a widely distributed, underwritten public offering registered under the Securities Act (or an underwritten offering pursuant to the exercise of such Management Investor's piggyback registration rights pursuant to Section 3.1(a) hereof) or pursuant to a sale effected through an open market, nondirected broker's transaction pursuant to Rule 144 in which the seller does not know that the buyer is a competitor. For purposes of this provision, the good faith determination of a majority of the entire Board that a proposed Transferee is a "competitor," made within thirty (30) days of written notice to the Board of the proposed Transfer, shall in all respects be conclusive. 2.2 Compliance with Securities Laws. No Management Investor shall Transfer any shares of Common Stock unless the Transfer is made in accordance with the terms of this Agreement and (i) the Transfer is pursuant to an effective registration statement under the Securities Act and in compliance with any other applicable federal securities laws and state securities or "blue sky" laws or (ii) such Management Investor shall have furnished the Company with an opinion of counsel, if reasonably requested by the Company, which opinion and counsel shall be reasonably satisfactory to the Company, to the effect that no such registration is required because of the availability of an exemption from registration under the Securities Act and under any applicable state securities or "blue sky" laws and that the Transfer otherwise complies with this Agreement and any other applicable federal securities laws and state securities or "blue sky" laws. 2.3 Permitted Transfers. 2.3.1 GSCP Transfers. (a) GSCP and any Affiliate of GSCP shall be free to Transfer shares of Common Stock to any Person, in whole at any time, or in part from time to time; provided, however, that if such Person is not Affiliate of GSCP, such Transfer shall be subject to Section 2.4 and Section 2.5 hereof. In any Transfer made pursuant to the foregoing to an Affiliate of GSCP, the Transferee shall agree, in connection with such Transfer, for the benefit of the Company, that such Transferee will Transfer back to the Transferor or another continuing Affiliate of GSCP (that will be similarly bound by this sentence) any shares of Common Stock so Transferred, if the Transferee at any time is no longer an Affiliate of GSCP. (b) No Transfer of shares of Common Stock by GSCP or an Affiliate of GSCP otherwise permitted pursuant to this Section 2.3.1 shall be effective unless the Transferee (whether or not an Affiliate of GSCP) shall have executed an appropriate -7- 12 document in form and substance reasonably satisfactory to the Company confirming that the Transferee takes such shares subject to all the terms and conditions of this Agreement to the same extent as its Transferor was bound by and entitled to the benefits of such provisions. 2.3.2 Management Investors. (a) The restrictions contained in Sections 2.1(a) of this Agreement with respect to Transfers by Management Investors (other than the Estate) of shares of Common Stock shall not apply to any Transfer by a Management Investor (other than the Estate): (i) to or among such Management Investor's spouse, children, grandchildren or other living descendants, or to a trust or family partnership of which there are no principal (i.e., corpus) beneficiaries or partners other than the grantor or one or more of such Management Investor, spouse or described relatives, and provided, in the case of a trust, that the existing beneficiaries and/or trustee(s) and/or grantor(s) of such trust have the power to act with respect to the trust's assets without court approval and, in the case of a family partnership, that the partners thereof have the power to act with respect to the partnership's assets without court approval and the partnership is not permitted to (x) distribute assets to Persons who are not among the relatives listed above or (y) have partners who are not among the relatives listed above, and, in any case, all the partners agree, for the benefit of the Company and GSCP, not to amend such provisions; (ii) to a legal representative of such Management Investor in the event such Management Investor becomes mentally incompetent or to such Management Investor's personal representative following the death of such Management Investor; (iii) with the prior written approval of the Company, which approval may be granted or withheld by the Board of Directors of the Company in its sole and absolute discretion; and (iv) pursuant to any pledge by a Management Investor to the Company or an Affiliate thereof for money borrowed to purchase shares of Common Stock pursuant to the Employment Agreements, if applicable. (b) The restrictions contained in Section 2.1(a) of this Agreement with respect to Transfers by the Estate shall not apply to any of the following Transfers by the Estate: (i) to a qualified terminable interest property trust in accordance with the terms of the will of the decedent of the Estate or (ii) with the prior written approval of the Company which approval may be granted or withheld by the Board of Directors of the Company in its sole and absolute discretion. 2.3.3 Permitted Transferees. Transferees to whom Transfers are permitted pursuant to clauses (i), (ii) and (iii) of Section 2.3.2(a) and clauses (i) and (ii) of Section -8- 13 2.3.2(b) are referred to herein as "Permitted Transferees." Any such permitted Transfer shall be subject to the terms of this Agreement, including compliance with Section 2.1(c). 2.3.4 Transfer by Permitted Transferees. The restrictions contained in Section 2.1(a) of this Agreement with respect to Transfers by Management Investors of shares of Common Stock shall not apply to any Transfer by a Permitted Transferee of a Management Investor to such Management Investor or to another Permitted Transferee of such Stockholder, and any such Transferee shall also be a "Permitted Transferee," subject to the provisions of Section 2.3.3. 2.3.5 Other Transfer Restrictions. The restrictions contained in Sections 2.1(a), 2.4 and 2.5 hereof and the provisions regarding Permitted Transferees contained in this Section 2.3 shall be in addition to and not in lieu or limitation of any restrictions on the ownership or Transfer of shares of Common Stock (including with respect to any Restricted Stock) contained in any Employment Agreement or any analogous provision of any employment, compensation or benefit agreement or arrangement or other agreement between Confetti or the Company and any Stockholder; provided, however, that upon the termination of any such Employment Agreement or other such agreement or arrangement or lapsing of such restrictions, the restrictions and provisions contained herein shall continue in full force and effect pursuant to this Agreement. 2.4 Tag-Along Rights. 2.4.1 Sale Notice. If GSCP proposes to sell any of the Common Stock owned by it, other than (a) to an Affiliate of GSCP, (b) pursuant to the exercise of a Drag-Along Right pursuant to Section 2.5 of this Agreement, (c) pursuant to a Demand Registration (which affords piggyback registration rights pursuant to Section 3.1) or Piggyback Registration, or (d) following an IPO, sales effected through open market, nondirected broker's transactions pursuant to Rule 144, then GSCP shall first give written notice (the "Sale Notice") to the Company and to each of the Management Investors (such Management Investors, being referred to herein as the "Offeree Stockholders"), stating that GSCP desires to make such sale, referring to Section 2.4 of this Agreement, specifying the number of shares of Common Stock proposed to be sold by GSCP pursuant to the offer (the "Offer Shares"), and specifying the price, the form of consideration and the material terms pursuant to which such sale is proposed to be made. -9- 14 2.4.2 Tag-Along Election. Within seven (7) days of the date of receipt of the Sale Notice, each Offeree Stockholder, other than GSCP, shall deliver to GSCP and to the Company a written notice stating whether the Offeree Stockholder elects to sell a pro rata portion of its Common Stock (equal to (A) the total number of shares of Common Stock owned by such Offeree Stockholder, plus the total number of shares of Common Stock then issuable upon exercise of vested Options then exercisable by such Offeree Stockholder, multiplied by (B) a fraction, (i) the numerator of which is the number of Offer Shares and (ii) the denominator of which is the total number of shares of Common Stock held by GSCP plus the total number of shares of Common Stock then issuable upon exercise or conversion of any convertible securities, if applicable, then exercisable or convertible by GSCP) to such Proposed Transferee on the same terms and conditions as GSCP (with respect to each Offeree Stockholder, its "Tag-Along Shares"). An election pursuant to the first sentence of this Section 2.4.2 shall constitute an irrevocable commitment by the Offeree Stockholder making such election to sell such Common Stock to the Proposed Transferee if the sale of Offer Shares to the Proposed Transferee occurs on the terms contemplated hereby. 2.4.3 Seller's Rights to Transfer. (a) Third Party Sale; Tag-Along Buyer. A sale to a Proposed Transferee pursuant to Section 2.4 shall only be consummated if the Proposed Transferee shall purchase, within 120 days of the date of the Sale Notice, concurrently with and on the same terms and conditions and at the same price as the Offer Shares, all of each Offeree Stockholder's Tag-Along Shares with respect to such sale, in accordance with their elections pursuant to Section 2.4.2 (the "Tag-Along Right"). (b) Sale Agreement. Each Offeree Stockholder electing to sell Tag-Along Shares (a "Tag-Along Seller") agrees to cooperate in consummating such a sale, including, without limitation, by becoming a party to the sales agreement and all other appropriate related agreements (other than any amendment to such Tag-Along Seller's Employment Agreement, if any), delivering at the consummation of such sale, stock certificates and other instruments for such Common Stock duly endorsed for transfer, free and clear of all liens and encumbrances, and voting or consenting in favor of such transaction (to the extent a vote or consent is required) and taking any other necessary or appropriate action in furtherance thereof, including the execution and delivery of any other appropriate agreements, certificates, instruments and other documents. The foregoing notwithstanding, in connection with such sale, a Tag-Along -10- 15 Seller, as such, shall not be required to make any representations and warranties with respect to the Company or the Company's business or with respect to any other seller. In addition, each Tag-Along Seller shall be severally responsible for its proportionate share of the expenses of sale incurred by the sellers in connection with such sale and the obligations and liabilities incurred by the sellers in connection with such sale. Such obligations and liabilities shall include (to the extent such obligations are incurred) obligations and liabilities for indemnification (including for (x) breaches of representations and warranties made in connection with such sale by the Company or any other seller with respect to the Company or the Company's business, (y) breaches of covenants and (z) other matters), and shall also include amounts paid into escrow or subject to holdbacks, and amounts subject to post-closing purchase price adjustments. The foregoing notwithstanding, (1) without the written consent of a Tag-Along Seller, the amount of such obligations and liabilities for which such Tag-Along Seller shall be responsible shall not exceed the gross proceeds received by such Tag-Along Seller in such sale and (2) a Tag-Along Seller shall not be responsible for the fraud of any other seller or for any indemnification obligations and liabilities for breaches of representations and warranties made by any other seller with respect to such other seller's (i) ownership of and title to shares of capital stock of the Company, (ii) organization, (iii) authority and (iv) conflicts and consents. (c) No Liability. Notwithstanding any other provision contained in this Section 2.4.3, there shall be no liability on the part of the Company or GSCP in the event that the sale pursuant to this Section 2.4.3 is not consummated for any reason whatsoever. The decision whether to effect a Transfer pursuant to this Section 2.4.3 shall be in the sole and absolute discretion of GSCP. 2.5 Drag-Along Right. 2.5.1 Exercise. If GSCP proposes to make a bona fide sale of all of its shares of Common Stock to a Proposed Transferee, pursuant to a stock sale, merger, business combination, recapitalization, consolidation, reorganization, restructuring or similar transaction, GSCP shall have the right (a "Drag-Along Right"), exercisable upon fifteen (15) days' prior written notice to the other Stockholders, to require the other Stockholders to sell all of their shares of Common Stock and, at the election of GSCP, Options (whether vested or unvested) to the Proposed Transferee on the same terms and conditions and at the same price (in the case of Options the purchase price of each Option shall be equal to the purchase price attributable -11- 16 to the number of shares of Common Stock issuable upon exercise of such Option less the exercise price thereof) as GSCP. 2.5.2 Sale Agreement. Each Stockholder selling shares of Common Stock pursuant to a transaction contemplated by this Section 2.5 (a "Drag-Along Seller") agrees to cooperate in consummating such a sale, including, without limitation, by becoming a party to the sales agreement and all other appropriate related agreements (other than any amendment to such Drag-Along Seller's Employment Agreement, if any), delivering at the consummation of such sale, stock certificates and other instruments for such shares of Common Stock duly endorsed for transfer, free and clear of all liens and encumbrances, and voting or consenting in favor of such transaction (to the extent a vote or consent is required) and taking any other necessary or appropriate action in furtherance thereof, including the execution and delivery of any other appropriate agreements, certificates, instruments and other documents. The foregoing notwithstanding, in connection with such sale, a Drag-Along Seller, as such, shall not be required to make any representations and warranties with respect to the Company or the Company's business or with respect to any other seller. In addition, each Drag-Along Seller shall be severally responsible for its proportionate share of the expenses of sale incurred by GSCP in connection with such sale and the obligations and liabilities incurred by the seller in connection with such sale. Such obligations and liabilities shall include (to the extent such obligations are incurred) obligations and liabilities for indemnification (including for (x) breaches of representations and warranties made in connection with such sale by the Company or any other seller with respect to the Company or the Company's business, (y) breaches of covenants and (z) other matters), and shall also include amounts paid into escrow or subject to holdbacks, and amounts subject to post-closing purchase price adjustments. The foregoing notwithstanding, (1) without the written consent of a Drag-Along Seller, the amount of such obligations and liabilities for which such Drag-Along Seller shall be responsible shall not exceed the gross proceeds received by such Drag-Along Seller in such sale and (2) a Drag-Along Seller shall not be responsible for the fraud of any other seller or any indemnification obligations and liabilities for breaches of representations and warranties made by any other seller with respect to such other seller's (i) ownership of and title to shares of capital stock of the Company, (ii) organization, (iii) authority and (iv) conflicts and consents. 2.5.3 No Liability. Notwithstanding any other provision contained in this Section 2.5, there shall be no liability on the part of the Company or GSCP in the event that the sale pursuant to this Section 2.5 is not consummated for any -12- 17 reason whatsoever. The decision whether to effect a Transfer pursuant to this Section 2.5 shall be in the sole and absolute discretion of GSCP. 2.6 Additional Provisions Relating to Restrictions on Transfers. 2.6.1 Legends. Each of the Stockholders hereby agrees that each outstanding certificate representing shares of Common Stock held or owned by such Stockholder or its Transferee, including any certificate representing shares of Common Stock acquired in accordance with the provisions of this Agreement or the Employment Agreements and any certificates representing shares of Common Stock issued upon exercise of the Options, in any case, subject to the provisions of this Agreement and issued prior to the date when the applicable restrictions are terminated pursuant to Section 2.6.3, shall bear endorsements reading substantially as follows: (a) The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended, or under the securities laws of any state and may not be transferred, sold or otherwise disposed of except while such a registration is in effect or pursuant to an exemption from registration under said Act and applicable state securities laws. (b) The securities represented by this certificate are subject to the terms and conditions set forth in a Stockholders' Agreement, dated as of December 19, 1997, copies of which may be obtained from the issuer or from the holder of this security. No transfer of such securities will be made on the books of the issuer unless accompanied by evidence of compliance with the terms of such agreement. Each outstanding certificate representing shares of Common Stock shall also bear any legend required by the terms of the Employment Agreements or the Stock Incentive Plan or as the Company may otherwise deem appropriate. 2.6.2 Copy of Agreement. A copy of this Agreement shall be filed with the corporate secretary of the Company and kept with the records of the Company and shall be made available for inspection by any stockholder of the Company at the principal executive offices of the Company. 2.6.3 Termination of Restrictions. The restriction referred to in the endorsement required pursuant to Section 2.6.1(a) shall cease and terminate as to any particular shares -13- 18 of Common Stock when, in the reasonable opinion of counsel for the Company, such restriction is no longer required in order to assure compliance with the Securities Act. The Company or the Company's counsel, at their election, may request from any Stockholder a certificate or an opinion of such Stockholder's counsel with respect to any relevant matters in connection with the removal of the endorsement set forth in Section 2.6.1(a) from such Stockholder's stock certificates, any such certificate or opinion of counsel to be reasonably satisfactory to the Company and its counsel. The restrictions referred to in Section 2.6.1(b) shall cease and terminate as to any particular shares of Common Stock when, in the reasonable opinion of counsel for the Company, the provisions of this Agreement are no longer applicable to such shares or this Agreement shall have terminated in accordance with its terms. Any other restrictions referred to in any other legends required pursuant to Section 2.6.1 shall cease and terminate when, in the reasonable opinion of counsel for the Company, such restrictions are no longer applicable. Whenever such restrictions shall cease and terminate as to any shares of Common Stock, the Stockholder holding such shares shall be entitled to receive from the Company, without expense (other than applicable transfer taxes, if any, if such unlegended shares are being delivered and transferred to any Person other than the registered holder thereof), new certificates for a like number of shares of Common Stock not bearing the relevant legend(s) set forth or referred to in Section 2.6.1. ARTICLE III REGISTRATION RIGHTS 3.1 Piggyback and Demand Registrations. (a) Piggyback Registrations. If at any time the Company proposes to register for sale by the Company under the Securities Act any of its equity securities (other than a registration on Form S-4 or Form S-8, or any successor or similar forms), or any shares of Common Stock held by GSCP pursuant to Section 3.1(b), in a manner that would permit registration of Registrable Securities for sale to the public under the Securities Act and in an underwritten offering, the Company will each such time promptly give written notice to all Stockholders who beneficially own any Registrable Securities of its intention to do so, of the registration form of the SEC that has been selected by the Company and of such holders' rights under this Section 3.1 (the "Piggyback Notice"). The Company will use its reasonable best efforts to include, and to cause the underwriter or underwriters to include, in the proposed offering, on -14- 19 the same terms and conditions as the securities of the Company included in such offering, all Registrable Securities that the Company has been requested in writing, within fifteen (15) calendar days after the Piggyback Notice is given, to register by the Stockholders thereof (each such registration pursuant to this Section 3.1(a), a "Piggyback Registration"); provided, however, that (i) if, at any time after giving a Piggyback Notice and prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine for any reason not to register such equity securities (or, in the case of a Demand Registration (as defined below), GSCP so determines), the Company may, at its election (or, in the case of a Demand Registration where GSCP so determines, the Company shall), give written notice of such determination to all Stockholders who beneficially own any Registrable Securities and, thereupon, shall be relieved of its obligation to register any Registrable Securities in connection with such abandoned registration, and (ii) in case of a determination by the Company to delay registration of its equity securities (or, in the case of a Demand Registration, GSCP so determines), the Company shall be permitted to (or, in the case of a Demand Registration where GSCP so determines, the Company shall) delay the registration of such Registrable Securities for the same period as the delay in registering such other equity securities (provided that clauses (i) and (ii) shall not relieve the Company of its obligations under Section 3.1(b)). In the case of any registration of Registrable Securities in an underwritten offering pursuant to this Section 3.1(a), all Stockholders proposing to distribute their securities pursuant to this Section 3.1(a) shall, at the request of the Company (or, in the case of a Demand Registration, GSCP), enter into an agreement in customary form with the underwriter or underwriters selected by the Company (or, in the case of a Demand Registration, selected by GSCP). Notwithstanding the foregoing, following an IPO, the Company shall not be obligated to effect registration of Registrable Securities for which Piggyback Registration is requested by a Management Investor if, at the time of such request, all such Registrable Securities are eligible for sale to the public by the requesting Management Investor without registration under Rule 144 under the Securities Act, with such sale not being limited by the volume restrictions thereunder. (b) Demand Registrations. The Company, upon the reasonable request of GSCP, shall, from time to time, use its reasonable best efforts to register under the Securities Act any reasonable portion of Registrable Securities held by GSCP (including, at the election of GSCP, in an underwritten offering) and bear all expenses in connection with such offering in a manner consistent with paragraph (c) below and shall enter into such other agreements in furtherance thereof (including -15- 20 with underwriters selected by GSCP, including, in any case, Affiliates of GSCP as lead underwriters, if requested by GSCP) (each such registration pursuant to this Section 3.1(b), a "Demand Registration"), and the Company shall provide customary indemnifications in such instances (in a manner consistent with the indemnification provisions of this Article III) to GSCP and any such underwriters; provided, however, that the Company shall not be obligated to effect more than four Demand Registrations. A registration shall not count as a Demand Registration unless and until the registration statement relating thereto has been declared effective by the SEC and not withdrawn. (c) Expenses. The Company shall pay all Registration Expenses in connection with each registration of Registrable Securities requested pursuant to this Section 3.1; provided, however, that each Stockholder shall pay all underwriting discounts and commissions and transfer taxes, if any, relating to the sale or disposition of such Stockholder's Registrable Securities pursuant to a registration statement effected pursuant to this Section 3.1. (d) Priority in Piggyback and Demand Registrations. If the managing underwriter for a registration pursuant to this Section 3.1 shall advise the Company in writing that, in its opinion, the number of securities requested to be included in such registration exceeds the number (the "Section 3.1 Sale Number") that can be sold in an orderly manner in such offering within a price range acceptable to the Company (or, in the case of a Demand Registration, to GSCP), the Company shall include in such offering (i) first, all the securities the Company proposes to register for its own sale, and (ii) second, to the extent that the securities the Company proposes to register are less than the Section 3.1 Sale Number, all Registrable Securities requested to be included by all Stockholders; provided, however, that if the number of such Registrable Securities exceeds (x) the Section 3.1 Sale Number less (y) the number of securities included pursuant to clause (i) hereof, then the number of such Registrable Securities included in such registration shall be allocated pro rata among all requesting Stockholders, on the basis of the relative number of shares of such Registrable Securities each such Stockholder then holds. If there is any reduction or exclusion of Registrable Securities pursuant to this Section 3.1(d) in connection with a Demand Registration, such registration shall not be deemed to be a Demand Registration for purposes of determining the maximum number of Demand Registrations the Company is obligated to effect pursuant to Section 3.1(b) hereof. -16- 21 (e) Underwriting Requirements. In connection with any offering involving any underwriting of securities in a Piggyback Registration, the Company shall not be required to include any Stockholder's Registrable Securities in such underwriting unless such Stockholder accepts the terms of the underwriting as agreed upon between the Company and the underwriters in such quantities and on such terms as set forth in Section 3.1(a) hereof, and such Management Investor agrees to sell such Management Investor's securities on the basis provided therein and completes and/or executes all questionnaires, indemnities, lock-ups, underwriting agreements and other documents (including powers of attorney and custody arrangements) required generally of all selling Stockholders, in each case in customary form and substance, which are requested to be executed in connection therewith. 3.2 Registration Procedures. If and whenever the Company is required to use its reasonable best efforts to effect or cause the registration of any Registrable Securities under the Securities Act as provided in this Article III, the Company will, as soon as practicable: (a) prepare and file with the SEC the requisite registration statement with respect to such Registrable Securities and use its reasonable best efforts to cause such registration statement to become and remain effective; (b) prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for such period as the Company shall deem appropriate and to comply with the provisions of the Securities Act with respect to the sale or other disposition of all securities covered by such registration statement during such period; (c) furnish to each seller of such Registrable Securities and each underwriter such number of copies of such registration statement and of each amendment and supplement thereto (in each case including all exhibits), such number of copies of the prospectus included in such registration statement (including each preliminary prospectus and summary prospectus), in conformity with the requirements of the Securities Act, and such other documents as such seller may reasonably request; -17- 22 (d) promptly notify each Stockholder that holds Registrable Securities covered by such registration statement, (i) when such registration statement or any post-effective amendment or supplement thereto becomes effective, (ii) of the issuance by the SEC or any state securities authority of any stop order, injunction or other order or requirement suspending the effectiveness of such registration statement (and take all reasonable action to prevent the entry of such stop order or to remove it if entered, or the initiation of any proceedings for that purpose), or (iii) of the happening of any event as a result of which the registration statement, as then in effect, the prospectus related thereto or any document included therein by reference includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made and promptly file such amendments and supplements which may be required on account of such event and use its reasonable best efforts to cause each such amendment and supplement to become effective; (e) promptly furnish counsel for each underwriter, if any, and for the selling Stockholders of Registrable Securities copies of any written request by the SEC or any state securities authority for amendments or supplements to a registration statement and prospectus or for additional information; (f) use reasonable best efforts to obtain the withdrawal of any order suspending the effectiveness of a registration statement at the earliest possible time; (g) use its best efforts to cause all such Registrable Securities covered by such registration statement to be listed on the principal securities exchange or authorized for quotation on Nasdaq on which similar equity securities issued by the Company are then listed or authorized for quotation, or eligible for listing or quotation, if the listing or authorization for quotation of such securities is then permitted under the rules of such exchange or the NASD; (h) enter into an underwriting agreement with the underwriter of such offering in the form customary for such underwriter for similar offerings, including such representations and warranties by the Company, provisions -18- 23 regarding the delivery of opinions of counsel for the Company and accountants' letters, provisions regarding indemnification and contribution, and such other terms and conditions as are at the time customarily contained in such underwriter's underwriting agreements for similar offerings (the sellers of Registrable Securities which are to be distributed by such underwriter(s) may, at their option, require that any or all of the representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of such underwriter(s) shall also be made to and for the benefit of such sellers of Registrable Securities); (i) make available for inspection by representatives of the selling Stockholders who hold Registrable Securities and any underwriters participating in any disposition pursuant hereto and any counsel or accountant retained by such Stockholders or underwriters, all relevant financial and other records, pertinent corporate documents and properties of the Company and cause the respective officers, directors and employees of the Company to supply all information reasonably requested by any such representative, underwriter, counsel or accountant in connection with a registration pursuant hereto; provided, however, that, with respect to records, documents or information which the Company determines, in good faith, to be confidential and as to which the Company notifies such representatives, underwriters, counsel or accountants in writing of such confidentiality, such representatives, underwriters, counsel or accountants shall not disclose such records, documents or information unless (i) the release of such records, documents or information is ordered pursuant to a subpoena or other order from a court of competent jurisdiction, (ii) such records, documents or information have previously been generally made available to the public, or (iii) the disclosure of such records, documents or information is necessary, in the written opinion of outside legal counsel, to avoid or correct a material misstatement or omission in the registration statement and then only after reasonable request has been made to the Company to make such disclosure and the Company has denied such request. Each selling Stockholder of such Registrable Securities agrees that information obtained by it as a result of such inspections shall be deemed confidential and shall not be used by it as the basis for any market transactions in the securities of the Company or its Affiliates (or for such Stockholder's business purposes or for any reason other than in connection with a registration hereunder) -19- 24 unless and until such information is made generally available (other than by such Stockholder or where such Stockholder knows that such information became publicly available as a result of a breach of any confidentiality arrangement) to the public. Each selling Stockholder of such Registrable Securities further agrees that it will, upon learning that disclosure of such records is sought, give notice to the Company and allow the Company, at its expense, to undertake appropriate action to prevent disclosure of the records deemed confidential; (j) permit any beneficial owner of Registrable Securities who, in the sole judgment, exercised in good faith, of such holder, might be deemed to be a controlling person of the Company, to participate in the preparation of such registration or comparable statement and to require the insertion therein of material, furnished to the Company in writing, that in the judgment of such holder, as aforesaid, should be included; and (k) make reasonably available its employees and personnel and otherwise provide reasonable assistance to the underwriters (taking into account the needs of the Company's businesses and the requirements of the marketing process) in the marketing of Registrable Securities in any underwritten offering. The Company may require each seller of Registrable Securities as to which any registration is being effected to furnish the Company such information regarding such seller and the distribution of such securities as the Company may from time to time reasonably request in writing. The Company shall not be required to register or qualify any Registrable Securities covered by such registration statement under any state securities, or "blue sky," laws of such jurisdictions other than as it deems necessary in connection with the chosen method of distribution or to take any other actions or do any other things other than those it deems necessary or advisable to consummate such distribution, and the Company shall not for any such purpose be required to qualify generally to do business as a foreign corporation in any jurisdiction wherein it would not otherwise be obligated to be so qualified, to subject itself to taxation in any such jurisdiction or to consent to general service of process in any such jurisdiction. Each beneficial owner of Registrable Securities agrees that upon receipt of any notice from the Company of the happening of any event of the kind described in subclauses (i) and (ii) of clause (d) of this Section 3.2, such beneficial owner will forthwith discontinue disposition of Registrable -20- 25 Securities pursuant to the registration statement covering such Registrable Securities until such beneficial owner's receipt of the copies of the supplemented or amended prospectus contemplated by clause (d) of this Section 3.2, and, if so directed by the Company, such beneficial owner will deliver to the Company (at the Company's expense) all copies, other than permanent file copies then in such beneficial owner's possession, of the prospectus covering such Registrable Securities that was in effect prior to such amendment or supplement. 3.3 Indemnification. (a) In the event of any registration of any Registrable Securities pursuant to this Article III, the Company will, and hereby does, indemnify and hold harmless, to the fullest extent permitted by law, the seller of any Registrable Securities covered by such registration statement, its directors, officers, fiduciaries, employees and stockholders or general and limited partners (and the directors, officers, fiduciaries, employees and stockholders or general and limited partners thereof), each other Person who participates as an underwriter or a qualified independent underwriter, if any, in the offering or sale of such securities, each director, officer, fiduciary, employee and stockholder or general and limited partner of such underwriter or qualified independent underwriter, and each other Person (including any such Person's directors, officers, fiduciaries, employees and stockholders or general and limited partners), if any, who controls such seller or any such underwriter or qualified independent underwriter, within the meaning of the Securities Act, against any and all Claims in respect thereof and expenses (including reasonable fees and expenses of counsel and any amounts paid in any settlement effected with the Company's consent, which consent shall not be unreasonably withheld or delayed) to which each such indemnified party may become subject under the Securities Act, the Exchange Act or otherwise, insofar as such Claims or expenses arise out of or are based upon any of the following actual or alleged statements, omissions or violations (each, a "Violation"): (i) any untrue statement or alleged untrue statement of a material fact contained in any registration statement under which such securities were registered pursuant to this Agreement under the Securities Act or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, (ii) any untrue statement or alleged untrue statement of a material fact contained in any preliminary, final or summary prospectus or any amendment or supplement thereto, together with the documents incorporated by reference therein, or the omission or alleged omission to state therein a material -21- 26 fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, or (iii) any violation by the Company of any federal, state or common law rule or regulation applicable to the Company and relating to action required of or inaction by the Company in connection with any such registration, and the Company will reimburse any such indemnified party for any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such Claim as such expenses are incurred; provided, that the Company shall not be liable to any such indemnified party in any such case to the extent such Claim or expense arises out of or is based upon any Violation which occurs in reliance upon and in conformity with written information furnished to the Company or its representatives by or on behalf of such indemnified party expressly stating that such information is for use therein. (b) Each holder of Registrable Securities that are included in the securities as to which any Demand Registration or Piggyback Registration is being effected (and, if the Company requires as a condition to including any Registrable Securities in any registration statement filed in connection with any Demand Registration or Piggyback Registration, any underwriter and qualified independent underwriter, if any) shall, severally and not jointly, indemnify and hold harmless (in the same manner and to the same extent as set forth in paragraph (a) of this Section 3.3), to the extent permitted by law, the Company, its directors, officers, fiduciaries, employees and stockholders (and the directors, officers, fiduciaries, employees and stockholders or general and limited partners thereof) and each Person (including any such Person's directors, officers, fiduciaries, employees and stockholders or general and limited partners), if any, controlling the Company within the meaning of the Securities Act and all other prospective sellers and their directors, officers, fiduciaries, employees and stockholders or general and limited partners and respective controlling Persons (including any such Person's directors, officers, fiduciaries, employees and stockholders or general and limited partners) against any and all Claims and expenses (including reasonable fees and expenses of counsel and any amounts paid in any settlement effected with the consent of the indemnifying party, which consent shall not be unreasonably withheld or delayed) to which each such indemnified party may become subject under the Securities Act, the Exchange Act or otherwise, insofar as such Claims or expenses arise out of or are based upon any Violation which occurs in reliance upon and in conformity with written information furnished to the Company or its representatives by or on behalf of such holder or underwriter or qualified independent underwriter, if any, expressly -22- 27 stating that such information is for use in connection with any registration statement, preliminary, final or summary prospectus or amendment or supplement or document incorporated by reference into any of the foregoing; provided, however, that the aggregate amount which any such holder, underwriter or qualified independent underwriter shall be required to pay pursuant to this Section 3.3(b) and Sections 3.3(c) and (e) shall be limited to (x) in the case of any such holder, the amount of the gross proceeds received by such holder upon the sale of the Registrable Securities pursuant to the registration statement giving rise to such claim and (y) in the case of any such underwriter or qualified independent underwriter, the amount of the total sales price of the Registrable Securities sold through or by it pursuant to the registration statement giving rise to such claim. (c) Indemnification similar to that specified in the preceding paragraphs (a) and (b) of this Section 3.3 (with appropriate modifications) shall be given by the Company and each seller of Registrable Securities (and, if the Company requires as a condition to including any Registrable Securities in any registration statement filed in connection with any Demand Registration or Piggyback Registration, any underwriter and qualified independent underwriter, if any) with respect to any required registration or other qualification of securities under any state securities and "blue sky" laws. (d) Any Person entitled to indemnification under this Agreement shall notify promptly the indemnifying party in writing of the commencement of any action or proceeding with respect to which a claim for indemnification may be made pursuant to this Section 3.3, but the failure of any indemnified party to provide such notice shall not relieve the indemnifying party of its obligations under the preceding paragraphs of this Section 3.3, except to the extent the indemnifying party is prejudiced thereby and shall not relieve the indemnifying party from any liability which it may have to any indemnified party otherwise than under this Section 3.3. In case any action or proceeding is brought against an indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, unless in the reasonable opinion of outside counsel to the indemnified party a conflict of interest between such indemnified and indemnifying parties may exist in respect of such claim, to assume the defense thereof jointly with any other indemnifying party similarly notified, to the extent that it chooses, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party that it so chooses, the indemnifying party shall not be liable to such indemnified party for any -23- 28 legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation; provided, however, that (i) if the indemnifying party fails to take reasonable steps necessary to defend diligently the action or proceeding within twenty (20) days after receiving notice from such indemnified party that the indemnified party believes it has failed to do so; or (ii) if such indemnified party who is a defendant in any action or proceeding which is also brought against the indemnifying party reasonably shall have concluded that there may be one or more legal defenses available to such indemnified party which are not available to the indemnifying party; or (iii) if representation of both parties by the same counsel is otherwise inappropriate under applicable standards of professional conduct, then, in any such case, the indemnified party shall have the right to assume or continue its own defense as set forth above (but with no more than one firm of counsel for all indemnified parties in each jurisdiction, except to the extent any indemnified party or parties reasonably shall have concluded that there may be legal defenses available to such party or parties which are not available to the other indemnified parties or to the extent representation of all indemnified parties by the same counsel is otherwise inappropriate under applicable standards of professional conduct) and the indemnifying party shall be liable for any expenses therefor. No indemnifying party shall, without the written consent of the indemnified party, which consent shall not be unreasonably withheld, effect the settlement or compromise of, or consent to the entry of any judgment with respect to, any pending or threatened action or claim in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified party is an actual or potential party to such action or claim) unless such settlement, compromise or judgment (A) includes an unconditional release of the indemnified party from all liability arising out of such action or claim and (B) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of any indemnified party. (e) If for any reason the foregoing indemnity is unavailable or is insufficient to hold harmless an indemnified party under Section 3.3(a), (b) or (c), then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of any Claim in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and the indemnified party on the other from the relevant offering of securities. If, however, the allocation provided in the immediately preceding sentence is not permitted by applicable law, or if the indemnified party failed to give the notice required by Section 3.3(d) above and -24- 29 the indemnifying party is prejudiced thereby, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative fault of but also the relative benefits received by the indemnifying party, on the one hand, and the indemnified party, on the other hand, as well as any other relevant equitable considerations. The relative fault shall be determined by reference to, among other things, whether the Violation relates to information supplied by the indemnifying party or the indemnified party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such Violation. The parties hereto agree that it would not be just and equitable if contributions pursuant to this Section 3.3(e) were to be determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the preceding sentences of this Section 3.3(e). The amount paid or payable in respect of any Claim shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such Claim. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. Notwithstanding anything in this Section 3.3(e) to the contrary, no indemnifying party (other than the Company) shall be required pursuant to this Section 3.3(e) to contribute any amount in excess of (x) in the case of an indemnifying party that is a holder of Registrable Securities, the gross proceeds received by such indemnifying party from the sale of Registrable Securities in the offering to which the losses, claims, damages or liabilities of the indemnified parties relate, or (y) in the case of an indemnifying party that is an underwriter or a qualified independent underwriter, the amount of the total sales price of the Registrable Securities sold through or by it in the offering to which the losses, claims, damages or liabilities of the indemnified parties relate, less, in any such case referred to in (x) and (y), the amount of all indemnification and contribution payments made pursuant to Sections 3.3(b) and (c) and this Section 3.3(e), as the case may be, in connection with such offering. (f) The indemnity agreements contained herein shall be in addition to any other rights to indemnification or contribution which any indemnified party may have pursuant to law or contract and shall remain operative and in full force and effect regardless of any investigation made or omitted by or on behalf of any indemnified party and shall survive the transfer of the Registrable Securities by any such party. -25- 30 (g) The indemnification and contribution required by this Section 3.3 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or expense, loss, damage or liability is incurred. (h) In connection with underwritten offerings, the Company will use reasonable best efforts to negotiate terms of indemnification that are reasonably favorable to the various sellers pursuant thereto, as appropriate under the circumstances. 3.4 Holdback Agreement. (a) If requested in writing by the Company or the underwriter, if any, of any offering affording Stockholders registration rights pursuant to Section 3.1 (whether or not some or all of such Stockholder's Registrable Securities are subject to a cutback pursuant to Section 3.1 of this Agreement), including without limitation an IPO, each Stockholder agrees not to effect any public sale or distribution, including any sale pursuant to Rule 144, of any Registrable Securities or any other equity security of the Company or of any security convertible into or exchangeable or exercisable for any equity security of the Company (in each case, other than as part of such underwritten public offering) within fourteen (14) days before or 180 days after the effective date of a registration statement affording Stockholders registration rights pursuant to Section 3.1 (including where subject to a cutback pursuant to Section 3.1(d)). (b) If requested in writing by the underwriter of any offering in connection with a Demand Registration, the Company agrees not to effect any public sale or distribution (other than public sales or distributions solely by and for the account of the Company of securities issued (x) pursuant to any employee or director benefit or similar plan or any dividend reinvestment plan or (y) in any acquisition by the Company) of any Registrable Securities or any other equity security of the Company or of any security convertible into or exchangeable or exercisable for any equity security of the Company (in each case, other than as part of such underwritten public offering), within fourteen (14) days before or 180 days after the effective date of a registration statement filed in connection with a Demand Registration, or for such shorter period as the sole or lead managing underwriter shall request, in any such case, unless consented to by such underwriter. -26- 31 ARTICLE IV MANAGEMENT INVESTORS' PUTS AND CALLS 4.1 Call Rights. If, prior to the consummation of an IPO, a Management Investor (other than the Estate or the Estate's Permitted Transferees) dies or the Management Investor's (other than the Estate or the Estate's Permitted Transferees) employment by the Company terminates for any reason (including due to a Disability, as defined in such Management Investor's Employment Agreement or any analogous provision of any employment, compensation or benefit agreement or arrangement, if any, and if not so defined, upon the good faith determination of the Board of Directors of the Company of such Disability), the Company shall have the right, at its election, to purchase all (but not less than all) of the Management Investor's shares of Common Stock (including any shares held by its Permitted Transferees) within six (6) months after such termination, or fifteen (15) months after such termination in the case of death of the Management Investor (with respect to any shares of Common Stock acquired after such termination or death upon the exercise of Options held by the Management Investor, such period to run from the date of exercise) at a price equal to the Fair Market Value of such Common Stock determined as of, in all cases other than the death of the Management Investor, the date such termination is effective and, in the case of the Management Investor's death, as of the date of death. The Company shall pay the purchase price in cash to the extent that (x) subsidiaries of the Company are permitted to dividend the funds for such purchase to the Company (a "Subsidiary Dividend") (under both applicable law and the indebtedness of the Company and its Affiliates) and (y) the Company is permitted to purchase such shares for cash (under both applicable law and such indebtedness). The Company shall fund any amount not permitted to be funded through a Subsidiary Dividend or to be used to purchase such shares with a Buy-Out Note. The Board of Directors of the Company may, in its discretion, assign the rights and obligations of the Company under this Section 4.1 to any other Person, but no such assignment shall relieve the Company of its obligations hereunder to the extent not satisfied by such assignee. 4.2 Put Rights. If, prior to the consummation of an IPO, a Management Investor (other than the Estate or the Estate's Permitted Transferee) dies or the Management Investor's (other than the Estate or the Estate's Permitted Transferee's) employment by the Company is terminated by the Company for any reason (including due to a Disability, as defined in such Management Investor's Employment Agreement or any analogous provision of any employment, compensation or benefit -27- 32 agreement or arrangement, if any, and if not so defined, upon the good faith determination of the Board of Directors of the Company of such Disability), the Management Investor or the Management Investor's legal representative or trustee, as the case may be, shall have the right, within three (3) months after such termination is effective (or one year after the date of death in the case of the Management Investor's death), to require the Company to purchase all (but not less than all) of the Management Investor's Common Stock (including any shares held by its Permitted Transferees) at a price equal to (A) in the case of termination by reason of death or Disability, the Fair Market Value thereof determined as of the date of death (in the case of termination due to death) or the date such other termination is effective and (B) in the case of termination by the Company for any other reason, the lower of (1) Fair Market Value and (2) the product of (x) the number of shares of Common Stock and (y) the New Cost Per Share (subject to adjustment to reflect any adjustments to the Common Stock made to reflect any merger, reorganization, consolidation, recapitalization, spinoff, stock dividend, stock split, extraordinary distribution with respect to the Common Stock or other change in corporate structure affecting the Common Stock, as the Company reasonably shall deem fair and appropriate). To the extent the funds for such purchase are permitted under the indebtedness of the Company and its Affiliates and applicable law to be funded through a Subsidiary Dividend and to be used to purchase such shares, the Company shall pay the purchase price in cash. The Company shall pay any amount not permitted to be funded through a Subsidiary Dividend or to be used to purchase such shares with a Buy-Out Note. The Board of Directors of the Company may, in its discretion, assign the rights and obligations of the Company under this Section 4.2 to any other Person, but no such assignment shall relieve the Company of its obligations hereunder to the extent not satisfied by such assignee. ARTICLE V MISCELLANEOUS 5.1 Effectiveness; Term. (a) This Agreement shall become effective (the "Effective Date") simultaneously with the closing of the transactions under the Merger Agreement and shall terminate without liability or penalty on the part of any party or its directors, officers, fiduciaries, employees and stockholders or general and limited partners (and the directors, officers, fiduciaries, employees and stockholders or general and limited partners thereof) to any other party or such -28- 33 other party's Affiliates upon the termination of the Merger Agreement pursuant to its terms. (b) Unless theretofore terminated pursuant to the preceding paragraph, the rights and obligations of, and restrictions on, the Stockholders under Article II of this Agreement shall terminate when GSCP and its Affiliates no longer hold in the aggregate at least 40% of the fully diluted shares of Common Stock then outstanding. Notwithstanding the foregoing, in the event the Company enters into any agreement to merge with or into any other Person or adopts any other plan of recapitalization, consolidation, reorganization or other restructuring transaction as a result of which the Stockholders and their respective Permitted Transferees (including GSCP and any Affiliates thereof) shall own less than a majority of the outstanding voting power of the entity surviving such transaction, this Agreement shall terminate. (c) Unless theretofore terminated pursuant to Section 5.1(a), and notwithstanding anything in Section 5.1(b) to the contrary, the provisions contained in Article III hereof shall continue to remain in full force and effect until the earlier to occur of the twentieth anniversary of the date hereof and the date on which there are no longer any Registrable Securities outstanding or issuable or thereafter available for or subject to issuance to any Stockholder upon exercise or conversion of any options, warrants, rights or other convertible securities; provided, however, that the provisions of Section 3.3 hereof shall survive termination pursuant to Section 5.1(b) or (c) of this Agreement. 5.2 No Voting or Conflicting Agreements. Prior to an IPO, no Management Investor shall grant any proxy or enter into or agree to be bound by any voting trust with respect to the Common Stock nor, at any time, shall any Management Investor enter into any stockholder agreements or arrangements of any kind with any Person with respect to the Common Stock inconsistent with the provisions of this Agreement (whether or not such agreements and arrangements are with other Management Investors or holders of Common Stock that are not parties to this Agreement). The foregoing prohibition includes, but is not limited to, agreements or arrangements with respect to the acquisition, disposition or voting of shares of Common Stock inconsistent with the provisions of this Agreement. No Management Investor shall act, at any time, for any reason, as a member of a group or in concert with any other Persons in connection with the acquisition, disposition or voting of shares of Common Stock in any manner which is inconsistent with the provisions of this Agreement. -29- 34 5.3 Approval of Stock Incentive Plan by Stockholders. The Stockholders by their execution of this Agreement, hereby approve the Stock Incentive Plan, a copy of which is attached hereto as Exhibit A. 5.4 Specific Performance. The parties hereto acknowledge that there would be no adequate remedy at law if any party fails to perform any of its obligations hereunder, and accordingly agree that each party, in addition to any other remedy to which it may be entitled at law or in equity, shall be entitled to compel specific performance of the obligations of any other party under this Agreement in accordance with the terms and conditions of this Agreement. Any remedy under this Section 5.4 is subject to certain equitable defenses and to the discretion of the court before which any proceedings therefor may be brought. 5.5 Notices. All notices, statements, instructions or other documents required to be given hereunder shall be in writing and shall be given either personally or by mailing the same in a sealed envelope, by overnight courier or by first-class mail, postage prepaid and either certified or registered, in either case, return receipt requested, or by telecopy, addressed to the Company at its principal offices and to the other parties at their addresses reflected on the signature pages hereto. Each party hereto, by written notice given to the other parties hereto in accordance with this Section 5.5, may change the address to which notices, statements, instructions or other documents are to be sent to such party. All notices, statements, instructions and other documents hereunder that are mailed or telecopied shall be deemed to have been given on the date of mailing or, in the case of telecopying, upon confirmation of receipt. 5.6 Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the parties, and their respective successors and assigns. If any Stockholder or any Affiliate thereof or any Transferee of any Stockholder shall acquire any shares of Common Stock in any manner, whether by operation of law or otherwise, such shares shall be held subject to all of the terms of this Agreement, and by taking and holding such shares such Person shall be conclusively deemed to have agreed to be bound by and to perform all of the terms and provisions of this Agreement. 5.7 Recapitalizations and Exchanges Affecting Common Stock. The provisions of this Agreement shall apply, to the full extent set forth herein with respect to Common Stock, to any and all shares of capital stock or equity securities of the -30- 35 Company or any successor or assign of the Company (whether by merger, consolidation, sale of assets or otherwise) which may be issued in respect of, in exchange for, or in substitution of, the Common Stock, or which may be issued by reason of any stock dividend, stock split, reverse stock split, combination, recapitalization, reclassification or otherwise. Upon the occurrence of any of such events, numbers of shares and amounts hereunder shall be appropriately adjusted, as determined in good faith by the Board of Directors of the Company. 5.8 Governing Law. This Agreement shall be governed and construed and enforced in accordance with the laws of the State of New York, without regard to the principles of conflicts of law thereof. 5.9 Descriptive Headings, Etc. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning of terms contained herein. Unless the context of this Agreement otherwise requires, references to "hereof," "herein," "hereby," "hereunder" and similar terms shall refer to this entire Agreement. 5.10 Amendment; Waiver; Bylaws. This Agreement may not be amended or supplemented except by an instrument in writing signed by the Company and by Stockholders holding a majority of the then outstanding shares of Common Stock held by all Stockholders; provided that any amendment, supplement or modification of this Agreement which adversely affects the rights and obligations of any Stockholder (an "Affected Holder") differently than those of any other Stockholder shall also require the approval of such Affected Holder; provided further, the foregoing proviso notwithstanding, any amendment, supplement or modification of this Agreement that adversely affects the Management Investors (or a group thereof) as a class may be approved by Management Investors (or members of such group, as the case may be) holding Common Stock or Options to purchase Common Stock, which together represent a majority of the sum of the total number of (x) the shares of such Common Stock and (y) the shares of Common Stock issuable upon exercise of such Options held by all the Management Investors (or such group, as the case may be). The foregoing notwithstanding, (i) the Company, without the consent of any other party hereto, may amend Schedule I and the signature pages hereto, in order to add any Management Investor or any other party that becomes a holder of Common Stock or securities convertible into or exercisable for Common Stock and (ii) GSCP and the Company may amend Article III of this Agreement (other than in a manner that would materially reduce the Management Investor's rights or materially increase the Management Investor's obligations with respect to -31- 36 Piggyback Registrations) without the agreement or consent of any Management Investor. 5.11 Severability. If any term or provision of this Agreement shall to any extent be invalid or unenforceable, the remainder of this Agreement shall not be affected thereby, and each term and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. Upon the determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties shall negotiate in good faith to modify this Agreement so as to effect their original intent as closely as possible in an acceptable manner to the end that transactions contemplated hereby are fulfilled to the extent possible. 5.12 Further Assurances. The parties hereto shall from time to time execute and deliver all such further documents and do all acts and things as the other party may reasonably require to effectively carry out or better evidence or perfect the full intent and meaning of this Agreement, including, to the extent necessary or appropriate, using all reasonable efforts to cause the amendment of the Amended Certificate or the By-Laws in order to provide for the enforcement of this Agreement in accordance with its terms. In furtherance and not in limitation of the foregoing, in the event of any amendment, modification or termination of this Agreement in accordance with its terms, the Stockholders shall cause the Board to meet within thirty (30) days following such amendment, modification or termination or as soon thereafter as is practicable for the purpose of amending the Amended Certificate and By-Laws, as may be required as a result of such amendment, modification or termination, and, to the extent required by law, proposing such amendments to the stockholders of the Company entitled to vote thereon, and such action shall be the first action to be taken at such meeting. 5.13 Complete Agreement; Counterparts. This Agreement (together with the Merger Agreement, the Voting Agreement, the Stock Incentive Plan, the Employment Agreements and the other agreements referred to herein and therein) constitutes the entire agreement and supersedes all other agreements and understandings, both written and oral, among the parties or any of them, with respect to the subject matter hereof. This Agreement may be executed by any one or more of the parties hereto in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same instrument. 5.14 Certain Transactions. The parties hereto agree that Goldman Sachs shall have the exclusive right to perform all -32- 37 consulting, financing, investment banking and similar services for the Company and its subsidiaries (including as lead underwriter or in any analogous role in connection with any public or private offering of securities or debt, and including in connection with the Merger), for customary compensation and on other terms that are customary for similar engagements with unaffiliated third parties, and neither the Company nor its subsidiaries shall engage any other Person to perform such services during the term of this Agreement except to the extent Goldman Sachs shall consent thereto or shall decline, at its sole election, to perform such services. 5.15 No Third Party Beneficiaries. The provisions of this Agreement shall be only for the benefit of the parties to this Agreement, and no other Person (other than Goldman Sachs with respect to Section 5.14) shall have any third party beneficiary or other right hereunder. -33- 38 IN WITNESS WHEREOF, the parties hereto have caused this instrument to be duly executed on the date first written above. AMSCAN HOLDINGS, INC. By: /s/ GERALD C. RITTENBERG ------------------------------------- Name: Gerald C. Rittenberg Title: Chief Executive Officer Address: 80 Grasslands Road Elmsford, New York 10523 Attn: Secretary Telecopier No.: (914) 345-2056 GS CAPITAL PARTNERS II, L.P. By: GS Advisors, L.P. General Partner By: GS Advisors Inc., its General Partner By: /s/ RICHARD A. FRIEDMAN ------------------------------------- Name: Richard A. Friedman Title: President Address: c/o Goldman, Sachs & Co. 85 Broad Street New York, NY 10004 Attn: David J. Greenwald Telecopier No.: (212) 357-5505 39 GS CAPITAL PARTNERS II OFFSHORE, L.P. By: GS Advisors II (Cayman), L.P. General Partner By: GS Advisors II, Inc., its General Partner By: /s/ RICHARD A. FRIEDMAN ------------------------------------- Name: Richard A. Friedman Title: President Address: c/o Goldman, Sachs & Co. 85 Broad Street New York, NY 10004 Attn: David J. Greenwald Telecopier No.: (212) 357-5505 GOLDMAN, SACHS & CO. VERWALTUNGS GMBH By: /s/ RICHARD A. FRIEDMAN ------------------------------------- Name: Richard A. Friedman Title: Managing Agent By: /s/ EVE GERRIETS ------------------------------------- Name: Eve Gerriets Title: Registered Agent Address: c/o Goldman, Sachs & Co. 85 Broad Street New York, NY 10004 Attn: David J. Greenwald Telecopier No.: (212) 357-5505 40 STONE STREET FUND 1997, L.P. By: Stone Street Asset Corp. General Partner By: /s/ RICHARD A. FRIEDMAN ------------------------------------- Name: Richard A. Friedman Title: Address: c/o Goldman, Sachs & Co. 85 Broad Street New York, NY 10004 Attn: David J. Greenwald Telecopier No.: (212) 357-5505 BRIDGE STREET FUND 1997, L.P. By: Stone Street Asset Corp. Managing General Partner By: /s/ RICHARD A. FRIEDMAN ------------------------------------- Name: Richard A. Friedman Title: Address: c/o Goldman, Sachs & Co. 85 Broad Street New York, NY 10004 Attn: David J. Greenwald Telecopier No.: (212) 357-5505 41 THE ESTATE OF JOHN A. SVENNINGSEN By: /s/ CHRISTINE SVENNINGSEN ------------------------------------ Name: Christine Svenningsen Title: Executrix Address: The following individuals, in their capacities as trustees or other fiduciaries (whether on the date hereof or at any point in the future) of any trust or similar instrument created by or at the instruction of, or under the last will and testament of, John A. Svenningsen or the Estate, acknowledge this Agreement and agree to be bound by the terms hereof in each such capacity, such agreement being for the benefit of each of the parties hereto, and such individuals further agree to cause any such trust or similar instrument upon its formation to become a party to this Agreement as a Permitted Transferee pursuant to Section 2.3.3 hereof (and as if a Management Investor hereunder) and in accordance herewith have agreed to and acknowledged this Agreement: By: /s/ LEE HARRISON CORBIN Dated: December 19, 1997 -------------------------- ----------------------- Name: Lee Harrison Corbin Title: Attorney-In-Fact for Trustee Address: 1 North Broadway White Plains, NY 10801 By: /s/ FANNY S. WARREN Dated: December 19, 1997 -------------------------- ----------------------- Name: Fanny S. Warren Title: Trustee Address: 1 North Broadway White Plains, NY 10801 42 /s/ GERALD C. RITTENBERG Dated: December 19, 1997 - -------------------------- ----------------------- Gerald C. Rittenberg Management Investor Address: 43 /s/ JAMES M. HARRISON Dated: December 19, 1997 - -------------------------- ----------------------- James M. Harrison Management Investor Address: 44 /s/ WILLIAM WILKEY Dated: December 19, 1997 - -------------------------- ----------------------- William Wilkey Management Investor Address: 45 /s/ DIANE D. SPAAR Dated: December 19, 1997 - -------------------------- ----------------------- Diane D. Spaar Management Investor Address: 46 /s/ KATHERINE A. KUSNIERZ Dated: December 19, 1997 - -------------------------- ----------------------- Katherine A. Kusnierz Management Investor Address: 47 /s/ WILLIAM MARK Dated: December 19, 1997 - -------------------------- ----------------------- William Mark Management Investor Address: 48 /s/ KAREN MCKENZIE Dated: December 19, 1997 - -------------------------- ----------------------- Karen McKenzie Management Investor Address: 49 /s/ HOWARD HARDING Dated: December 19, 1997 - -------------------------- ----------------------- Howard Harding Management Investor Address: 50 /s/ ROSE GIAGRANDE Dated: December 19, 1997 - -------------------------- ----------------------- Rose Giagrande Management Investor Address: 51 /s/ ERIC STOLLMAN Dated: December 19, 1997 - -------------------------- ----------------------- Eric Stollman Management Investor Address: 52 /s/ VINCENT ANASTASI Dated: December 19, 1997 - -------------------------- ----------------------- Vincent Anastasi Management Investor Address: 53 /s/ MARK IRVINE Dated: December 19, 1997 - -------------------------- ----------------------- Mark Irvine Management Investor Address: 54 /s/ CHERYL CONSIDINE Dated: December 19, 1997 - -------------------------- ----------------------- Cheryl Considine Management Investor Address: 55 /s/ ROBERT YEDOWITZ Dated: December 19, 1997 - -------------------------- ----------------------- Robert Yedowitz Management Investor Address: 56 /s/ ANGELO GIUMMARRA Dated: December 19, 1997 - -------------------------- ----------------------- Angelo Giummarra Management Investor Address: 57 /s/ KEITH JOHNSON Dated: December 19, 1997 - -------------------------- ----------------------- Keith Johnson Management Investor Address: 58 /s/ CHARLES PHILLIPS Dated: December 19, 1997 - -------------------------- ----------------------- Charles Phillips Management Investor Address: 59 /s/ KATHLEEN ROONEY Dated: December 19, 1997 - -------------------------- ----------------------- Kathleen Rooney Management Investor Address: 60 /s/ AOIFE QUINN Dated: December 19, 1997 - -------------------------- ----------------------- Aoife Quinn Management Investor Address: 61 /s/ SCOTT LAMETTO Dated: December 19, 1997 - -------------------------- ----------------------- Scott Lametto Management Investor Address: 62 /s/ PATRICK VENUTI Dated: December 19, 1997 - -------------------------- ----------------------- Patrick Venuti Management Investor Address: 63 /s/ NIGEL KEANE Dated: December 19, 1997 - -------------------------- ----------------------- Nigel Keane Management Investor Address: 64 /s/ MORTON FISHER Dated: December 19, 1997 - -------------------------- ----------------------- Morton Fisher Management Investor Address: 65 /s/ WALTER THOMPSON Dated: December 19, 1997 - -------------------------- ----------------------- Walter Thompson Management Investor Address: 66 /s/ SUSAN SCOTT Dated: December 19, 1997 - -------------------------- ----------------------- Susan Scott Management Investor Address: 67 /s/ RANDY HARRIS Dated: December 19, 1997 - -------------------------- ----------------------- Randy Harris Management Investor Address: 68 /s/ JAMES DOTTI Dated: December 19, 1997 - -------------------------- ----------------------- James Dotti Management Investor Address: 69 /s/ MICHAEL A. CORREALE Dated: December 19, 1997 - -------------------------- ----------------------- Michael A. Correale Management Investor Address: 70 /s/ JOSEPH WALTER Dated: December 19, 1997 - -------------------------- ----------------------- Joseph Walter Management Investor Address: 71 /s/ DALLAS HARTMAN Dated: December 19, 1997 - -------------------------- ----------------------- Dallas Hartman Management Investor Address: 72 /s/ CONNIE WECKMAN Dated: December 19, 1997 - -------------------------- ----------------------- Connie Weckman Management Investor Address: 73 /s/ KEN DANFORTH Dated: December 19, 1997 - -------------------------- ----------------------- Ken Danforth Management Investor Address: 74 EXHIBIT A [STOCK INCENTIVE PLAN] 75 AMSCAN HOLDINGS, INC. 1997 STOCK INCENTIVE PLAN SECTION 1. Purpose; Definitions The purpose of the Plan is to give Amscan Holdings, Inc. (the "Company") and its Affiliates (each as defined below) a competitive advantage in attracting, retaining and motivating officers, employees, consultants and directors, and to provide the Company and its subsidiaries with a stock plan providing incentives linked to the financial results of the Company's businesses and increases in shareholder value. For purposes of the Plan, the following terms are defined as set forth below: "Affiliate" of a Person means a Person directly or indirectly controlled by, controlling or under common control with such Person. "Award" means a Stock Appreciation Right, Stock Option or Restricted Stock. "Award Agreement" means a Restricted Stock Agreement or Option Agreement. An Award Agreement may consist of provisions of an employment agreement. "Board" means the Board of Directors of the Company. "Change in Control" shall mean (1) the acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) other than GSCP (as defined in the Stockholders' Agreement) and their Affiliates of a majority of the outstanding voting stock of the Company or (2) the sale of or other disposition (other than by way of merger or consolidation) of all or substantially all of the assets of the Company and its subsidiaries taken as a whole to any Person or group of Persons, other than to a Person (or group of Persons) a majority of the outstanding voting stock (or other voting interests) of which are beneficially owned by GSCP and their Affiliates. "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any successor thereto. "Committee" means (a) before an IPO, the Executive Committee of the Board, or such other committee of the Board as the Board may designate for such purpose under the Plan, and (b) 76 after an IPO, such committee of the Board as the Board may designate, which shall be composed of not less than two Non-Employee Directors, each of whom shall be appointed by and serve at the pleasure of the Board. "Common Stock" means the Common Stock, par value $0.10 per share, of the Company. "Company" means Amscan Holdings, Inc., a Delaware corporation. "Employment" means, unless otherwise defined in an applicable Restricted Stock Agreement, Option Agreement or Employment Agreement, employment with, or service as a director of or as a consultant to, the Company or any of its Affiliates. "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, and any successor thereto. "Fair Market Value" of the Common Stock means, as of any given date, the mean between the highest and lowest reported sales prices of the Common Stock on the New York Stock Exchange or, if not listed on such exchange, on any other national securities exchange on which the Common Stock is listed or, if not so listed, on the Nasdaq National Market. If such sales prices are not so available, the Fair Market Value of the Common Stock shall be determined by the Committee in good faith. "IPO" means the consummation of a registered underwritten public offering or offerings of Common Stock with gross proceeds to the Company in the aggregate of at least $50 million. "Incentive Stock Option" means any Stock Option designated as, and qualified as, an "incentive stock option" within the meaning of Section 422 of the Code. "Nasdaq" means The Nasdaq Stock Market, Inc. "Non-Employee Director" means a member of the Board who qualifies as a Non-Employee Director as defined in Rule 16b--3(b)(3), as promulgated by the SEC under the Exchange Act, or any successor definition adopted by the SEC. "Nonqualified Stock Option" means any Stock Option that is not an Incentive Stock Option. "Option Agreement" means an agreement setting forth the terms and conditions of an Award of Stock Options and, if applicable, Stock Appreciation Rights. 2 77 "Participant" has the meaning set forth in Section 4. "Person" means an individual, corporation, partnership, limited liability company, joint venture, trust, unincorporated organization, government (or any department or agency thereof) or other entity. "Plan" means the Amscan Holdings, Inc. 1997 Stock Incentive Plan, as set forth herein and as hereinafter amended from time to time. "Plan Shares" has the meaning set forth in Section 12(b). "Restricted Stock" means an Award granted under Section 7. "Restricted Stock Agreement" means an agreement setting forth the terms and conditions of an Award of Restricted Stock. "Rule 13d-3" means Rule 13d-3, as promulgated by the SEC under the Exchange Act, as amended from time to time. "SEC" means the Securities and Exchange Commission or any successor agency. "Securities Act" means the Securities Act of 1933, as amended from time to time, and any successor thereto. "Stock Appreciation Right" means a right granted under Section 6. "Stock Option" means an option granted under Section 5. "Stockholders' Agreement" has the meaning as set forth in Section 12(a). In addition, certain other terms used herein have definitions otherwise ascribed to them herein. SECTION 2. Administration The Plan shall be administered by the Committee, or, if no Committee has been designated or appointed, by the Board (in which case all references herein to the Committee shall include the Board). Among other things, the Committee shall have the authority, subject to the terms of the Plan, to: 3 78 (a) select the Participants to whom Awards may from time to time be granted; (b) determine whether and to what extent Incentive Stock Options, Nonqualified Stock Options, Stock Appreciation Rights and Restricted Stock or any combination thereof are to be granted hereunder; (c) determine the number of shares of Common Stock to be covered by each Award granted hereunder; (d) determine the terms and conditions of any Award granted hereunder (including, but not limited to, the option price, any vesting conditions, restrictions or limitations (which may be related to the performance of the Participant, the Company or any of its Affiliates)) and any acceleration of vesting or waiver of forfeiture regarding any Award and the shares of Common Stock relating thereto, based on such factors as the Committee shall determine; (e) modify, amend or adjust the terms and conditions of any Award, at any time or from time to time; (f) determine to what extent and under what circumstances Common Stock and other amounts payable with respect to an Award shall be deferred; (g) determine under what circumstances an Award may be settled in cash or Common Stock under Section 5(g); (h) adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan as it shall from time to time deem advisable; (i) interpret the terms and provisions of the Plan and any Award issued under the Plan (and any agreement relating thereto); and (j) otherwise supervise the administration of the Plan. The Committee may act only by a majority of its members then in office, except that the members thereof may authorize any one or more of their number or any officer of the Company to execute and deliver documents on behalf of the Committee. Any dispute or disagreement which may arise under, or as a result of, or in any way relate to, the interpretation, construction or application of the Plan or an Award (or related Award Agreement) granted hereunder shall be determined by the Committee. Any determination made by the Committee pursuant to 4 79 the provisions of the Plan with respect to the Plan, any Award or Award Agreement shall be made in the sole discretion of the Committee and, with respect to an Award, at the time of the grant of the Award or, unless in contravention of any express term of the Plan, at any time thereafter. All decisions made by the Committee shall be final and binding on all persons, including the Company and the Participants. SECTION 3. Common Stock Subject to Plan The total number of shares of Common Stock reserved and available for grant under the Plan shall be 120. Shares subject to an Award under the Plan may be authorized and unissued shares or may be treasury shares. If any shares of Restricted Stock are forfeited or if any Stock Option (and related Stock Appreciation Right, if any) terminates without being exercised, or if any Stock Appreciation Right is exercised for cash, the shares subject to such Awards shall again be available for distribution in connection with Awards under the Plan. In the event of any merger, reorganization, consolidation, recapitalization, spinoff, stock dividend, stock split, reverse stock split, extraordinary distribution with respect to the Common Stock or other change in corporate structure affecting the Common Stock, the Committee or the Board may make such substitution or adjustment in the aggregate number and kind of shares or other property reserved for issuance under the Plan, in the number, kind and Exercise Price (as defined herein) of shares or other property subject to outstanding Stock Options and Stock Appreciation Rights, in the number and kind of shares or other property subject to Restricted Stock Awards, and/or such other equitable substitution or adjustments as it may determine to be fair and appropriate in its sole discretion. Any such adjusted Exercise Price shall also be used to determine the amount payable by the Company upon the exercise of any Stock Appreciation Right associated with any Stock Option. SECTION 4. Participants Officers, employees, consultants and non-employee directors of the Company and its Affiliates who are responsible for or contribute to the management, growth and profitability of the business of the Company and its Affiliates shall be "Participants" eligible to be granted Awards under the Plan. 5 80 SECTION 5. Stock Options The Committee shall have the authority to grant any Participant Incentive Stock Options, Nonqualified Stock Options or both types of Stock Options (in each case with or without Stock Appreciation Rights). Incentive Stock Options may be granted only to employees of the Company and its subsidiaries (within the meaning of Section 424(f) of the Code). To the extent that any Stock Option is not designated as an Incentive Stock Option or even if so designated does not qualify as an Incentive Stock Option, it shall constitute a Nonqualified Stock Option. Stock Options shall be evidenced by Option Agreements, which shall include such terms and provisions as the Committee may determine from time to time. An Option Agreement shall expressly indicate whether it is intended to be an agreement for an Incentive Stock Option or a Nonqualified Stock Option. The grant of a Stock Option shall occur on the date the Committee by resolution selects an individual to be a Participant in any grant of a Stock Option, determines the number of shares of Common Stock to be subject to such Stock Option to be granted to such individual and specifies the terms and provisions of the Stock Option, or on such other date as the Committee may determine. The Company shall notify a Participant of any grant of a Stock Option, and a written Option Agreement shall be duly executed and delivered by the Company to the Participant. Subject to Section 12(a), such agreement shall become effective upon execution by the Company and the Participant. Anything in the Plan to the contrary notwithstanding, no term of the Plan relating to Incentive Stock Options shall be interpreted, amended or altered, nor shall any discretion or authority granted under the Plan be exercised, so as to disqualify the Plan under Section 422 of the Code or, without the consent of the Participant affected, to disqualify any Incentive Stock Option under such Section 422. Stock Options shall be subject to the following terms and conditions and shall contain such additional terms and conditions as the Committee shall deem desirable: (a) Exercise Price. The price per share of Common Stock purchasable under a Stock Option shall be determined by the Committee and set forth in the Option Agreement (the "Exercise Price"). (b) Option Term. The term of each Stock Option shall be fixed by the Committee. Absent any such term being fixed by the Committee, pursuant to an Option Agreement or otherwise, such term shall be ten years. 6 81 (c) Exercisability. Except as otherwise provided herein, Stock Options shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Committee. If the Committee provides that any Stock Option is exercisable only in installments, the Committee may at any time waive such installment exercise provisions, in whole or in part, based on such factors as the Committee may determine. In addition, the Committee may at any time accelerate the exercisability of any Stock Option. (d) Method of Exercise. Subject to the provisions of this Section 5, vested Stock Options may be exercised, in whole or in part, at any time during the option term by giving written notice of exercise to the Company specifying the number of shares of Common Stock subject to the Stock Option to be purchased. Such notice shall be accompanied by payment in full of the purchase price by certified or bank check or such other instrument as the Company may accept. If approved by the Committee, payment, in full or in part, may also be made in the form of unrestricted Common Stock already owned by the Participant of the same class as the Common Stock subject to the Stock Option (based on the Fair Market Value of the Common Stock on the date the Stock Option is exercised); provided, however, that, in the case of an Incentive Stock Option the right to make a payment in the form of already owned shares of Common Stock of the same class as the Common Stock subject to the Stock Option may be authorized only at the time the Stock Option is granted. In the discretion of the Committee, after an IPO, payment for any shares subject to a Stock Option may also be made by delivering a properly executed exercise notice to the Company, together with a copy of irrevocable instructions to a broker to deliver promptly to the Company the amount of sale or loan proceeds to pay the purchase price, and, if requested by the Company, the amount of any federal, state, local or foreign withholding taxes. To facilitate the foregoing, the Company may enter into agreements for coordinated procedures with one or more brokerage firms. In addition, in the discretion of the Committee, payment for any shares subject to a Stock Option may also be made by instructing the Committee to withhold a number of such shares having a Fair Market Value on the date of exercise equal to the aggregate exercise price of such Stock Option. No shares of Common Stock shall be issued until full payment therefor has been made. Except as otherwise provided in 7 82 the Stockholders' Agreement or the applicable Option Agreement, subject to a Participant's compliance with Section 12(a) hereof, a Participant shall have all of the rights of a stockholder of the Company holding the class or series of Common Stock that is subject to such Stock Option (including, if applicable, the right to vote the shares and the right to receive dividends and distributions), when the Participant has given written notice of exercise, has paid in full for such shares and, if requested, has given the representations referred to in Section 12(c). (e) Nontransferability of Stock Options. No Stock Option shall be transferable by the Participant other than (i) by will or by the laws of descent and distribution or (ii) in the case of a Nonqualified Stock Option, as otherwise expressly permitted under the applicable Option Agreement including, if so permitted, pursuant to a qualified domestic relations order (as defined in the Code) or pursuant to a gift to such Participant's spouse, children, grandchildren or other living descendants, whether directly or indirectly or by means of a trust, partnership, limited liability company or otherwise. All Stock Options shall be exercisable, subject to the terms of this Plan, during the Participant's lifetime, only by the Participant or any person to whom such Stock Option is transferred pursuant to the preceding sentence, including such Participant's guardian, legal representative and other transferee. The term "Participant" includes the estate of the Participant or the legal representative of the Participant named in the Option Agreement and any person to whom an Option is otherwise transferred in accordance with this Section 5(e), by will or the laws of descent and distribution; provided, however, that references herein to Employment of a Participant or termination of Employment of a Participant shall continue to refer to the Employment or termination of Employment of the applicable grantee of an Award hereunder. (f) Termination of Employment. Except as otherwise provided by the Committee or in the applicable Option Agreement, upon the Participant's death or when the Participant's Employment is terminated for any reason, the Participant: a. shall forfeit all Stock Options that have not previously vested; b. shall have three months to exercise the Participant's vested Stock Options that are vested on the date of the Participant's termination of Employment if such termination is for any reason other than the Participant's death; and 8 83 c. shall have one year to exercise the Participant's vested Stock Options that are vested on the date of death if the Participant's termination of Employment is due to the Participant's death. Any vested Stock Options not exercised within the permissible period of time shall be forfeited by the Participant. Notwithstanding any of the foregoing, the Participant shall not be permitted to exercise any Stock Option at a time beyond the initial option term. (g) Cashing Out of Stock Option. On receipt of written notice of exercise, the Committee may elect to cash out all or any portion of the shares of Common Stock for which a Stock Option is being exercised by paying the Participant an amount, in cash or Common Stock, equal to the excess of the Fair Market Value of one share of Common Stock over the Exercise Price per share times the number of shares of Common Stock for which the Option is being exercised on the effective date of such cashout. SECTION 6. Stock Appreciation Rights (a) Grant and Exercise. Stock Appreciation Rights may be granted in conjunction with all or part of any Stock Option granted under the Plan. In the case of a Nonqualified Stock Option, such rights may be granted either at or after the time of grant of such Stock Option. In the case of an Incentive Stock Option, such rights may be granted only at the time of grant of such Stock Option. A Stock Appreciation Right shall terminate and no longer be exercisable upon the termination or exercise of the related Stock Option. In either case, the terms and conditions of a Stock Appreciation Right shall be set forth in the Option Agreement for the related Stock Option or an amendment thereto. A Stock Appreciation Right may be exercised by a Participant in accordance with Section 6(b) by surrendering the applicable portion of the related Stock Option in accordance with procedures established by the Committee. Upon such exercise and surrender, the Participant shall be entitled to receive an amount determined in the manner prescribed in Section 6(b). Stock Options which have been so surrendered shall no longer be exercisable to the extent the related Stock Appreciation Rights have been exercised. 9 84 (b) Terms and Conditions. Stock Appreciation Rights shall be subject to such terms and conditions as shall be determined by the Committee, including the following: (i) Stock Appreciation Rights shall be exercisable only at such time or times and to the extent that the Stock Options to which they relate are exercisable in accordance with the provisions of Section 5 and this Section 6; (ii) upon the exercise of a Stock Appreciation Right, a Participant shall be entitled to receive an amount equal to the product of (a) the excess of the Fair Market Value of one share of Common Stock over the Exercise Price per share specified in the related Stock Option times (b) the number of shares in respect of which the Stock Appreciation Right shall have been exercised, in cash, shares of Common Stock or both, with the Committee having the right to determine the form of payment; (iii) Stock Appreciation Rights shall be transferable only with the related Stock Option in accordance with Section 5(e); and (iv) upon the exercise of a Stock Appreciation Right (other than an exercise for cash), the Stock Option or part thereof to which such Stock Appreciation Right is related shall be deemed to have been exercised for the purpose of the limitation set forth in Section 3 on the number of shares of Common Stock to be issued under the Plan, but only to the extent of the number of shares covered by the Stock Appreciation Right at the time of exercise. SECTION 7. Restricted Stock The Committee shall determine the Participants to whom and the time or times at which grants of Restricted Stock will be awarded, the number of shares to be awarded to any Participant, the conditions for vesting, the time or times within which such Awards may be subject to forfeiture and restrictions on transfer and any other terms and conditions of the Awards (including provisions (i) relating to placing legends on certificates representing shares of Restricted Stock, (ii) permitting the Company to require that shares of Restricted Stock be held in custody by the Company with a stock power from the owner thereof until restrictions lapse and (iii) relating to any rights to purchase the Restricted Stock on the part of the Company and 10 85 its Affiliates), in addition to those contained in the Stockholders' Agreement. The terms and conditions of Restricted Stock Awards shall be set forth in a Restricted Stock Agreement, which shall include such terms and provisions as the Committee may determine from time to time. Except as provided in this Section 7, the Restricted Stock Agreement, the Stockholders' Agreement and any other relevant agreements, the Participant shall have, with respect to the shares of Restricted Stock, all of the rights of a stockholder of the Company holding the class or series of Common Stock that is the subject of the Restricted Stock Award, including, if applicable, the right to vote the shares and, subject to the following sentence, the right to receive any cash dividends or distributions (but, subject to the third paragraph of Section 3, not the right to receive non-cash dividends or distributions). If so determined by the Committee in the applicable Restricted Stock Agreement, cash dividends and distributions on the class or series of Common Stock that is the subject of the Restricted Stock Award shall be automatically deferred and reinvested in additional Restricted Stock, held subject to the vesting of the underlying Restricted Stock, or held subject to meeting conditions applicable only to dividends and distributions. SECTION 8. Tax Offset Bonuses At the time an Award is made hereunder or at any time thereafter, the Committee may grant to the Participant receiving such Award the right to receive a cash payment in an amount specified by the Committee, to be paid at such time or times (if ever) as the Award results in compensation income to the Participant, for the purpose of assisting the Participant to pay the resulting taxes, all as determined by the Committee, and on such other terms and conditions as the Committee shall determine. SECTION 9. Change in Control Provisions Notwithstanding any other provision of the Plan to the contrary, unless otherwise provided in the applicable Award Agreement or the Stockholders' Agreement, in the event of a Change in Control: (a) immediately prior to the occurrence of a Change in Control, all Stock Options and Stock Appreciation Rights outstanding as of such date, and which are not then exercisable and vested, shall become fully exercisable and vested to the full extent of the original grant; and 11 86 (b) the restrictions and deferral limitations applicable to any Restricted Stock (and any dividends or distributions in respect of Restricted Stock) shall lapse, and such Restricted Stock (and any dividends or distributions in respect of Restricted Stock) shall become free of all restrictions, fully vested and transferable to the full extent of the not theretofore forfeited portion of the original grant. SECTION 10. Term, Amendment and Termination The Plan will terminate ten years after the effective date of the Plan. Awards outstanding as of such date shall not be affected or impaired by the termination of the Plan. The Board may amend, alter, or discontinue the Plan, prospectively or retroactively, but no amendment, alteration or discontinuation shall be made which would impair the rights of any Participant under an Award theretofore granted without the Participant's consent. The Committee may amend the terms of any Award theretofore granted, prospectively or retroactively, but no such amendment shall be made which would impair the rights of any Participant thereunder without the Participant's consent. SECTION 11. Unfunded Status of Plan It is presently intended that the Plan constitute an "unfunded" plan for incentive and deferred compensation. The Committee may authorize the creation of trusts or other arrangements to meet the obligations created under the Plan to deliver Common Stock or make payments; provided, however, that unless the Committee otherwise determines, the existence of such trusts or other arrangements is consistent with the "unfunded" status of the Plan. SECTION 12. General Provisions (a) Stockholders' Agreement. Notwithstanding anything in this Plan to the contrary, unless the Committee determines otherwise, it shall be a condition to receiving any Award under the Plan or transferring any Option in accordance with Section 5(e) or any other transfer permitted under the terms of an Award Agreement or otherwise, that a Participant (or transferee in the case of such transfer) shall become a party to the Stockholders' Agreement, dated as of December 19, 1997, 12 87 among the Company and certain stockholders of the Company, as amended from time to time (the "Stockholders' Agreement"), and such Participant (or transferee in the case of such transfer) shall become a "Management Investor" thereunder (or such transferee shall become a "Permitted Transferee" of a "Management Investor" thereunder). (b) Awards and Certificates. Shares of Restricted Stock and shares of Common Stock issuable upon the exercise of a Stock Option or Stock Appreciation Right (together, "Plan Shares") shall be evidenced in such manner as the Committee may deem appropriate, including book-entry registration or issuance of one or more stock certificates. Any certificate issued in respect of Plan Shares shall be registered in the name of such Participant and shall bear appropriate legends referring to the terms, conditions, and restrictions applicable to such Award, substantially in the following form: "The transferability of this certificate and the shares of stock represented hereby are subject to the terms, conditions and restrictions (including forfeiture) of the Amscan Holdings, Inc. 1997 Stock Incentive Plan and a Restricted Stock Agreement and/or an Option Agreement, as the case may be, between the issuer and the registered holder hereof. Copies of such Plan and Agreement are on file at the offices of Amscan Holdings, Inc., 80 Grasslands Road, Elmsford, New York 10523." "The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended, or under the securities laws of any state, and may not be sold or otherwise disposed of except pursuant to an effective registration statement under said Act and applicable state securities laws or an applicable exemption to the registration requirements of such Act and laws." Such shares may bear other legends to the extent the Committee or the Board determines it to be necessary or appropriate, including any required by the Stockholders' Agreement or pursuant to any applicable Restricted Stock Agreement or Option Agreement. If and when all restrictions expire without a prior forfeiture of the Plan Shares theretofore subject to such restrictions, new certificates for such shares shall be delivered to the Participant without the first legend listed above. 13 88 The Committee may require that any certificates evidencing Plan Shares be held in custody by the Company until the restrictions thereon shall have lapsed and that the Participant deliver a stock power, endorsed in blank, relating to the Plan Shares. (c) Representations and Warranties. The Committee may require each person purchasing or receiving Plan Shares to (i) represent to and agree with the Company in writing that such person is acquiring the shares without a view to the distribution thereof and (ii) make any other representations and warranties that the Committee deems appropriate. (d) Additional Compensation. Nothing contained in the Plan shall prevent the Company or any of its Affiliates from adopting other or additional compensation arrangements for its employees. (e) No Right of Employment. Adoption of the Plan or grant of any Award shall not confer upon any employee any right to continued Employment, nor shall it interfere in any way with the right of the Company or any of its Affiliate thereof to terminate the Employment of any employee at any time. (f) Withholding Taxes. No later than the date as of which an amount first becomes includible in the gross income of a Participant for federal income tax purposes with respect to any Award under the Plan, such Participant shall pay to the Company or, if appropriate, any of its Affiliates, or make arrangements satisfactory to the Committee regarding the payment of, any federal, state, local or foreign taxes of any kind required by law to be withheld with respect to such amount. If approved by the Committee, withholding obligations may be settled with Common Stock, including Common Stock that is part of the Award that gives rise to the withholding requirement. The obligations of the Company under the Plan shall be conditional on such payment or arrangements, and the Company and its Affiliates shall, to the extent permitted by law, have the right to deduct any such taxes from any payment otherwise due to the Participant. The Committee may establish such procedures as it deems appropriate, including making irrevocable elections, for the settlement of withholding obligations with Common Stock. (g) Beneficiaries. The Committee shall establish such procedures as it deems appropriate for a Participant to designate a beneficiary to whom any amounts payable in the event of the Participant's death are to be paid or by whom any rights of the Participant, after the Participant's death, may be exercised. 14 89 (h) Pooling of Interests. Notwithstanding any other provision of this Plan, if any right (or the exercise of such right) granted pursuant to this Plan would make a Change in Control transaction ineligible for pooling-of-interests accounting under APB No. 16 that but for the nature of such grant or grants would otherwise be eligible for such accounting treatment, the Committee shall have the ability to substitute for the cash payable pursuant to such grant or grants Common Stock with a Fair Market Value equal to the cash that would otherwise be payable hereunder, or make any other appropriate adjustment. (i) Governing Law. The Plan and all Awards made and actions taken thereunder shall be governed by and construed and enforced in accordance with the laws of the State of New York without regard to the principles of conflicts of law thereof. (j) Compliance with Laws. If any law or any regulation of any commission or agency having jurisdiction shall require the Company or a Participant seeking to exercise Stock Options or Stock Appreciation Rights to take any action with respect to the Plan Shares to be issued upon the exercise of Stock Options or Stock Appreciation Rights then the date upon which the Company shall issue or cause to be issued the certificate or certificates for the Plan Shares shall be postponed until full compliance has been made with all such requirements of law or regulation; provided, that the Company shall use its reasonable efforts to take all necessary action to comply with such requirements of law or regulation. Moreover, in the event that the Company shall determine that, in compliance with the Securities Act or other applicable statutes or regulations, it is necessary to register any of the Plan Shares with respect to which an exercise of a Stock Option or Stock Appreciation Right has been made, or to qualify any such Plan Shares for exemption from any of the requirements of the Securities Act or any other applicable statute or regulation, no Stock Options or Stock Appreciation Rights may be exercised and no Plan Shares shall be issued to the exercising Participant until the required action has been completed; provided, that the Company shall use its reasonable efforts to take all necessary action to comply with such requirements of law or regulation. Notwithstanding anything to the contrary contained herein, neither the Board nor the members of the Committee owes a fiduciary duty to any Participant in his or her capacity as such. 15 90 SECTION 13. Effective Date of Plan The Plan shall be effective as of the date it is approved by the holders of a majority of the outstanding shares of Common Stock, which approval is evidenced by Section 5.3 under the Stockholders' Agreement. 16 91 Schedule I Management Investors Options ------- Gerald C. Rittenberg 16.648 James M. Harrison 16.268 William S. Wilkey 16.441 Diane D. Spaar 11.827 Katherine A. Kusnierz 11.577 Morton Fisher 2.383 William Mark 1.280 Angelo Giummarra 2.477 Karen McKenzie 1.477 Keith Johnson 1.280 Howard Harding 1.280 Walter Thompson 1.144 Charles Phillips 0.478 Susan Scott 1.144 Rose Giagrande 1.238 Randy Harris 0.718 Eric Stollman 1.238 Kathleen Rooney 1.238 James Dotti 1.238 Vincent Anastasi 0.794 Michael A. Correale 2.570 Mark Irvine 0.555 Scott Lametto 0.999 Joseph Walter 0.555 Cheryl Considine 0.999 Patrick Venuti 0.555 Dallas Hartman 0.555 Robert Yedowitz 0.555 Nigel Keane 0.555 Connie Weckman 0.555 Ken Danforth 0.555 EX-12.1 5 STATEMENT RE COMPUTATION OF RATIOS 1 Exhibit 12.1 AMSCAN HOLDINGS, INC. RATIO OF EARNINGS TO FIXED CHARGES (IN THOUSANDS, EXCEPT RATIO DATA)
YEARS ENDED DECEMBER 31, -------------------------------------------------------- TRANSACTION PRO FORMA 1992 1993 1994 1995 1996 1996 ------- ------- ------- ------- ------- ----------- Earnings: Income before taxes and minority interests $ 7,784 $ 9,104 $10,591 $19,206 $ 5,732 $ 8,449 Add: Fixed charges 2,556 3,358 4,719 6,874 8,735 25,090 ------- ------- ------- ------- ------- ------- Earnings, as adjusted $10,340 $12,462 $15,310 $26,080 $14,467 $33,539 ======= ======= ======= ======= ======= ======= Computation of fixed charges: Interest expense $ 2,135 $ 2,711 $ 3,971 $ 6,025 $ 6,968 $23,323 Interest portion of rent expense 421 647 748 849 1,767 1,767 ------- ------- ------- ------- ------- ------- Total fixed charges $ 2,556 $ 3,358 $ 4,719 $ 6,874 $ 8,735 $25,090 ======= ======= ======= ======= ======= ======= Ratio of earnings to fixed charges 4.0x 3.7x 3.2x 3.8x 1.7x 1.3x
TWELVE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------------- ------------- TRANSACTION TRANSACTION PRO FORMA PRO FORMA 1996 1997 1997 1997 ------- ------- ----------- ----------- Earnings: Income before taxes and minority interests $20,104 $28,677 $14,335 $12,161 Add: Fixed charges 6,013 4,296 18,534 25,345 ------- ------- ------- ------- Earnings, as adjusted $26,117 $32,973 $32,869 $37,506 ======= ======= ======= ======= Computation of fixed charges: Interest expense $ 4,827 $ 2,799 $17,037 $23,267 Interest portion of rent expense 1,186 1,497 1,497 2,078 ------- ------- ------- ------- Total fixed charges $ 6,013 $ 4,296 $18,534 $25,345 ======= ======= ======= ======= Ratio of earnings to fixed charges 4.3x 7.7x 1.8x 1.5x
EX-99.1 6 LETTER OF TRANSMITTAL 1 LETTER OF TRANSMITTAL AMSCAN HOLDINGS, INC. OFFER TO EXCHANGE 9 7/8% SENIOR SUBORDINATED NOTES DUE 2007 FOR ALL OF ITS OUTSTANDING 9 7/8% SENIOR SUBORDINATED NOTES DUE 2007 THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON MARCH , 1998, UNLESS THE OFFER IS EXTENDED TO: IBJ SCHRODER BANK & TRUST COMPANY (THE "EXCHANGE AGENT") By Registered or Certified Mail: By Overnight Courier or By Hand: IBJ Schroder Bank & Trust Company IBJ Schroder Bank & Trust Company P.O. Box 84 One State Street Bowling Green Station New York, NY 10004 New York, New York 10274-0084 Attention: Securities Processing Window Attention: Reorganization Operations Department Subcellar One (SC-1)
By Facsimile: (212) 858-2611 Confirm by Telephone: (212) 858-2103 Delivery of this instrument to an address other than as set forth above or transmission of instructions via a facsimile number other than the ones listed above will not constitute a valid delivery. The instructions accompanying this Letter of Transmittal should be read carefully before this Letter of Transmittal is completed. The undersigned hereby acknowledges receipt of the Prospectus dated February , 1998 (the "Prospectus") of Amscan Holdings, Inc. (the "Company") and this Letter of Transmittal, which together constitute the Company's offer (the "Exchange Offer") to exchange $1,000 principal amount of its 9 7/8% Senior Subordinated Notes due 2007 (the "Exchange Notes"), which have been registered under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to a Registration Statement of which the Prospectus is a part, for each $1,000 principal amount of its outstanding 9 7/8% Senior Subordinated Notes due 2007 (the "Notes"), respectively. The term "Expiration Date" shall mean 5:00 p.m., New York City time, on March , 1998, unless the Company, in its reasonable judgment, extends the Exchange Offer, in which case the term shall mean the latest date and time to which the Exchange Offer is extended. Capitalized terms used but not defined herein have the meaning given to them in the Prospectus. YOUR BANK OR BROKER CAN ASSIST YOU IN COMPLETING THIS FORM. THE INSTRUCTIONS INCLUDED WITH THIS LETTER OF TRANSMITTAL MUST BE FOLLOWED. QUESTIONS AND REQUESTS FOR ASSISTANCE OR FOR ADDITIONAL COPIES OF THE PROSPECTUS AND THIS LETTER OF TRANSMITTAL MAY BE DIRECTED TO THE EXCHANGE AGENT. List below the notes to which this Letter of Transmittal relates. If the space indicated below is inadequate, the Certificate or Registration Numbers and Principal Amounts should be listed on a separately signed schedule affixed hereto. - -------------------------------------------------------------------------------- DESCRIPTION OF NOTES TENDERED HEREBY - ------------------------------------------------------------------------------------------------------------------------------ AGGREGATE PRINCIPAL CERTIFICATE OR AMOUNT PRINCIPAL NAME(S) AND ADDRESS(ES) OF REGISTERED OWNER(S) REGISTRATION REPRESENTED AMOUNT (PLEASE FILL IN) NUMBERS* BY NOTES TENDERED** ------------------------------------------------------------------------------------------------------------------------------ --------------------------------------------------------------- --------------------------------------------------------------- --------------------------------------------------------------- Total ------------------------------------------------------------------------------------------------------------------------------
* Need not be completed by Book-entry Holders. ** Unless otherwise indicated, the Holder will be deemed to have tendered the full aggregate principal amount represented by such Notes. All tenders must be in integral multiples of $1,000. - -------------------------------------------------------------------------------- 2 This Letter of Transmittal is to be used (i) if certificates of Notes are to be forwarded herewith, (ii) if delivery of Notes is to be made by book-entry transfer to an account maintained by the Exchange Agent at The Depository Trust Company (the "Depository") pursuant to the procedures set forth in "The Exchange Offer -- Procedures for Tendering Notes" in the Prospectus or (iii) tender of the Notes is to be made according to the guaranteed delivery procedures described in the Prospectus under the caption "The Exchange Offer -- Guaranteed Delivery Procedures." See Instruction 2. Delivery of documents to a book-entry transfer facility does not constitute delivery to the Exchange Agent. The term "Holder" with respect to the Exchange Offer means any person in whose name Notes are registered on the books of the Company or any other person who has obtained a properly completed bond power from the registered holder. The undersigned has completed, executed and delivered this Letter of Transmittal to indicate the action the undersigned desires to take with respect to the Exchange Offer. Holders who wish to tender their Notes must complete this letter in its entirety. [ ] CHECK HERE IF TENDERED NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER MADE TO AN ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE DEPOSITORY AND COMPLETE THE FOLLOWING: Name of Tendering Institution ------------------------------------------------------ Account Number ------------------------------------------------------ Transaction Code Number ------------------------------------------------------ Holders whose Notes are not immediately available or who cannot deliver their Notes and all other documents required hereby to the Exchange Agent on or prior to the Expiration Date must tender their Notes according to the guaranteed delivery procedure set forth in the Prospectus under the caption "The Exchange Offer -- Guaranteed Delivery Procedures." See Instruction 2. [ ] CHECK HERE IF TENDERED NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY AND COMPLETE THE FOLLOWING: Name of Registered Holder(s) ----------------------------------------------------- Name of Eligible Institution that Guaranteed Delivery ------------------------------------------------------ IF DELIVERY BY BOOK-ENTRY TRANSFER: Account Number ------------------------------------------------------ Transaction Code Number ------------------------------------------------------ [ ] CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO. Name ------------------------------------------------------ Address ------------------------------------------------------ PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY 2 3 Ladies and Gentlemen: Upon the terms and subject to the conditions of the Exchange Offer, the undersigned hereby tenders to the Company the principal amount of the Notes indicated above. Subject to, and effective upon, the acceptance for exchange of such Notes tendered hereby, the undersigned hereby exchanges, assigns and transfers to, or upon the order of, the Company all right, title and interest in and to such Notes as are being tendered hereby, including all rights to accrued and unpaid interest thereon as of the Expiration Date. The undersigned hereby irrevocably constitutes and appoints the Exchange Agent the true and lawful agent and attorney-in-fact of the undersigned (with full knowledge that said Exchange Agent acts as the agent of the Company in connection with the Exchange Offer) to cause the Notes to be assigned, transferred and exchanged. The undersigned represents and warrants that it has full power and authority to tender, exchange, assign and transfer the Notes and to acquire Exchange Notes issuable upon the exchange of such tendered Notes, and that when the same are accepted for exchange, the Company will acquire good and unencumbered title to the tendered Notes, free and clear of all liens, restrictions, charges and encumbrances and not subject to any adverse claim. The undersigned represents to the Company that (i) the Exchange Notes acquired pursuant to the Exchange Offer are being obtained in the ordinary course of business of the person receiving such Exchange Notes, whether or not such person is the undersigned, and (ii) neither the undersigned nor any such other person is engaged or intends to engage in, or has an arrangement or understanding with any person to participate in, the distribution of such Exchange Notes. If the undersigned or the person receiving the Exchange Notes covered hereby is a broker-dealer that is receiving the Exchange Notes for its own account in exchange for Notes that were acquired as a result of market-making activities or other trading activities, the undersigned acknowledges that it or such other person will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of such Exchange Notes; however, by so acknowledging and by delivering a prospectus, the undersigned will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. The undersigned and any such other person acknowledge that, if they are participating in the Exchange Offer for the purpose of distributing the Exchange Notes, (i) they cannot rely on the position of the staff of the Securities and Exchange Commission enunciated in Exxon Capital Holdings Corporation (available April 13, 1989), Morgan Stanley & Co., Inc. (available June 5, 1991) or similar no-action letters and, in the absence of an exemption therefrom, must comply with the registration and prospectus delivery requirements of the Securities Act in connection with the resale of the Exchange Notes and (ii) failure to comply with such requirements in such instance could result in the undersigned or any such other person incurring liability under the Securities Act for which such persons are not indemnified by the Company. If the undersigned or the person receiving the Exchange Notes covered by this letter is an affiliate (as defined under Rule 405 of the Securities Act) of the Company, the undersigned represents to the Company that the undersigned understands and acknowledges that such Exchange Notes may not be offered for resale, resold or otherwise transferred by the undersigned or such other person without registration under the Securities Act or an exemption therefrom. The undersigned also warrants that it will, upon request, execute and deliver any additional documents deemed by the Exchange Agent or the Company to be necessary or desirable to complete the exchange, assignment and transfer of tendered Notes or transfer ownership of such Notes on the account books maintained by a book-entry transfer facility. The undersigned further agrees that acceptance of any tendered Notes by the Company and the issuance of Exchange Notes in exchange therefor shall constitute performance in full by the Company of its obligations under the Registration Rights Agreement and that the Company shall have no further obligations or liabilities thereunder for the registration of the Notes or the Exchange Notes. The Exchange Offer is subject to certain conditions set forth in the Prospectus under the caption "The Exchange Offer -- Conditions." The undersigned recognizes that as a result of these conditions (which may be waived, in whole or in part, by the Company), as more particularly set forth in the Prospectus, the Company may not be required to exchange any of the Notes tendered hereby and, in such event, the Notes not exchanged will be returned to the undersigned at the address shown below the signature of the undersigned. All authority herein conferred or agreed to be conferred shall survive the death or incapacity of the undersigned and every obligation of the undersigned hereunder shall be binding upon the heirs, personal representatives, successors and assigns of the undersigned. Tendered Notes may be withdrawn at any time prior to the Expiration Date. 3 4 Unless otherwise indicated in the box entitled "Special Registration Instructions" or the box entitled "Special Delivery Instructions" in this Letter of Transmittal, certificates for all Exchange Notes delivered in exchange for tendered Notes, and any Notes delivered herewith but not exchanged, will be registered in the name of the undersigned and shall be delivered to the undersigned at the address shown below the signature of the undersigned. If an Exchange Note is to be issued to a person other than the person(s) signing this Letter of Transmittal, or if the Exchange Note is to be mailed to someone other than the person(s) signing this Letter of Transmittal or to the person(s) signing this Letter of Transmittal at an address different than the address shown on this Letter of Transmittal, the appropriate boxes of this Letter of Transmittal should be completed. If Notes are surrendered by Holder(s) that have completed either the box entitled "Special Registration Instructions" or the box entitled "Special Delivery Instructions" in this Letter of Transmittal, signature(s) on this Letter of Transmittal must be guaranteed by an Eligible Institution (defined in Instruction 2). SPECIAL REGISTRATION INSTRUCTIONS To be completed ONLY if the Exchange Notes are to be issued in the name of someone other than the undersigned. Name: --------------------------------------------------- Address: ------------------------------------------------- ------------------------------------------------------------ Book-Entry Transfer Facility Account: ------------------------------------------------------------ Employer Identification or Social Security Number: ------------------------------------------------------------ (Please print or type) SPECIAL DELIVERY INSTRUCTIONS To be completed ONLY if the Exchange Notes are to be sent to someone other than the undersigned, or to the undersigned at an address other than that shown under "Description of Notes Tendered Hereby." Name: --------------------------------------------------- Address: ------------------------------------------------- ------------------------------------------------------------ Employer Identification or Social Security Number: ------------------------------------------------------------ (Please print or type) 4 5 REGISTERED HOLDER(S) OF NOTES SIGN HERE (IN ADDITION, COMPLETE SUBSTITUTE FORM W-9 BELOW) X - -------------------------------------------------------------------------------- X - -------------------------------------------------------------------------------- Must be signed by registered holder(s) exactly as name(s) appear(s) on the Notes or on a security position listing as the owner or the Notes or by person(s) authorized to become registered holder(s) by properly completed bond powers transmitted herewith. If signature is by attorney-in-fact, trustee, executor, administrator, guardian, officer of a corporation or other person acting in a fiduciary capacity, please provide the following information. (Please print or type): --------------------------------------------------- Name and Capacity (full title) --------------------------------------------------- --------------------------------------------------- --------------------------------------------------- Address (including zip code) --------------------------------------------------- (Area Code and Telephone Number) --------------------------------------------------- (Taxpayer Identification or Social Security No.) Dated: ------------------------------------ , 19 -- SIGNATURE GUARANTEE (IF REQUIRED -- SEE INSTRUCTION 4) --------------------------------------------------- (Signature of Representative of Signature Guarantor) --------------------------------------------------- (Name and Title) --------------------------------------------------- (Name of Firm) --------------------------------------------------- (Area Code and Telephone Number) Dated: - ------------------------------------ , 19 - -- 5 6 INSTRUCTIONS FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER 1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND CERTIFICATES. All physically delivered Notes or confirmation of any book-entry transfer to the Exchange Agent's account at a book-entry transfer facility of Notes tendered by book-entry transfer, as well as a properly completed and duly executed copy of this Letter of Transmittal or facsimile thereof, and any other documents required by this Letter of Transmittal, must be received by the Exchange Agent at its address set forth herein on or prior to the Expiration Date (as defined in the Prospectus). The method of delivery of this Letter of Transmittal, the Notes and any other required documents is at the election and risk of the Holder, and except as otherwise provided below, the delivery will be deemed made only when actually received by the Exchange Agent. If such delivery is by mail, it is suggested that registered mail with return receipt requested, properly insured, be used. No alternative, conditional, irregular or contingent tenders will be accepted. All tendering Holders, by execution of this Letter of Transmittal (or facsimile thereof), shall waive any right to receive notice of the acceptance of the Notes for exchange. Delivery to an address other than as set forth herein, or instructions via a facsimile number other than the ones set forth herein, will not constitute a valid delivery. 2. GUARANTEED DELIVERY PROCEDURES. Holders who wish to tender their Notes, but whose Notes are not immediately available and thus cannot deliver their Notes, the Letter of Transmittal or any other required documents to the Exchange Agent (or comply with the procedures for book-entry transfer) prior to the Expiration Date, may effect a tender if: (a) the tender is made through a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., a commercial bank or trust company having an office or correspondent in the United States or an "eligible guarantor institution" within the meaning of Rule 17Ad-15 under the Exchange Act (an "Eligible Institution"); (b) 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, the registration number(s) of such Notes and the principal amount of Notes tendered, stating that the tender is being made thereby and guaranteeing that, within three New York Stock Exchange trading days after the Expiration Date, the Letter of Transmittal (or facsimile thereof), together with the Notes (or a confirmation of book-entry transfer of such Notes into the Exchange Agent's account at the Depository) and any other documents required by the Letter of Transmittal, will be deposited by the Eligible Institution with the Exchange Agent; and (c) such properly completed and executed Letter of Transmittal (or facsimile thereof), as well as all tendered Notes in proper form for transfer (or a confirmation of book-entry transfer of such Notes into the Exchange Agent's account at the Depository) and all other documents required by the Letter of Transmittal, are received by the Exchange Agent within three New York Stock Exchange trading days after the Expiration Date. Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be sent to Holders who wish to tender their Notes according to the guaranteed delivery procedures set forth above. Any Holder who wishes to tender Notes pursuant to the guaranteed delivery procedures described above must ensure that the Exchange Agent receives the Notice of Guaranteed Delivery relating to such Notes prior to the Expiration Date. Failure to comply with the guaranteed delivery procedures outlined above will not, of itself, affect the validity or effect a revocation of any Letter of Transmittal form properly completed and executed by a Holder who attempted to use the guaranteed delivery procedures. 3. PARTIAL TENDERS; WITHDRAWALS. If less than the entire principal amount of Notes evidenced by a submitted certificate is tendered, the tendering Holder should fill in the principal amount tendered in the column entitled "Principal Amount Tendered" of the box entitled "Description of Notes Tendered Hereby." A newly 6 7 issued Note for the principal amount of Notes submitted but not tendered will be sent to such Holder as soon as practicable after the Expiration Date. All Notes delivered to the Exchange Agent will be deemed to have been tendered in full unless otherwise indicated. Notes tendered pursuant to the Exchange Offer may be withdrawn at any time prior to the Expiration Date, after which tenders of Notes are irrevocable. To be effective, a written, telegraphic or facsimile transmission notice of withdrawal must be timely received by the Exchange Agent. Any such notice of withdrawal must (i) specify the name of the person having deposited the Notes to be withdrawn (the "Depositor"), (ii) identify the Notes to be withdrawn (including the registration number(s) and principal amount of such Notes, or, in the case of Notes transferred by book-entry transfer, the name and number of the account at the Depository to be credited), (iii) be signed by the Holder in the same manner as the original signature on this Letter of Transmittal (including any required signature guarantees) or be accompanied by documents of transfer sufficient to have the Trustee with respect to the Notes register the transfer of such Notes into the name of the person withdrawing the tender and (iv) specify the name in which any such notes are to be registered, if different from that of the Depositor. All questions as to the validity, form and eligibility (including time of receipt) of such notices will be determined by the Company, whose determination shall be final and binding on all parties. Any Notes so withdrawn will be deemed not to have been validly tendered for purposes of the Exchange Offer and no Exchange Notes will be issued with respect thereto unless the Notes so withdrawn are validly retendered. Any Notes which have been tendered but which are not accepted for exchange, will be returned to the Holder thereof without cost to such Holder as soon as practicable after withdrawal, rejection of tender or termination of Exchange Offer. 4. SIGNATURE ON THIS LETTER OF TRANSMITTAL; WRITTEN INSTRUMENTS AND ENDORSEMENTS; GUARANTEE OF SIGNATURES. If this Letter of Transmittal is signed by the registered Holder(s) of the Notes tendered hereby, the signature must correspond with the name(s) as written on the face of the certificates without alteration or enlargement or any change whatsoever. If this Letter of Transmittal is signed by a participant in the Depository, the signature must correspond with the name as it appears on the security position listing as the owner of the Notes. If any of the Notes tendered hereby are owned of record by two or more joint owners, all such owners must sign this Letter of Transmittal. If a number of Notes registered in different names are tendered, it will be necessary to complete, sign and submit as many separate copies of this Letter of Transmittal as there are different registrations of Notes. Signatures of this Letter of Transmittal or a notice of withdrawal, as the case may be, must be guaranteed by an Eligible Institution unless the Notes tendered hereby are tendered (i) by a registered Holder who has not completed the box entitled "Special Registration Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or (ii) for the account of an Eligible Institution. If this Letter of Transmittal is signed by the registered Holder or Holders of Notes (which term, for the purposes described herein, shall include a participant in the Depository whose name appears on a security listing as the owner of the Notes) listed and tendered hereby, no endorsements of the tendered Notes or separate written instruments of transfer or exchange are required. In any other case, the registered Holder (or acting Holder) must either properly endorse the Notes or transmit properly completed bond powers with this Letter of Transmittal (in either case, executed exactly as the name(s) of the registered Holder(s) appear(s) on the Notes, and, with respect to a participant in the Depository whose name appears on a security position listing as the owner of Notes, exactly as the name of the participant appears on such security position listing), with the signature on the Notes or bond power guaranteed by an Eligible Institution (except where the Notes are tendered for the account of an Eligible Institution). If this Letter of Transmittal, any certificates or separate written instruments of transfer or exchange 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, proper evidence satisfactory to the Company of their authority so to act must be submitted. 7 8 5. SPECIAL REGISTRATION AND DELIVERY INSTRUCTIONS. Tendering Holders should indicate, in the applicable box, the name and address (or account at the Depository) in which the Exchange Notes or substitute Notes for principal amounts not tendered or not accepted for exchange are to be issued (or deposited), if different from the names and addresses or accounts of the person signing this Letter of Transmittal. In the case of issuance in a different name, the employer identification number or social security number of the person named must also be indicated and the tendering Holder should complete the applicable box. If no instructions are given, the Exchange Notes (and any Notes not tendered or not accepted) will be issued in the name of and sent to the acting Holder of the Notes or deposited at such Holder's account at the Depository. 6. TRANSFER TAXES. The Company shall pay all transfer taxes, if any, applicable to the transfer and exchange of Notes to it or its order pursuant to the Exchange Offer. If a transfer tax is imposed for any other reason other than the transfer and exchange of Notes to the Company or its order pursuant to the Exchange Offer, the amount of any such transfer taxes (whether imposed on the registered Holder or any other person) will be payable by the tendering Holder. If satisfactory evidence of payment of such taxes or exception therefrom is not submitted herewith, the amount of such transfer taxes will be collected from the tendering Holder by the Exchange Agent. Except as provided in this Instruction 6, it will not be necessary for transfer stamps to be affixed to the Notes listed in this Letter of Transmittal. 7. WAIVER OF CONDITIONS. The Company reserves the right, in its reasonable judgment, to waive, in whole or in part, any of the conditions to the Exchange Offer set forth in the Prospectus. 8. MUTILATED, LOST, STOLEN OR DESTROYED NOTES. Any Holder whose Notes have been mutilated, lost, stolen or destroyed should contact the Exchange Agent at the address indicated above for further instructions. 9. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions relating to the procedure for tendering as well as requests for additional copies of the Prospectus and this Letter of Transmittal, may be directed to the Exchange Agent at the address and telephone number(s) set forth above. In addition, all questions relating to the Exchange Offer, as well as requests for assistance or additional copies of the Prospectus and this Letter of Transmittal, may be directed to Amscan Holdings, Inc., 80 Grasslands Road, Elmsford, New York 10523, Attention: Corporate Secretary; telephone (914) 345-2020. 10. VALIDITY AND FORM. All questions as to the validity, form, eligibility (including time of receipt), acceptance of tendered Notes and withdrawal of tendered Notes will be determined by the Company in its sole discretion, which determination will be final and binding. The Company reserves the absolute right to reject any and all Notes not properly tendered or any Notes the Company's acceptance of which would, in the opinion of counsel for the Company, be unlawful. The Company also reserves the right, in its reasonable judgment, to waive any defects, irregularities or conditions of tender as to particular Notes. The Company's interpretation of the terms and conditions of the Exchange Offer (including the instructions in this Letter of Transmittal) will be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of Notes must be cured within such time as the Company shall determine. Although the Company intends to notify Holders of defects or irregularities with respect to tenders of Notes, neither the Company, the Exchange Agent nor any other person shall incur any liability for failure to give such notification. Tenders of Notes will not be deemed to have been made until such defects or irregularities have been cured or waived. Any Notes received by the Exchange Agent that are not properly tendered and as to which the defects or irregularities have not been cured or waived will be returned by the Exchange Agent to the tendering Holder as soon as practicable following the Expiration Date. IMPORTANT TAX INFORMATION Under federal income tax law, a Holder tendering Notes is required to provide the Exchange Agent with such Holder's correct TIN on Substitute Form W-9 above. If such Holder is an individual, the TIN is the Holder's social security number. The Certificate of Awaiting Taxpayer Identification Number should be completed if the 8 9 tendering Holder has not been issued a TIN and has applied for a number or intends to apply for a number in the near future. If the Exchange Agent is not provided with the correct TIN, the Holder may be subject to a $50 penalty imposed by the Internal Revenue Service. In addition, payments that are made to such Holder with respect to tendered Notes may be subject to backup withholding. Certain Holders (including, among others, all domestic corporations and certain foreign individuals and foreign entities) are not subject to these backup withholding and reporting requirements. Such a Holder, who satisfies one or more of the conditions set forth in Part 2 of the Substitute Form W-9 should execute the certification following such Part 2. In order for a foreign Holder to qualify as an exempt recipient, that Holder must submit to the Exchange Agent a properly completed Internal Revenue Service Form W-8, signed under penalties of perjury, attesting to that Holder's exempt status. Such forms can be obtained from the Exchange Agent. If backup withholding applies, the Exchange Agent is required to withhold 31% of any amounts otherwise payable to the Holder. Backup withholding is not an additional tax. Rather, the tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund may be obtained from the Internal Revenue Service. PURPOSE OF SUBSTITUTE FORM W-9. To prevent backup withholding on payments that are made to a Holder with respect to Notes tendered for exchange, the Holder is required to notify the Exchange Agent of his or her correct TIN by completing the form herein certifying that the TIN provided on Substitute Form W-9 is correct (or that such Holder is awaiting a TIN) and that (i) such Holder is exempt, (ii) such Holder has not been notified by the Internal Revenue Service that he or she is subject to backup withholding as a result of failure to report all interest or dividends or (iii) the Internal Revenue Service has notified such Holder that he or she is no longer subject to backup withholding. WHAT NUMBER TO GIVE THE EXCHANGE AGENT. Each Holder is required to give the Exchange Agent the social security number or employer identification number of the record Holder(s) of the Notes. If Notes are in more than one name or are not in the name of the actual Holder, consult the instructions on Internal Revenue Service Form W-9, which may be obtained from the Exchange Agent, for additional guidance on which number to report. CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER. If the tendering Holder has not been issued a TIN and has applied for a number or intends to apply for a number in the near future, write "Applied For" in the space for the TIN or Substitute Form W-9, sign and date the form and the Certificate of Awaiting Taxpayer Identification Number and return them to the Exchange Agent. If such certificate is completed and the Exchange Agent is not provided with the TIN within 60 days, the Exchange Agent will withhold 31% of all payments made thereafter until a TIN is provided to the Exchange Agent. IMPORTANT: This Letter of Transmittal or a facsimile thereof (together with Notes or confirmation of book-entry transfer and all other required documents) or a Notice of Guaranteed Delivery must be received by the Exchange Agent on or prior to the Expiration Date. 9 10 PAYOR'S NAME: IBJ SCHRODER BANK & TRUST COMPANY, AS EXCHANGE AGENT - -------------------------------------------------------------------------------------------------------- SUBSTITUTE PART 1 -- PLEASE PROVIDE YOUR TIN IN -------------------------------- FORM W-9 THE BOX AT THE RIGHT AND CERTIFY BY Social Security Number DEPARTMENT OF THE TREASURY SIGNING AND DATING BELOW. OR INTERNAL REVENUE SERVICE ------------------------------- Employer Identification Number PAYOR'S REQUEST FOR TAXPAYER IDENTIFICATION NUMBER ("TIN") - -------------------------------------------------------------------------------------------------------- PART 2 -- CHECK THE BOX IF YOU ARE NOT SUBJECT TO BACKUP WITHHOLDING UNDER THE PROVISIONS OF SECTION 3406(A)(1)(C) OF THE INTERNAL REVENUE PART 3 -- CODE BECAUSE (1) YOU ARE EXEMPT FROM BACKUP WITHHOLDING, (2) YOU HAVE AWAITING TIN [ ] NOT BEEN NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING AS A RESULT OF FAILURE TO REPORT ALL INTEREST OR DIVIDENDS OR (3) THE INTERNAL REVENUE SERVICE HAS NOTIFIED YOU THAT YOU ARE NO LONGER SUBJECT TO BACKUP WITHHOLDING. [ ]. - -------------------------------------------------------------------------------------------------------- The IRS does not require your consent to any provision of this document other than the certifications required to avoid backup withholding. - -------------------------------------------------------------------------------------------------------- CERTIFICATION: UNDER PENALTIES OF PERJURY, I CERTIFY THAT THE INFORMATION PROVIDED ON THIS FORM IS TRUE, CORRECT AND COMPLETE. SIGNATURE DATE - --------------------------------------------------------------------------------------------------------
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE EXCHANGE OFFER. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS. YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN PART 3 OF THE SUBSTITUTE FORM W-9. CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER I certify under penalties of perjury that a taxpayer identification number has not been issued to me, and either (a) I have mailed or delivered an application to receive a taxpayer identification number to the appropriate Internal Revenue Service Center or Social Security Administration Office or (b) I intend to mail or deliver an application in the near future. I understand that if I do not provide a taxpayer identification number by the time of payment, 31% of all reportable payments made to me will be withheld until I provide a number, but will be refunded if I provide a certified taxpayer identification number within 60 days. - --------------------------------------------- --------------------------------------------- Signature Date
10 EX-99.2 7 NOTICE OF GUARANTEED DELIVERY 1 NOTICE OF GUARANTEED DELIVERY FOR TENDER OF 9 7/8% SENIOR SUBORDINATED NOTES DUE 2007 (INCLUDING THOSE IN BOOK-ENTRY FORM) OF AMSCAN HOLDINGS, INC. This form or one substantially equivalent hereto must be used to accept the Exchange Offer of Amscan Holdings, Inc. (the "Company") made pursuant to the Prospectus, dated February , 1998 (the "Prospectus"), if certificates for the outstanding 9 7/8% Senior Subordinated Notes due 2007 of the Company (the "Old Notes") are not immediately available or if the procedure for book-entry transfer cannot be completed on a timely basis or time will not permit all required documents to reach the Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration Date of the Exchange Offer. Such form may be delivered or transmitted by telegram, telex, facsimile transmission, mail or hand delivery to IBJ Schroder Bank & Trust Company (the "Exchange Agent") as set forth below. In addition, in order to utilize the guaranteed delivery procedure to tender Old Notes pursuant to the Exchange Offer, a completed, signed and dated Letter of Transmittal (or facsimile thereof) must also be received by the Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration Date. Capitalized terms not defined herein are defined in the Prospectus. IBJ SCHRODER BANK & TRUST COMPANY, EXCHANGE AGENT. By Mail: IBJ Schroder Bank & Trust Company P.O. Box 84 Bowling Green Station New York, New York 10274-0084 Attention: Reorganization Operations Department By Overnight Courier or By Hand: IBJ Schroder Bank & Trust Company One State Street New York, New York 10004 Attn: Securities Processing Window -- Subcellar One (SC-1) By Facsimile: (212) 858-2611 Confirm by Telephone: (212) 858-2103 DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE, OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE, WILL NOT CONSTITUTE A VALID DELIVERY. 2 Ladies and Gentlemen: Upon the terms and conditions set forth in the Prospectus and the accompanying Letter of Transmittal, the undersigned hereby tenders to the Company the principal amount of Old Notes set forth below, pursuant to the guaranteed delivery procedure described in "The Exchange Offer -- Guaranteed Delivery Procedures" section of the Prospectus. Principal Amount of Old Notes Tendered:* $ ---------------------------------------------------------------- Certificate Nos. (if available): ------------------------------------------------------------------ Total Principal Amount Represented by Certificate(s): $ ---------------------------------------------------------------- *Must be in denominations of principal amount of $1,000 and any integral multiple thereof. All authority herein conferred or agreed to be conferred shall survive the death or incapacity of the undersigned and every obligation of the undersigned hereunder shall be binding upon the heirs, personal representatives, successors and assigns of the undersigned. PLEASE SIGN HERE X - ----------------------------------------------------- ------------------------------------- - ----------------------------------------------------- ------------------------------------- Signature(s) of Owner(s) Date or Authorized Signatory
Area Code and Telephone Number: ________________________________________________________ Must be signed by the holder(s) of Old Notes as their name(s) appear(s) on certificates for Old Notes or on a security position listing, or by person(s) authorized to become registered holder(s) by endorsement and documents transmitted with this Notice of Guaranteed Delivery. If signature is by a trustee, executor, administrator, guardian, attorney-in-fact, officer or other person acting in a fiduciary or representative capacity, such person must set forth his or her full title below. If Old Notes will be delivered by book-entry transfer to The Depository Trust Company, provide account number. PLEASE PRINT NAME(S) AND ADDRESS(ES) NAME(S): _____________________________________________________________________________ _____________________________________________________________________________ _____________________________________________________________________________ _____________________________________________________________________________ _____________________________________________________________________________ CAPACITY: _____________________________________________________________________________ _____________________________________________________________________________ ADDRESS(ES): _________________________________________________________________________ _________________________________________________________________________ ACCOUNT NUMBER: ______________________________________________________________________ 3 GUARANTEE (NOT TO BE USED FOR SIGNATURE GUARANTEE) The undersigned, a financial institution (including most banks, savings and loan associations and brokerage houses) that is a participant in the Securities Transfer Agents Medallion Program, the New York Stock Exchange Medallion Signature Program or the Stock Exchanges Medallion Program, hereby guarantees that the undersigned will deliver to the Exchange Agent the certificates representing the Old Notes being tendered hereby or confirmation of book-entry transfer of such Old Notes into the Exchange Agent's account at The Depository Trust Company, in proper form for transfer, together with any other documents required by the Letter of Transmittal within three New York Stock Exchange trading days after the Expiration Date. Name of Firm --------------------------------------------------------------------- Address ------------------------------------------------------------------------ Area Code & Telephone No. -------------------------------------------------------- Authorized Signature -------------------------------------------------------------- Name -------------------------------------------------------------------------- (Please Type or Print) Title--------------------------------------------------------------------------- Date ---------------------------------------------------------- NOTE: DO NOT SEND CERTIFICATES OF OLD NOTES WITH THIS FORM. CERTIFICATES OF OLD NOTES SHOULD BE SENT ONLY WITH A COPY OF THE PREVIOUSLY EXECUTED LETTER OF TRANSMITTAL. -----END PRIVACY-ENHANCED MESSAGE-----