-----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, I4VGcroZr+qCvO6ByC27sqx2uLQmzhx7BZkLNGV/kJOIbEgJ9skGmRG+pnJXigJ7 l9nrAVtVM1pcC81HKPqIpQ== 0000950135-98-004572.txt : 19980812 0000950135-98-004572.hdr.sgml : 19980812 ACCESSION NUMBER: 0000950135-98-004572 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 58 FILED AS OF DATE: 19980810 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AAI FOSTERGRANT INC CENTRAL INDEX KEY: 0001067346 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: RI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-61119 FILM NUMBER: 98681508 BUSINESS ADDRESS: STREET 1: 500 GEORGE WASHINGTON HWY CITY: SMITHFIELD STATE: RI ZIP: 02917 BUSINESS PHONE: 4012313800 MAIL ADDRESS: STREET 1: 500 GEORGE WASHINGTON HWY CITY: SMITHFIELD STATE: RI ZIP: 02917 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BONNEAU CO CENTRAL INDEX KEY: 0001067347 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: RI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-61119-01 FILM NUMBER: 98681509 BUSINESS ADDRESS: STREET 1: 500 GEORGE WASHINGTON HWY CITY: SMITHFIELD STATE: RI ZIP: 02917 BUSINESS PHONE: 4012313800 MAIL ADDRESS: STREET 1: 500 GEORGE WASHINGTON HWY CITY: SMITHFIELD STATE: RI ZIP: 02917 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BONNEAU GENERAL INC CENTRAL INDEX KEY: 0001067348 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: RI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-61119-02 FILM NUMBER: 98681510 BUSINESS ADDRESS: STREET 1: 500 GEORGE WASHINGTON HWY CITY: SMITHFIELD STATE: RI ZIP: 02917 BUSINESS PHONE: 4012313800 MAIL ADDRESS: STREET 1: 500 GEORGE WASHINGTON HWY CITY: SMITHFIELD STATE: RI ZIP: 02917 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BONNEAU HOLDINGS INC CENTRAL INDEX KEY: 0001067349 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: RI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-61119-03 FILM NUMBER: 98681511 BUSINESS ADDRESS: STREET 1: 500 GEORGE WASHINGTON HWY CITY: SMITHFIELD STATE: RI ZIP: 02917 BUSINESS PHONE: 4012313800 MAIL ADDRESS: STREET 1: 500 GEORGE WASHINGTON HWY CITY: SMITHFIELD STATE: RI ZIP: 02917 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FGG INVESTMENTS INC CENTRAL INDEX KEY: 0001067350 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: RI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-61119-04 FILM NUMBER: 98681512 BUSINESS ADDRESS: STREET 1: 500 GEORGE WASHINGTON HWY CITY: SMITHFIELD STATE: RI ZIP: 02917 BUSINESS PHONE: 4012313800 MAIL ADDRESS: STREET 1: 500 GEORGE WASHINGTON HWY CITY: SMITHFIELD STATE: RI ZIP: 02917 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FANTASMA LLC CENTRAL INDEX KEY: 0001067354 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: RI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-61119-05 FILM NUMBER: 98681513 BUSINESS ADDRESS: STREET 1: 500 GEORGE WASHINGTON HWY CITY: SMITHFIELD STATE: RI ZIP: 02917 BUSINESS PHONE: 4012313800 MAIL ADDRESS: STREET 1: 500 GEORGE WASHINGTON HWY CITY: SMITHFIELD STATE: RI ZIP: 02917 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FOSTER GRANT GROUP L P CENTRAL INDEX KEY: 0001067355 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: RI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-61119-06 FILM NUMBER: 98681514 BUSINESS ADDRESS: STREET 1: 500 GEORGE WASHINGTON HWY CITY: SMITHFIELD STATE: RI ZIP: 02917 BUSINESS PHONE: 4012313800 MAIL ADDRESS: STREET 1: 500 GEORGE WASHINGTON HWY CITY: SMITHFIELD STATE: RI ZIP: 02917 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FOSTER GRANT HOLDINGS INC CENTRAL INDEX KEY: 0001067357 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: RI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-61119-07 FILM NUMBER: 98681515 BUSINESS ADDRESS: STREET 1: 500 GEORGE WASHINGTON HWY CITY: SMITHFIELD STATE: RI ZIP: 02917 BUSINESS PHONE: 4012313800 MAIL ADDRESS: STREET 1: 500 GEORGE WASHINGTON HWY CITY: SMITHFIELD STATE: RI ZIP: 02917 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OPTI RAY INC CENTRAL INDEX KEY: 0001067358 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: RI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-61119-08 FILM NUMBER: 98681516 BUSINESS ADDRESS: STREET 1: 500 GEORGE WASHINGTON HWY CITY: SMITHFIELD STATE: RI ZIP: 02917 BUSINESS PHONE: 4012313800 MAIL ADDRESS: STREET 1: 500 GEORGE WASHINGTON HWY CITY: SMITHFIELD STATE: RI ZIP: 02917 FILER: COMPANY DATA: COMPANY CONFORMED NAME: O RAY HOLDINGS INC CENTRAL INDEX KEY: 0001067359 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: RI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-61119-09 FILM NUMBER: 98681517 BUSINESS ADDRESS: STREET 1: 500 GEORGE WASHINGTON HWY CITY: SMITHFIELD STATE: RI ZIP: 02917 BUSINESS PHONE: 4012313800 MAIL ADDRESS: STREET 1: 500 GEORGE WASHINGTON HWY CITY: SMITHFIELD STATE: RI ZIP: 02917 S-4 1 AAI.FOSTERGRANT, INC. 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 10, 1998 REGISTRATION NO. 333- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 AAI.FOSTERGRANT, INC. (Exact name of registrant as specified in its charter) RHODE ISLAND 5094 05--0419304 (State or other jurisdiction of (Primary SIC Code Number) (I.R.S. Employer Identification incorporation or organization) No.)
THE BONNEAU COMPANY (Exact name of registrant as specified in its charter) TEXAS 6719 75--1280454 (State or other jurisdiction of (Primary SIC Code Number) (I.R.S. Employer Identification incorporation or organization) No.)
BONNEAU GENERAL, INC. (Exact name of registrant as specified in its charter) DELAWARE 6719 75--2572796 (State or other jurisdiction of (Primary SIC Code Number) (I.R.S. Employer Identification incorporation or organization) No.)
BONNEAU HOLDINGS, INC. (Exact name of registrant as specified in its charter) DELAWARE 6719 51--0364025 (State or other jurisdiction of (Primary SIC Code Number) (I.R.S. Employer Identification incorporation or organization) No.)
F.G.G. INVESTMENTS, INC. (Exact name of registrant as specified in its charter) DELAWARE 6719 36--3956826 (State or other jurisdiction of (Primary SIC Code Number) (I.R.S. Employer Identification incorporation or organization) No.)
FANTASMA, LLC (Exact name of registrant as specified in its charter) DELAWARE 5094 11--3340245 (State or other jurisdiction of (Primary SIC Code Number) (I.R.S. Employer Identification incorporation or organization) No.)
FOSTER GRANT GROUP, L.P. (Exact name of registrant as specified in its charter) DELAWARE 5048 75--2572797 (State or other jurisdiction of (Primary SIC Code Number) (I.R.S. Employer Identification incorporation or organization) No.)
2 FOSTER GRANT HOLDINGS, INC. (Exact name of registrant as specified in its charter) DELAWARE 6719 05-0500108 (State or other jurisdiction of (Primary SIC Code Number) (I.R.S. Employer Identification incorporation or organization) No.)
O-RAY HOLDINGS, INC. (Exact name of registrant as specified in its charter) DELAWARE 6719 51--0364026 (State or other jurisdiction of (Primary SIC Code Number) (I.R.S. Employer Identification incorporation or organization) No.)
OPTI-RAY, INC. (Exact name of registrant as specified in its charter) NEW YORK 6719 11--1812045 (State or other jurisdiction of (Primary SIC Code Number) (I.R.S. Employer Identification incorporation or organization) No.)
500 GEORGE WASHINGTON HIGHWAY SMITHFIELD, RI 02917 (401) 231-3800 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) DUANE M. DESISTO, CHIEF FINANCIAL OFFICER AAi.FOSTERGRANT, Inc. 500 George Washington Highway Smithfield, RI 02917 (401) 231-3800 (Name, address, including zip code, and telephone number, including area code, of agent for service) WITH COPIES TO: MARGARET D. FARRELL, ESQ. Hinckley, Allen & Snyder 1500 Fleet Center Providence, RI 02903 (401) 274-2000 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE PUBLIC: As soon as practicable after the Registration Statement becomes effective. If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. [ ] CALCULATION OF REGISTRATION FEE - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED PER UNIT OFFERING PRICE REGISTRATION FEE - ---------------------------------------------------------------------------------------------------------------------------- 10 3/4% Series B Senior Notes due 2006.................................. $75,000,000(1) (2) (2) $22,125 - ---------------------------------------------------------------------------------------------------------------------------- Guarantees of the 10 3/4% Series B Senior Notes due 2006................. -- -- -- None(3) - ---------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------
(1) Equals the aggregate principal amount of the securities being registered. (2) Pursuant to Rule 457(f)(2), the registration fee has been calculated using the book value of the securities being registered. (3) Pursuant to Rule 457(n). THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT 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. 3 PROSPECTUS [AAI.FOSTER GRANT LOGO] OFFER TO EXCHANGE ITS 10 3/4% SERIES B SENIOR NOTES DUE 2006 WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, FOR ANY AND ALL OF ITS OUTSTANDING 10 3/4% SERIES A SENIOR NOTES DUE 2006 THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON , 1998, UNLESS EXTENDED. AAi.FosterGrant, Inc. ("AAi" or the "Company") hereby offers, upon the terms and subject to the conditions set forth in this Prospectus and the accompanying Letter of Transmittal (the "Letter of Transmittal" and, together with this Prospectus, the "Exchange Offer"), to exchange $1,000 principal amount of its 10 3/4% Series B Senior Notes due 2006 (the "New Notes") which have been registered under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to a registration statement (the "Registration Statement") of which this Prospectus is a part, for each $1,000 principal amount of its outstanding 10 3/4% Series A Senior Notes due 2006 (the "Old Notes"), of which $75,000,000 principal amount is outstanding as of the date hereof. See "The Exchange Offer." The Old Notes and the New Notes are sometimes collectively referred to herein as the "Notes." Although the Notes are titled "Senior," the Company has not issued, and does not have any current firm arrangements to issue, any significant additional indebtedness to which the Notes would be senior. The Notes are general unsecured obligations of the Company and rank pari passu in right of payment to all existing and future unsubordinated indebtedness of the Company, including indebtedness under the Senior Credit Facility (as defined). The obligations of the Company under the Senior Credit Facility, however, are secured by the accounts receivable and inventory of the Company and its Domestic Subsidiaries (as defined). Accordingly, the Company's obligations under the Senior Credit Facility will effectively rank senior in right of payment to the Notes to the extent of the assets subject to such security interest. The Company's payment of principal, premium, if any, interest and Liquidated Damages, if any, on the Notes are fully and unconditionally guaranteed on a senior unsecured basis (the "Subsidiary Guarantees") by all existing and future Domestic Subsidiaries of the Company (the "Guarantors"). The Subsidiary Guarantees will rank pari passu in right of payment with all existing and future unsecured and unsubordinated indebtedness of the Guarantors but secured indebtedness of a Guarantor (including the secured guarantees granted under the Senior Credit Facility) will effectively rank senior in right of payment to the Notes to the extent of the assets subject to such security interest. As of April 4, 1998, on a pro forma basis after giving effect to the Acquisitions (as defined herein) and the Offering (as defined) and the application of the net proceeds therefrom, the Company and the Guarantors would have had approximately $76.4 million of unsecured indebtedness outstanding (including $75.0 million principal amount of the Old Notes) and the Company would have had approximately $60.0 million of secured indebtedness available to be incurred under the Senior Credit Facility. See "Description of Other Indebtedness." The terms of the Indenture (as defined) will permit the Company and its subsidiaries to incur additional indebtedness (including secured indebtedness), subject to certain limitations, but the Company has no current or pending arrangements or agreements to incur any additional significant indebtedness to which the Notes would rank subordinate or pari passu in right of payment. The Company will accept for exchange any and all validly tendered Old Notes prior to 5:00 p.m., New York City time, on , 1998, unless extended by the Company (such date, as it may be extended, the "Expiration Date"). The Expiration Date will not be extended beyond the 30th business day after the date of this Prospectus. The Old Notes may be tendered only in integral multiples of $1,000. Tenders of the Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. The Exchange Offer is not conditioned upon any minimum principal amount of the Old Notes being tendered for exchange. However, the Exchange Offer is subject to certain customary conditions. In the event the Company terminates the Exchange Offer and does not accept for exchange any Old Notes, the Company will promptly return the Old Notes to the holders thereof. The Company will not receive any proceeds from the Exchange Offer. See "The Exchange Offer." THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL ARE FIRST BEING MAILED TO HOLDERS OF THE OLD NOTES ON , 1998. SEE "RISK FACTORS" BEGINNING ON PAGE 14 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH 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 , 1998 4 The New Notes will be obligations of the Company evidencing the same debt as the Old Notes and will be entitled to the benefits of the Indenture. See "Description of Notes." The form and terms of the New Notes are generally the same as the form and terms of the Old Notes in all material respects except that the New Notes have been registered under the Securities Act and hence do not include certain rights to registration thereunder and do not contain transfer restrictions or terms with respect to certain special payments applicable to the Old Notes. See "The Exchange Offer." The New Notes are being offered hereunder in order to satisfy certain obligations under the Registration Rights Agreement, dated as of June 21, 1998 (the "Registration Rights Agreement"), among the Company, the Guarantors, and NationsBanc Montgomery Securities LLC, Prudential Securities Incorporated and BancBoston Securities Inc. (the "Initial Purchasers"), a copy of which has been filed as an exhibit to the Registration Statement of which this Prospectus is a part. The Exchange Offer is intended to satisfy the Company's obligations under the Registration Rights Agreement to register the New Notes and exchange them for the Old Notes under the Securities Act. Once the Exchange Offer is consummated, the Company will have no further obligations to register any of the Old Notes tendered for exchange except pursuant to a shelf registration statement to be filed under certain limited circumstances specified in "The Exchange Offer -- Purpose of the Exchange Offer." See "Risk Factors -- Consequences to Non-Tendering Holders of the Old Notes." The Company has agreed to pay the expenses of the Exchange Offer. Based on interpretations by the staff of the Securities and Exchange Commission (the "Commission") set forth in several no-action letters issued to third parties (the "Exchange Offer No-Action Letters"), the Company believes that the New Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be offered for resale, resold and otherwise transferred by Holders thereof who are not affiliates of AAi (other than a broker-dealer who acquired such Old Notes directly from the Company for resale pursuant to Rule 144A under the Securities Act or any other available exemption under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act; provided that the Holder is acquiring the New Notes in its ordinary course of business and has not engaged in, and does not intend to engage in, any distribution (within the meaning of the Securities Act) of the New Notes and has no arrangement or understanding with any person to participate in a distribution of the New Notes. Persons wishing to exchange the Old Notes in the Exchange Offer must represent to the Company that such conditions have been met. However, any Holder who may be deemed an "affiliate" (as defined under Rule 405 of the Securities Act) of the Company or who tenders in the Exchange Offer with the intention to participate, or for the purpose of participating, in a distribution of the New Notes cannot rely on the interpretation by the staff of the Commission set forth in the Exchange Offer No-Action Letters and must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction. See "The Exchange Offer -- Purpose of the Exchange Offer." In addition, each broker-dealer that receives the New Notes for its own account pursuant to the Exchange Offer in exchange for Old Notes where such Old Notes were acquired by such broker-dealer for its own account as a result of market-making activities or other trading activities (other than acquisitions directly from the Company) must acknowledge that it will deliver a prospectus in connection with any resale of such New 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 the New Notes received in exchange for the Old Notes where such Old Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities (other than acquisitions directly from the Company). The Company has agreed that, for a period of 180 days after the Exchange Offer is consummated, it will, upon reasonable request, make this Prospectus available promptly to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." EXCEPT AS DESCRIBED IN THIS PARAGRAPH, THIS PROSPECTUS MAY NOT BE USED FOR ANY OFFER TO RESELL, RESALE OR OTHER TRANSFER OF THE NEW NOTES. i 5 The Old Notes were initially represented by a single Global Old Note (as defined) in fully registered form, registered in the name of a nominee of The Depository Trust Company ("DTC"), as depository. The New Notes exchanged for the Old Notes represented by the Global Old Note will be represented by one or more Global New Notes (as defined) in fully registered form, registered in the name of the nominee of DTC. The Global New Notes will be exchangeable for New Notes in registered form, in denominations of $1,000 and integral multiples thereof as described herein. The New Notes in global form will trade in DTC's Same-Day Funds Settlement System, and secondary market trading activity of such New Notes will therefore settle in immediately available funds. See "Description of Notes -- Book Entry, Delivery and Form." The New Notes will bear interest at a rate equal to 10 3/4% per annum from the last date on which interest was paid on the Old Notes surrendered in exchange therefor, or if no interest has been paid, from the date of original issue of such Old Notes. Interest on the Notes is payable semi-annually on January 15 and July 15 of each year, commencing January 15, 1999. The Notes are redeemable at the option of the Company, in whole or in part, on or after July 15, 2002, at the redemption prices set forth herein, plus accrued and unpaid interest thereon and liquidated damages, if any, payable pursuant to Section 5 of the Registration Rights Agreement with respect to the Old Notes ("Liquidated Damages") to the redemption date. Notwithstanding the foregoing, at any time on or before July 15, 2001, the Company may redeem up to 35% of the original aggregate principal amount of the Notes with the net proceeds of a public sale of common stock of the Company at the redemption prices set forth herein, plus accrued and unpaid interest thereon, if any, to the redemption date, provided that at least 65% of the original aggregate principal amount of the Notes remains outstanding immediately after the occurrence of such redemption, and provided, further, that such redemption shall occur within 45 days of the date of the closing of such public sale. Upon a Change of Control (as defined), the Company will be required to make an offer to repurchase all outstanding Notes at 101% of the principal amount thereof plus accrued and unpaid interest thereon and Liquidated Damages, if any, to the date of repurchase. There can be no assurance that the Company will have the financial resources necessary or be permitted by its other debt agreements to repurchase the Notes upon the occurrence of a Change of Control. The Old Notes are designated for trading in the Private Offerings, Resales and Trading through Automated Linkages ("PORTAL") market. Prior to this offering, there has been no public market for the Notes. The Company does not intend to apply for listing or quotation of the Notes on any securities exchange or stock market. As the Old Notes were issued and the New Notes are being issued primarily to a limited number of institutions who typically hold similar securities for investment, the Company does not expect that an active public market for the Notes will develop. In addition, resales by certain holders of the Notes of a substantial percentage of the aggregate principal amount of such Notes could constrain the ability of any market maker to develop or maintain a market for the Notes. To the extent that a market for the Notes should develop, the market value of the Notes will depend on prevailing interest rates, the market for similar securities and other factors, including the financial condition, performance and prospects of the Company. Such factors might cause the Notes to trade at a discount from face value. See "Risk Factors -- Lack of a Public Market for the Notes." THE COMPANY WILL NOT RECEIVE ANY PROCEEDS FROM THE EXCHANGE OFFER. THE COMPANY HAS AGREED TO PAY THE EXPENSES OF THE EXCHANGE OFFER. NO UNDERWRITER IS BEING USED IN CONNECTION WITH THE EXCHANGE OFFER. ii 6 NOTE REGARDING FORWARD-LOOKING STATEMENTS THE INFORMATION CONTAINED IN THIS OFFERING MEMORANDUM CONTAINS "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, WHICH ARE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY," "WILL," "COULD," "SHOULD," "EXPECT," "ANTICIPATE," "INTEND," "PLAN," "ESTIMATE" OR "CONTINUE" OR THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREOF. SUCH FORWARD-LOOKING STATEMENTS ARE NECESSARILY BASED ON VARIOUS ASSUMPTIONS AND ESTIMATES AND ARE INHERENTLY SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES, INCLUDING RISKS AND UNCERTAINTIES RELATING TO THE POSSIBLE INVALIDITY OF THE UNDERLYING ASSUMPTIONS AND ESTIMATES AND POSSIBLE CHANGES OR DEVELOPMENTS IN SOCIAL, ECONOMIC, BUSINESS, INDUSTRY, MARKET, LEGAL AND REGULATORY CIRCUMSTANCES AND CONDITIONS AND ACTIONS TAKEN OR OMITTED TO BE TAKEN BY THIRD PARTIES, INCLUDING CUSTOMERS, SUPPLIERS, BUSINESS PARTNERS AND COMPETITORS AND LEGISLATIVE, REGULATORY, JUDICIAL AND OTHER GOVERNMENTAL AUTHORITIES AND OFFICIALS. IN ADDITION TO ANY RISKS AND UNCERTAINTIES SPECIFICALLY IDENTIFIED IN THE TEXT SURROUNDING SUCH FORWARD-LOOKING STATEMENTS, THE STATEMENTS IN "RISK FACTORS" BEGINNING ON PAGE 11 OF THIS OFFERING MEMORANDUM OR IN THE REPORTS AND OTHER INFORMATION REFERRED TO IN "AVAILABLE INFORMATION" CONSTITUTE CAUTIONARY STATEMENTS IDENTIFYING IMPORTANT FACTORS THAT COULD CAUSE ACTUAL AMOUNTS, RESULTS, EVENTS AND CIRCUMSTANCES TO DIFFER MATERIALLY FROM THOSE REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS. ------------------------ Foster Grant(R) is a registered trademark of AAi and Tempo(TM) is a trademark of AAi. Disney(R), Winnie the Pooh(R), Mickey Mouse(R), and Minnie Mouse(R) are registered trademarks of Disney Enterprises, Inc. and Mickey's Stuff for Kids(TM) is a trademark of Disney Enterprises, Inc. Revlon(R) and Almay(R) are registered trademarks of Revlon Consumer Products Corporation. Ironman Triathlon(R) is a registered trademark of World Triathlon Corporation. Barbie(R) is a registered trademark of Mattel, Inc. Crayola(R) is a registered trademark of Binney & Smith Properties, Inc. Sesame Street(R) and Elmo(R) are registered trademarks of Children's Television Workshop. Tweety(R) and Warner Bros.(R) are registered trademarks of Time Warner Entertainment Company, L.P. Hawaiian Tropic(R) is a registered trademark of Tanning Research Laboratories, Inc. Wet 'N Wild(R) is a registered trademark of AM Cosmetics. iii 7 SUMMARY The following Summary is qualified in its entirety by the more detailed information and Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus. Unless otherwise indicated: (i) references to "AAi" or the "Company" are to AAi.FosterGrant, Inc. and its direct and indirect subsidiaries (including Foster Grant Holdings, Inc.), (ii) references to the "Fantasma Acquisition" are to the Company's recent acquisition of an 80% interest in Fantasma, LLC ("Fantasma") and (iii) references to the "Acquisitions" are to AAi's recent acquisition of certain assets and liabilities of Eyecare Products UK Ltd. ("Foster Grant UK") and Superior Jewelry Company ("Superior") and the Fantasma Acquisition. See "The Company." THE COMPANY AAi is a leading value-added distributor of optical products, costume jewelry, watches, clocks and other accessories to mass merchandisers, variety stores, chain drug stores and supermarkets in North America and the United Kingdom. The Company sells its products in over 30,000 retail locations, including Wal-Mart, Target, Kmart, Eckerd Drugstores, Walgreens, Rite Aid, Albertsons, Dollar General and Family Dollar stores. The Company markets its products under its own brand names such as Foster Grant as well as customers' private labels. AAi also has the right to distribute products under numerous licensed brand names, including Ironman Triathlon, Revlon, Mickey's Stuff for Kids, Winnie the Pooh, Barbie and Crayola. The Company outsources all of its manufacturing. On a pro forma basis after giving effect to the Acquisitions, the Company would have generated net sales and EBITDA (as defined) of $182.0 million and $19.1 million, respectively, for fiscal 1997 and $187.2 million and $20.8 million, respectively, for the twelve months ended April 4, 1998. The Company's product lines contain a large number of stock keeping units ("SKUs") with low retail price points and typically represent a small percentage of retailers' total sales. As a result, many of AAi's customers have chosen to outsource the merchandising of these products to the Company. AAi's award- winning service program provides retailers with customized displays and product packaging and store-level merchandising designed to maximize sales and inventory turnover. The Company employs over 1,500 field service representatives who regularly visit program customers' stores to arrange, replenish and restock displays, reorder product and attend to markdowns and allowances. By providing retailers with in-store product management, the Company retains control of its product marketing and pricing, allowing AAi to maximize product sales and increase the floor space allocated to its product lines. In 1997, sales to customers utilizing the Company's service program accounted for 73% of AAi's net sales. AAi has grown rapidly through strategic acquisitions and internal growth, principally by expanding its product offerings, entering new domestic and international markets, adding new customers, cross-selling existing product lines to current customers and supporting its U.S.-based customers' international expansion. In the last five years, net sales have grown at a compounded annual rate of 22.9%, from $53.4 million in 1992 to $149.4 million in 1997. INDUSTRY OVERVIEW The Sunglass Association of America reports that 1997 domestic retail sales of sunglasses totaled $2.6 billion. Accessories Magazine estimates that 1997 domestic retail sales of fashion jewelry and watches totaled $4.8 billion and $3.0 billion, respectively. As a result of industry-wide consolidation among mass merchandisers and discount retailers, a small number of large companies dominate the Company's primary channels of distribution. These retailers have sought to reduce their purchasing and administrative costs by limiting the number of their suppliers and have utilized their market position to obtain minimum sell-throughs, reduced in-store inventory levels and price concessions. These retailers tend to require a high level of service, including customized sales and service programs, reliable delivery services and electronic interfaces. These trends have contributed to the growth of larger national and regional distributors, such as AAi, that have the service organizations, product offering, distribution technology and capital necessary to meet the demands of these customers. 1 8 COMPETITIVE STRENGTHS In order to increase its sales and profitability, the Company relies on the following competitive strengths: Innovative Service Program. Since many of its product sales are impulse driven, AAi believes that a well-positioned, visually appealing display is critical to making the sale to the consumer. In addition, the SKU-intensive nature of optical products and accessories and their low retail price points have led many retailers to outsource the merchandising of such products. AAi has responded by offering its customers a service program that includes store-level merchandise mix planning and in-store display maintenance and inventory stocking, balancing and reordering by the Company's field service representatives. AAi's service program is consistently recognized as one of the best in the mass retail industry. The Company has received several vendor-of-the-year awards from its retail customers, including Wal-Mart, as well as numerous Supplier Performance Awards by Retail Category (S.P.A.R.C.) from the International Mass Retail Institute. As part of its service program, the Company makes a significant investment in the design, production and installation of display fixtures in its customers' retail stores. The Company believes that its award-winning service program and store-level investment in display fixtures solidify its customer relationships and create opportunities to cross-sell its products and increase the Company's allotted display space. Diverse Product Offering. AAi offers a comprehensive selection of popularly priced optical products and accessories with over 15,000 SKUs. AAi's product lines include sunglasses, reading glasses, costume jewelry, small synthetic leather goods, handbags, hair accessories, cosmetic bags and key rings. With the Fantasma Acquisition, the Company added watches and clocks to its product lines. The substantial majority of the Company's products have retail price points at less than $20, with 57% at $10 or less. The diversity of AAi's product lines enables retailers to satisfy a substantial portion of their optical products and accessories needs from a single source and allows the Company to achieve operating efficiencies for low price point products. Powerful Proprietary and Licensed Brand Names. Branded products provide entry to new customers and retail channels and generally allow for higher gross margins on product sales. The Company owns several brands, most notably Foster Grant. In the 1998 annual Women's Wear Daily survey, the Foster Grant brand was ranked the third most recognized name in accessories by consumers. In addition to its own brands, AAi holds licenses for a variety of Disney, Sesame Street, Warner Bros. and Mattel characters (e.g., Winnie the Pooh, Mickey Mouse, Minnie Mouse, Elmo, Tweety, Barbie and others) as well as for several well-recognized brands such as Ironman Triathlon, Revlon, Almay and Crayola for terms generally ranging from one to three years. During 1997, the sales of the Company's own branded products and licensed branded products represented approximately 29% and 15%, respectively, of AAi's net sales. State-of-the-Art Distribution Capabilities. The Company's flexible distribution systems are capable of processing virtually any small package. AAi utilizes a high velocity fulfillment system that enables the Company to provide its customers with short delivery times and high order fulfillment rates, allowing retailers to maintain lower inventory levels. On average, the Company ships over 98% of all restocking orders within 24 hours of receipt of the order. AAi is currently expanding its Smithfield, Rhode Island distribution center and installing an inventory management system that utilizes radio frequency and bar-coding technologies to optimize supply chain operations, improve customer service, increase inventory turns and lower operating costs. The Company believes that its small package distribution capabilities provide a platform to add complementary product lines without requiring significant capital investment or additional fixed costs. Efficient Low-Cost Sourcing. The Company outsources manufacturing for all of its products. Approximately 75% of AAi's manufacturing is sourced to manufacturers in Asia through its joint venture in Hong Kong, with the remainder outsourced to independent domestic manufacturers. The Hong Kong joint venture monitors the contract manufacturing process, maintains relations with manufacturers, ensures quality control and serves as a sourcing agent to certain U.S. and European customers. AAi's sourcing capabilities allow it to reliably deliver competitively priced products to the retail market while retaining considerable flexibility in its cost structure. 2 9 Experienced Management Team. AAi's senior management team averages over 22 years in the industry and 18 years experience with the Company. Over the Company's 26 year history, its senior management team has developed strong relationships with suppliers and retailers. This team of seasoned managers has led the Company's transition from a small costume jewelry manufacturer to a leading distributor of optical products and accessories and has successfully completed six acquisitions over the past three years. BUSINESS STRATEGY The Company's objective is to increase sales and profitability by enhancing its position as a leading distributor of optical products and accessories. The key elements of the Company's business strategy are: Promote and Expand Branded Product Offering. Branded products enable the Company to reach new customers and enter new distribution channels which, in turn, present the Company with expanded cross-selling opportunities. The Company intends to actively promote its Foster Grant name through advertising as well as co-branding with licensed names. For example, AAi plans to roll out the Ironman Triathlon by Foster Grant co-branded line of sunglasses in the fourth quarter of 1998. The Company also plans to pursue licensing and acquisition of additional brands. Expand Product Lines. AAi believes it can increase sales to existing customers and access new distribution channels by expanding its product lines to include other accessories and small package products. The Company intends to achieve this goal by developing and acquiring new products and brands that deepen and broaden its product offering. By diversifying its product lines, the Company can enhance its capacity to provide regional and national retailers with convenient "one-stop" shopping for optical products and accessories. In addition, a diverse product offering provides cross-selling opportunities and permits the Company to achieve operating efficiencies in distribution and service programs. Expand Internationally. The Company's goal is to grow with its customers, particularly internationally, as they add new stores and expand into new geographic markets. For example, during the past several years, Wal-Mart has opened over 350 new stores in foreign markets, including Canada, Mexico, Germany and Argentina. In response, the Company established operations in Canada and Mexico to serve Wal-Mart and other potential customers in these markets. The Company's international net sales have grown from $1.3 million in 1995 to $6.7 million in 1997. Diversify Customer Base and Distribution Channels. Through its small package distribution capabilities, diverse product offering and unique service program, the Company has increased its customer base and sales to certain existing customers desiring more centralized and efficient distribution. The Company seeks to expand its distribution to additional retail channels such as department stores through internal growth and strategic acquisitions. Pursue Strategic Acquisitions. The Company intends to acquire complementary businesses and product lines in order to diversify its product offering, gain access to new customers and retail channels, penetrate international markets, lower operating cost margins and improve service to existing customers. For example, through the acquisitions in December 1996 and March 1998 of the Foster Grant businesses, AAi expanded its optical product line and extended operations to the United Kingdom. The June 1998 Fantasma Acquisition added watches, clocks and several brand licenses to AAi's product offering and provided the Company with access to new customers. The Company seeks to leverage its purchasing power and distribution capabilities to improve the financial performance of its acquired businesses and product lines. 3 10 THE EXCHANGE OFFER The Exchange Offer applies to the entire $75.0 million aggregate principal amount outstanding of the Old Notes. The New Notes will be obligations of the Company evidencing the same debt as the Old Notes and will be entitled to the benefits of the same Indenture. See "Description of Notes." The form and terms of the New Notes are generally the same as the form and terms of the Old Notes in all material respects except that the New Notes have been registered under the Securities Act and hence do not include certain rights to registration thereunder and do not contain transfer restrictions or terms with respect to certain special payments applicable to the Old Notes. See "Description of Notes." The Exchange Offer................. $1,000 principal amount of New Notes in exchange for each $1,000 principal amount of Old Notes. As of the date hereof, $75.0 million in aggregate principal amount of Old Notes were outstanding. The Company will issue the New Notes to Holders (as defined in "Description of Notes") on or promptly after the Expiration Date. Based on interpretations by the staff of the Commission set forth in the Exchange Offer No-Action Letters, the Company believes that New Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be offered for resale, resold and otherwise transferred by Holders thereof who are not affiliates of the Company (other than a broker-dealer who acquired such Old Notes directly from the Company for resale pursuant to Rule 144A under the Securities Act or any other available exemption under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act; provided that the Holder is acquiring New Notes in its ordinary course of business and has not engaged in, and does not intend to engage in, any distribution (within the meaning of the Securities Act) of the New Notes and has no arrangement or understanding with any person to participate in a distribution of the New Notes. Persons wishing to exchange Old Notes in the Exchange Offer must represent to the Company that such conditions have been met. However, any Holder who is an affiliate of the Company or who tenders in the Exchange Offer with the intention to participate, or for the purpose of participating, in a distribution of the New Notes cannot rely on the interpretation by the staff of the Commission set forth in such Exchange Offer No-Action Letters and must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction. See "The Exchange Offer -- Purpose of the Exchange Offer." Each broker-dealer that receives New 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 New 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 4 11 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 New Notes received in exchange for Old Notes where such Old Notes were acquired by such broker-dealer for its own account as a result of market-making activities or other trading activities (other than acquisitions directly from the Company). The Company has agreed that, for a period of 180 days after the Exchange Offer is consummated, it will, upon reasonable request, make this Prospectus available promptly to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." Expiration Date.................... 5:00 p.m., New York City time, on , 1998, unless the Exchange Offer is extended by the Company to the extent necessary to comply with applicable federal and state securities laws, in which case the term "Expiration Date" means the latest date and time to which the Exchange Offer is extended. The Expiration Date will not be extended beyond the 30th business day after the date of this Prospectus. Accrued Amounts on the Notes....... The New Notes will bear interest from the last date on which interest was paid on the Old Notes surrendered in exchange therefor or, if no interest has been paid, from the date of original issue of such Old Notes. Conditions to the Exchange Offer... The Exchange Offer is subject to certain customary conditions. The conditions are limited and relate in general to laws or Commission policies that might impair the ability of the Company to proceed with the Exchange Offer. As of the date of this Prospectus, none of these events had occurred, and the Company believes their occurrence to be unlikely. If any such conditions do exist prior to the Expiration Date, the Company may (i) refuse to accept any Old Notes and return all previously tendered Old Notes, (ii) extend the Exchange Offer, or (iii) waive such conditions. See "The Exchange Offer -- Conditions." Procedures for Tendering........... Each Holder of Old Notes wishing to accept the Exchange Offer must complete, sign and date the 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 such Old Notes to be exchanged and any other required documentation to IBJ Schroder Bank & Trust Company, as Exchange Agent (the "Exchange Agent"), at the address set forth herein and therein or effect a tender of such Old Notes pursuant to the procedures for book-entry transfer as provided for herein and therein. By executing the Letter of Transmittal, each Holder will represent to the Company that, among other things, the New Notes acquired pursuant to the Exchange Offer are being obtained in the ordinary course of business of the person receiving such New Notes, whether or not such person is the Holder, that neither the 5 12 Holder nor any such other person has engaged in, nor intends to engage in, any distribution of the New Notes or has an arrangement or understanding with any person to participate in the distribution of such New Notes and that neither the Holder nor any such other person is an "affiliate," as defined under Rule 405 of the Securities Act, of the Company or any of its subsidiaries. Each broker-dealer that receives New Notes for its own account in exchange for Old Notes, where such Old 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 New 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 New Notes received in exchange for Old Notes where such Old Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities (other than acquisitions directly from the Company). The Company has agreed that, for a period of 180 days after the Exchange Offer is consummated, it will make this Prospectus available to any broker-dealer for use in connection with any such resale (other than acquisitions directly from the Company). See "The Exchange Offer -- Procedures for Tendering" and "Plan of Distribution." Special Procedures for Beneficial Owners............................. Any beneficial owner whose Old Notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender such Old Notes in the Exchange Offer 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 Old Notes, either make appropriate arrangements to register ownership of the Old 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 and it may not be possible to complete a transfer initiated shortly before the Expiration Date. See "The Exchange Offer -- Procedures for Tendering." Guaranteed Delivery Procedures..... Holders of Old Notes who wish to tender their Old Notes and whose Old Notes are not immediately available or who cannot deliver their Old Notes, the Letter of Transmittal or any other documents required by the Letter of Transmittal to the Exchange Agent, or cannot complete the procedure for book-entry transfer prior to 5:00 p.m. on the Expiration Date, may tender their Old 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. 6 13 Acceptance of Old Notes and Delivery of New Notes.............. The Company will accept for exchange any and all Old Notes which are properly tendered in the Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date. The New Notes issued pursuant to the Exchange Offer will be delivered promptly following the Expiration Date. Any Old Notes not accepted for exchange will be returned without expense to the tendering Holder thereof as promptly as practicable after the expiration or termination of the Exchange Offer. See "The Exchange Offer -- Terms of the Exchange Offer." Certain Tax Considerations......... The exchange pursuant to the Exchange Offer will not be a taxable event for federal income tax purposes. See "Certain United States Federal Tax Considerations." Exchange Agent..................... IBJ Schroder Bank & Trust Company is serving as Exchange Agent in connection with the Exchange Offer. TERMS OF NEW NOTES The New Notes...................... $75.0 million principal amount of 10 3/4% Series B Senior Notes due 2006. Maturity Date...................... July 15, 2006. Interest Rate and Payment Dates.... The New Notes will bear interest at a rate of 10 3/4% per annum. Interest on the New Notes will accrue from the last date on which interest was paid on the Old Notes surrendered in exchange therefor, or if no interest has been paid, from the date of original issue of such Old Notes. Interest on the Notes is payable semi-annually in cash in arrears on January 15 and July 15 of each year, commencing January 15, 1999. Subsidiary Guarantees.............. The Notes are unconditionally guaranteed on a senior basis by each of the existing and future Domestic Subsidiaries of the Company (each a "Subsidiary Guarantor" and collectively, the "Subsidiary Guarantors"). Ranking............................ Although the Notes are entitled "Senior," the Company has not issued, and does not have any current firm arrangements to issue, any significant additional indebtedness to which the Notes would be senior. The Notes are general unsecured obligations of the Company and rank senior in right of payment to all future subordinated indebtedness of the Company and pari passu in right of payment to all existing and future unsubordinated indebtedness of the Company, including indebtedness under the Senior Credit Facility. The Subsidiary Guarantees are general unsecured obligations of the Subsidiary Guarantors and rank senior in right of payment to all future subordinated indebtedness of the Subsidiary Guarantors and pari passu in right of payment to all existing and future unsubordinated indebtedness of the Subsidiary Guarantors, including guarantees of indebtedness under the Senior Credit Facility. Borrowings, if any, under the 7 14 Company's Senior Credit Facility are secured by the accounts receivable and inventory of the Company and are guaranteed by the Subsidiary Guarantors, which guarantees are secured by the accounts receivable and inventory of the Subsidiary Guarantors. Accordingly, the Notes and the Subsidiary Guarantees are effectively subordinated to the borrowings outstanding under the Senior Credit Facility and the guarantees of such borrowings, respectively, to the extent of the value of the assets securing such borrowings and guarantees. As of April 4, 1998, on a pro forma basis after giving effect to the Acquisitions and the Offering and the application of the net proceeds therefrom, the Company and its subsidiaries would have had $1.4 million of senior indebtedness outstanding other than the Notes, all of which would have been secured debt. Optional Redemption................ The Notes may be redeemed at the option of the Company, in whole or in part, on or after July 15, 2002, at the redemption prices set forth herein, plus accrued and unpaid interest thereon and Liquidated Damages, if any, to the date of redemption. Notwithstanding the foregoing, at any time on or before July 15, 2001, the Company may redeem up to 35% of the original aggregate principal amount of the Notes with the net proceeds of a public sale of Common Stock of the Company at the redemption price set forth herein, plus accrued and unpaid interest thereon and Liquidated Damages, if any, to the redemption date; provided, that 65% of the original aggregate principal amount of Notes remains outstanding immediately after the occurrence of such redemption; and, provided, further, that such redemption shall occur within 45 days of the date of the closing of such public sale. See "Description of Notes -- Optional Redemption." Change of Control.................. Upon a Change of Control, the Company is required to make an offer to repurchase all outstanding Notes at a repurchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest thereon and Liquidated Damages, if any, to the date of repurchase. See "Description of Notes -- Repurchase at the Option of Holders -- Change of Control." Covenants.......................... The Indenture contains certain covenants that, among other things, limit the ability of the Company and its subsidiaries to incur additional Indebtedness (as defined) and issue preferred stock, enter into sale and leaseback transactions, incur liens, pay dividends or make certain other restricted payments, apply net proceeds from certain asset sales, enter into certain transactions with affiliates, merge or consolidate with any other person, sell stock of subsidiaries, and assign, transfer, lease, convey or otherwise dispose of substantially all of the assets of the Company. See "Description of Notes -- Certain Covenants." 8 15 Exchange Rights.................... Holders of New Notes are not entitled to any exchange rights with respect to the New Notes. Holders of Old Notes are entitled to certain exchange rights pursuant to the Registration Rights Agreement. Under the Registration Rights Agreement, the Company is required to offer to exchange the Old Notes for new notes having substantially identical terms which have been registered under the Securities Act. This Exchange Offer is intended to satisfy such obligation. Once the Exchange Offer is consummated, the Company will have no further obligations to register any of the Old Notes not tendered by the Holders for exchange, except pursuant to a shelf registration statement to be filed under certain limited circumstances specified in "The Exchange Offer -- Purpose of the Exchange Offer." See "Risk Factors -- Consequences to Non-Tendering Holders of Old Notes." Use of Proceeds.................... The Company will not receive any proceeds from the Exchange Offer. RISK FACTORS SEE "RISK FACTORS" AS WELL AS OTHER INFORMATION AND DATA INCLUDED IN THIS PROSPECTUS FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN EVALUATING AN INVESTMENT IN THE NOTES. 9 16 SUMMARY PRO FORMA FINANCIAL INFORMATION The following pro forma statement of operations data and other data of AAi for the year ended December 31, 1997 and for the three and twelve months ended April 4, 1998 and balance sheet data as of April 4, 1998 have been derived from, and are qualified by reference to, the Unaudited Pro Forma Combined Financial Statements of AAi included elsewhere in this Prospectus. The pro forma financial information and other data give effect to the Acquisitions and the sale of the Old Notes (the "Offering") and the application of the net proceeds therefrom as if they had occurred at the beginning of each of the periods indicated. The pro forma adjustments are based upon available information and certain assumptions that the Company believes are reasonable. The pro forma consolidated financial data presented below should not be considered indicative of actual results that would have been achieved had the Acquisitions been consummated on the dates assumed and do not purport to indicate results of operations as of any future date or for any future period. The pro forma consolidated financial data presented below should be read in conjunction with "Use of Proceeds," "Capitalization," "Selected Historical Financial Information," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's Consolidated Financial Statements and the Notes thereto included elsewhere in this Prospectus.
PRO FORMA ------------------------------------------------------------ YEAR ENDED THREE MONTHS ENDED TWELVE MONTHS ENDED DECEMBER 31, 1997 APRIL 4, 1998 APRIL 4, 1998 ----------------- ------------------ ------------------- (DOLLARS IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Net sales.................................... $181,992 $47,527 $187,174 Cost of goods sold........................... 97,706 26,300 100,507 -------- ------- -------- Gross profit................................. 84,286 21,227 86,667 Operating expenses........................... 76,680 19,565 78,055 -------- ------- -------- Income from operations....................... 7,606 1,662 8,612 Interest expense(a).......................... (8,664) (2,163) (8,657) Other (expense) income, net.................. (49) 58 (32) -------- ------- -------- Income (loss) before taxes................... (1,107) (443) (77) Income tax benefit (expense)................. 642 195 34 -------- ------- -------- Net income (loss)............................ $ (465) $ (248) $ (43) ======== ======= ======== Net loss applicable to common shareholders(b)........................... $ (2,961) $ (931) $ (2,625) ======== ======= ======== OTHER DATA: Depreciation and amortization................ $ 11,577 $ 3,351 $ 12,223 EBITDA(c).................................... 19,134 5,071 20,802 Capital expenditures......................... 8,445 9,596 16,303 Cash interest expense........................ 8,269 2,016 8,260 SELECTED RATIOS: Ratio of EBITDA to cash interest expense..... 2.31x 2.52x 2.52x Ratio of total debt to EBITDA................ 4.02x 3.77x 3.67x Ratio of earnings to fixed charges(d)........ -- -- --
AS OF APRIL 4, 1998 ------------- (IN THOUSANDS) BALANCE SHEET DATA: Working capital........................................... $ 52,226 Total assets.............................................. 134,219 Total debt(e)............................................. 76,422 Preferred securities(f)................................... 26,766 Total shareholders' deficit............................... (6,590)
10 17 - --------------- (a) Reflects the estimated additional interest expense associated with the Notes at a rate of 10.75% per annum. (b) Reflects a reduction for accretion and noncash dividends on the Series A Preferred Stock (as defined). See Note 9 of the Notes to the Company's Consolidated Financial Statements. (c) "EBITDA" is defined as earnings before interest, taxes, depreciation and amortization. Although EBITDA is not a measure of performance calculated in accordance with generally accepted accounting principals ("GAAP"), AAi believes that EBITDA is accepted as a generally recognized measure of performance in the distribution industry. Nevertheless, this measure should not be considered in isolation or as a substitute for operating income, net income, net cash provided by operating activities or any other measure for determining AAi's operating performance or liquidity which is calculated in accordance with GAAP. (d) For purposes of computing the ratio of earnings to fixed charges, earnings consist of earnings before income taxes plus fixed charges (excluding accretion and noncash dividends on Series A Preferred Stock). Fixed charges consist of interest expense, amortization of debt issuance costs, accretion and noncash dividends on Series A Preferred Stock and the portion of rental expense that is representative of the interest factor. On a pro forma basis, earnings were insufficient to cover fixed charges by $7.2 million, $1.7 million and $6.4 million for the year ended December 31, 1997, the three months ended April 4, 1998 and the twelve months ended April 4, 1998, respectively. (e) Includes the Notes and $1.4 million in various lease and other long-term obligations. (f) Does not include redeemable preferred stock of AAi's subsidiary, Foster Grant Holdings, Inc. See Note 5 of the Notes to the Company's Consolidated Financial Statements. 11 18 SUMMARY HISTORICAL FINANCIAL INFORMATION The following table sets forth summary historical consolidated financial information of AAi as of the end of and for each of the five years ended December 31, 1997, for the three months ended March 31, 1997 and April 4, 1998 and as of April 4, 1998. The summary historical consolidated financial data as of December 31, 1996 and 1997 and for each of the three years in the period ended December 31, 1997 were derived from the Consolidated Financial Statements of the Company, which have been audited by Arthur Andersen LLP, independent public accountants, and are included elsewhere in this Prospectus. The summary historical consolidated financial data as of December 31, 1993, 1994 and 1995 and for the years ended December 31, 1993 and 1994 were derived from audited consolidated financial statements of the Company that are not included in this Prospectus. The summary historical consolidated financial data as of April 4, 1998 and for the three months ended March 31, 1997 and April 4, 1998 are unaudited, but have been prepared on the same basis as the audited Consolidated Financial Statements, which, in the opinion of management, contain all adjustments (consisting only of normal recurring adjustments) necessary for the fair presentation of the information set forth therein. The results of operation for the three months ended April 4, 1998 are not necessarily indicative of the results that may be expected for the full year. The following table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's Consolidated Financial Statements and the Notes thereto included elsewhere in this Prospectus.
Three Months Ended Year Ended December 31, ----------------------- ------------------------------------------------ March 31, April 4,(a) 1993 1994 1995 1996(a) 1997(a) 1997 1998 ------- ------- ------- ------- -------- --------- ----------- (Dollars in thousands) STATEMENT OF OPERATIONS DATA: Net sales..................... $68,703 $76,611 $88,050 $86,336 $149,411 $34,851 $42,703 Cost of goods sold............ 30,932 37,096 43,690 47,871 77,928 19,023 23,431 ------- ------- ------- ------- -------- ------- ------- Gross profit.................. 37,771 39,515 44,360 38,465 71,483 15,828 19,272 Operating expenses............ 32,785 36,441 34,782 35,678 65,285 14,687 17,627 ------- ------- ------- ------- -------- ------- ------- Income from operations........ 4,986 3,074 9,578 2,787 6,198 1,141 1,645 Interest expense.............. (491) (342) (1,031) (1,469) (4,214) (928) (1,178) Other (expense) income........ 459 88 (80) (331) 31 (48) 76 ------- ------- ------- ------- -------- ------- ------- Income before taxes........... 4,954 2,820 8,467 987 2,015 165 543 Income tax benefit (expense).................. -- -- (42) 204 (1,177) (96) (239) ------- ------- ------- ------- -------- ------- ------- Net income(b)................. $ 4,954 $ 2,820 $ 8,425 $ 1,191 $ 838 $ 69 $ 304 ======= ======= ======= ======= ======== ======= ======= Net income (loss) applicable to common shareholders(c)............ $ 4,954 $ 2,820 $ 8,425 $ 68 $ (1,658) $ (528) $ (379) ======= ======= ======= ======= ======== ======= ======= Pro forma net income (loss) applicable to common shareholders(d)............ $ 2,972 $ 1,692 $ 5,055 $ (530) $ (1,658) $ (528) $ (379) ======= ======= ======= ======= ======== ======= ======= OTHER DATA: Depreciation and amortization............... $ 473 $ 628 $ 783 $ 2,400 $ 9,894 $ 1,987 $ 2,972 EBITDA (e).................... 5,918 3,790 10,281 4,856 16,123 3,080 4,693 Capital expenditures (f)...... 680 1,552 1,555 1,572 7,583 1,492 9,073 Ratio of earnings to fixed charges (g)................ 8.30x 5.69x 8.12x -- -- -- --
AS OF DECEMBER 31, AS OF ------------------------------------------------ APRIL 4, 1993 1994 1995 1996 1997 1998 ------- ------- ------- ------- -------- ----------- (IN THOUSANDS) BALANCE SHEET DATA: Working capital (deficit)... $ 4,003 $ 4,436 $ 7,795 $ 722 $ 5,222 $ (4,951) Total assets................ 14,730 16,773 25,187 83,666 94,915 121,759 Total debt(h)............... 683 2,593 5,542 35,588 44,959 64,756 Preferred securities(i)..... -- -- -- 23,587 26,083 26,766 Total shareholders' equity (deficit)................ 4,848 4,890 11,523 (4,179) (6,234) (6,590)
12 19 - --------------- (a) Includes the results of operations of the acquired businesses from the respective dates of acquisition: the Tempo Division of Allison Reed Group, Inc. ("Tempo") in June 1996; Foster Grant Group L.P., The Bonneau Company, Opti Ray, Inc. and Asian Buying Source, Inc. (collectively, "Foster Grant US") in December 1996; Superior in July 1997; and Foster Grant UK in March 1998. (b) Represents net income before (i) a reduction for accretion and noncash dividends on the Series A Preferred Stock in the years ended December 31, 1996 and 1997 and the three months ended March 31, 1997 and April 4, 1998, and (ii) a pro forma income tax provision in the years ended December 31, 1993 through 1996. (c) Reflects a reduction from net income for accretion and noncash dividends on the Series A Preferred Stock. See Note 9 of the Notes to Company's Consolidated Financial Statements. (d) The Company was an S corporation under Section 1362 of the Internal Revenue Code until May 31, 1996. Pro forma income taxes, assuming the Company was subject to C corporation income taxes, have been provided, in the accompanying statement of operations for 1993, 1994, 1995 and 1996, at an estimated statutory rate of 40%. (e) "EBITDA" is defined as earnings before interest, taxes, depreciation and amortization. Although EBITDA is not a measure of performance calculated in accordance with GAAP, AAi believes that EBITDA is accepted as a generally recognized measure of performance in the distribution industry. Nevertheless, this measure should not be considered in isolation or as a substitute for operating income, net income, net cash provided by operating activities or any other measure for determining AAi's operating performance or liquidity which is calculated in accordance with GAAP. (f) Does not include capital assets acquired in connection with the acquisitions of Tempo, Foster Grant US, Superior and Foster Grant UK. (g) For purposes of computing the ratio of earnings to fixed charges, earnings consist of earnings before income taxes plus fixed charges (excluding accretion and noncash dividends on Series A Preferred Stock). Fixed charges consist of interest expense, amortization of debt issuance costs, accretion and noncash dividends on Series A Preferred Stock and the portion of rental expense that is representative of the interest factor. Earnings were insufficient to cover fixed charges by $0.9 million, $4.1 million, $1.3 million and $0.7 million for the years ended December 31, 1996 and 1997 and the three months ended March 31, 1997 and April 4, 1998, respectively. (h) Includes amounts outstanding under Revolving Credit Facility (as defined), various long-term obligations and subordinated promissory notes payable to shareholders at each applicable period. (i) Does not include redeemable preferred stock of Foster Grant Holdings, Inc. See Note 5 of the Notes to Company's Consolidated Financial Statements. 13 20 RISK FACTORS In addition to the other information contained in this Prospectus, the following risk factors should be carefully considered in evaluating the Company and its business before tendering the Old Notes in exchange for the New Notes offered hereby. The risk factors set forth below are generally applicable to the New Notes as well as the Old Notes. CONSEQUENCES TO NON-TENDERING HOLDERS OF OLD NOTES Upon consummation of the Exchange Offer, the Company will have no further obligation to register the Notes except pursuant to a shelf registration statement to be filed under certain limited circumstance specified in "The Exchange Offer -- Purpose of the Exchange Offer." Thereafter, subject to such exception, any Holder of Old Notes who does not tender its Old Notes in the Exchange Offer will continue to hold restricted securities which may not be offered, sold or otherwise transferred, pledged or hypothecated except pursuant to Rule 144 and 144A under the Securities Act or pursuant to any other exemption from registration under the Securities Act relating to the disposition of securities, in which case, an opinion of counsel must be furnished to the Company that such an exemption is available. Based on interpretations by the staff of the Commission, the Company believes that the New Notes issued pursuant to the Exchange Offer in exchange for the Old Notes may be offered for resale, resold or otherwise transferred by holders 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 New Notes are acquired in the ordinary course of such holders' business and such holders have no arrangement with any person to participate in the distribution of such New Notes. Each broker-dealer that receives the New Notes for its own account in exchange for the Old Notes, where such New 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 New Notes. The interpretations by the staff of the Commission on which the Company has relied were based on the Exchange Offer No-Action Letters. The Company has not sought, and does not intend to seek, its own no-action letter and there can be no assurance that the staff of the Commission would make a similar determination with respect to the Exchange Offer. See "Plan of Distribution" LEVERAGE As a result of the sale of the Old Notes, the Company is highly leveraged. On April 4, 1998, after giving pro forma effect to the Offering and the application of the net proceeds therefrom, the Company would have had total indebtedness of approximately $76.4 million (of which $75.0 million would have consisted of the Notes and the balance would have consisted of other long-term obligations) and shareholders' deficit of approximately $6.6 million. In addition, the Company, through a subsidiary, has issued preferred stock which is subject to mandatory redemption at an amount ranging from $1.0 million to $4.0 million upon certain events, but not later than February 28, 2000. See "Certain Transactions" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." On a pro forma basis after giving effect to the Acquisitions, for the twelve months ended April 4, 1998, earnings were insufficient to cover fixed charges by $6.4 million. Subject to certain limitations in the Senior Credit Facility and the Indenture, the Company and its subsidiaries will be permitted to incur substantial additional indebtedness in the future. See "Capitalization," "Description of Notes" and "Description of Senior Credit Facility." The Company's ability to make scheduled payments of principal of, or to pay the interest or Liquidated Damages, if any, on, or to refinance, its indebtedness (including the Notes), or to fund planned capital expenditures will depend on its future performance, which, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond its control. Based upon the current level of operations and anticipated cost savings and revenue growth, the Company believes that cash flow from operations and available cash, together with available borrowings under the Senior Credit Facility, will be adequate to meet the Company's future liquidity needs for at least the next several years. The Company may, however, need to refinance all or a portion of the principal of the Notes on or prior to maturity. There can be no assurance that the Company's business will generate sufficient cash flow from operations, that 14 21 anticipated cost savings and revenue growth will be realized or that future borrowings will be available under the Senior Credit Facility in an amount sufficient to enable the Company to service its indebtedness, including the Notes, or to fund its other liquidity needs. In addition, there can be no assurance that the Company will be able to effect any such refinancing 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 leveraged could have important consequences to holders of the Notes, including, but not limited to: (i) making it more difficult for the Company to satisfy its obligations with respect to the Notes, (ii) increasing the Company's vulnerability to general adverse economic and industry conditions, (iii) limiting the Company's ability to obtain additional financing to fund future working capital, capital expenditures, research and development and other general corporate requirements, (iv) requiring the dedication of a substantial portion of the Company's cash flow from operations to the payment of principal of, and interest on, its indebtedness, thereby reducing the availability of such cash flow to fund working capital, capital expenditures or other general corporate purposes, (v) limiting the Company's flexibility in planning for, or reacting to, changes in its business and the industry and (vi) placing the Company at a competitive disadvantage vis-a-vis less leveraged competitors. In addition, the Indenture and the Senior Credit Facility will contain financial and other restrictive covenants that will limit the ability of the Company to, among other things, borrow additional funds. Failure by the Company to comply with such covenants could result in an event of default which, if not cured or waived, could have a material adverse effect on the Company. In addition, the degree to which the Company is leveraged could prevent it from repurchasing all of the Notes tendered to it upon the occurrence of a Change of Control. See "Description of Notes -- Repurchase at the Option of Holders -- Change of Control" and "Description of Senior Credit Facility." EFFECTIVE SUBORDINATION OF THE NOTES The Notes and the Subsidiary Guarantees will be senior unsecured obligations and will rank pari passu in right of payment with all other current and future senior obligations of the Company and the Subsidiary Guarantors, respectively. However, loans under the Senior Credit Facility will be secured by the accounts receivable and inventory of the Company and will be guaranteed by the Company's Domestic Subsidiaries, which guarantees will be secured by the accounts receivable and inventory of such subsidiaries. Accordingly, the Notes and the Subsidiary Guarantees will be effectively subordinated to all secured indebtedness to the extent of the collateral and will rank pari passu in right of payment with all other existing and future senior obligations of the Company or the Guarantors, respectively. Upon an event of default under any such secured indebtedness, the lenders of any secured indebtedness, including indebtedness under the Senior Credit Facility, could elect to declare all amounts outstanding, together with accrued and unpaid interest thereon, to be immediately due and payable. If the Company or the Subsidiary Guarantors were unable to repay those amounts, such lenders could proceed against the collateral granted them to secure that indebtedness. There can be no assurance that the assets of the Company or the relevant Subsidiary Guarantor remaining after repayment in full of such secured indebtedness would be sufficient to repay the holders of the Notes. LIMITATION ON SUBSIDIARY GUARANTEES Certain of the Company's operations are conducted through its subsidiaries. However, only the Company's Domestic Subsidiaries will be guarantors of the Notes. As a result, holders of indebtedness of, and trade creditors of, the Company's foreign subsidiaries will generally be entitled to payment of their claims from the assets of such subsidiaries before such assets will be made available to the Company. On a pro forma basis after giving effect to the Acquisitions, the Company's foreign subsidiaries would have held 8.1% of the Company's consolidated assets as of April 4, 1998 and would have accounted for 4.9% of the Company's consolidated net sales for the twelve months ended April 4, 1998. See Note 18 of the Notes to the Company's Consolidated Financial Statements included elsewhere herein. LOSS OF CUSTOMERS; CUSTOMER CONCENTRATION AND CONSOLIDATION During the years ended December 31, 1996 and 1997, three customers accounted for approximately 57% and 39% of the Company's net sales, respectively. These customers' accounts receivable balances represented 15 22 approximately 34% and 45% of the Company's accounts receivable as of December 31, 1996 and 1997, respectively. In 1997, Wal-Mart accounted for approximately 25% of the Company's net sales. The loss of any significant customer, whether through competition or otherwise, could have a material adverse effect on the Company's business, financial condition and results of operations. A significant portion of the Company's business activity is with mass merchandisers whose ability to meet their financial obligations is dependent on economic conditions affecting the retail industry. During recent years, many major retailers have experienced significant financial difficulties and some, including customers of the Company, have filed for bankruptcy protection. There can be no assurance that the financial difficulties of the Company's significant customers would not materially adversely affect the Company's business, financial condition and results of operations. In addition, certain segments of the retail industry, particularly mass merchandisers, variety stores, drug stores and supermarkets, are experiencing significant consolidation. In 1997, the Company lost two customers, one as a result of a merger into a retail chain that does not carry costume jewelry and the other due to a retailer ceasing operations. Further industry consolidation could result in the Company's loss of additional customers that are acquired by retailers serviced by other suppliers as well as further concentration of the Company's credit risks which could have a material adverse effect on the Company's results of operations. DEPENDENCE ON LICENSED BRANDS A key element of the Company's marketing strategy is to utilize licensed brand names and characters to expand its product offering and gain access to new customers. Most of the Company's license agreements are non-exclusive, of short duration and may be terminated if the Company fails to comply with any material terms thereof. There can be no assurance that any of these relationships with licensors will continue, that such agreements will be renewed or that the Company will be able to obtain licenses for additional brands. If the Company were unable in the future to obtain such licenses on terms it deems reasonable, it would be required to modify its marketing plans and could be forced to rely more heavily on its proprietary brands or generic product sales, which could materially adversely affect its business, financial condition and results of operations. See "Business - Business Strategy" and "-- Intellectual Property and Licenses." RISKS ASSOCIATED WITH ACQUISITIONS General. As part of its operating history and growth strategy, the Company has acquired and seeks to continue acquiring other businesses. The Company continually seeks acquisition candidates in selected markets and from time to time engages in exploratory discussions with potential acquisition candidates. There can be no assurance, however, that the Company will be able to identify and acquire targeted businesses or obtain financing for such acquisitions on satisfactory terms. Furthermore, there can be no assurance that competition for acquisition candidates will not escalate, thereby increasing the costs of making acquisitions or making suitable acquisitions unattainable. Limited Knowledge and Operating History. Notwithstanding its own due diligence investigation, management has, and will have, limited knowledge about the specific operating history, trends and customer buying patterns of businesses acquired in its recent acquisitions or future acquisitions. Consequently, no assurance can be given that the Company will be able to make future acquisitions at favorable prices, that acquired lines of business will perform as well as they had performed historically or that the Company will have sufficient information to analyze accurately the markets in which it elects to make acquisitions. Furthermore, additions by the Company of new products present certain risks and uncertainties resulting from the Company's relative unfamiliarity with these new products, the market for such new products, and the financial and operating controls required to manage such new product offerings. There can be no assurance that the Company will be successful in marketing these or other additions to its product offering or that its existing customers will accept such additions to the products currently purchased from the Company. Integration. The process of integrating acquired businesses into the Company's operations may result in unforeseen difficulties and may require a disproportionate amount of resources and management attention. Although the Company endeavors to integrate and assimilate the operations of acquired lines of business in an effective and timely manner, no assurance can be given that the Company will be successful in such integration attempts or that the Company will be able to hire, train, retain and assimilate individuals employed 16 23 at the acquired businesses. Further, no assurance can be given that the Company will successfully integrate its recent acquisitions or any other future acquired businesses into the Company's purchasing, marketing and management information systems, or that the Company's management and financial controls, personnel, computer systems and other corporate support systems will be adequate to manage the increase in the size and scope of the Company's operations and acquisition activity. Integration of acquisitions is often a complex process which may entail material, non-recurring expenditures, including facility closing costs, warehouse assimilation expenses, asset writedowns and severance payments. These expenditures have in the past had, and may continue to have, an adverse impact on the Company's results of operations. Significant Future Charges to Earnings. On a pro forma basis after giving effect to the Acquisitions, as of April 4, 1998, the Company would have had $20.8 million of net intangible assets consisting principally of goodwill on its balance sheet. The Company expects that amortization of these intangibles will result in quarterly noncash charges of $411,000 for the next 28 quarters, $329,000 for the next four quarters, $246,000 for the next four quarters, $150,000 for the following 34 quarters, $146,000 for the following five quarters and $133,000 for the final 75 quarters. The Company also anticipates that future acquisitions will involve the recording of a significant amount of intangible assets, particularly goodwill, on its balance sheet, which will be amortized over varying periods of time. In addition, the Company anticipates incurring a $2.6 million restructuring charge in the second quarter of 1998. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "The Company" and Note 1 of the Notes to the Company's Consolidated Financial Statements included elsewhere herein. PLANNED SINGLE SITE DISTRIBUTION FACILITY The Company distributes substantially all of its optical products from its Dallas, Texas distribution facility and the remainder of its products from its distribution center in Smithfield, Rhode Island. Upon completion of the expansion of the Rhode Island distribution center scheduled for the fourth quarter of 1998, the Company intends to close the Texas facility and consolidate its distribution operations in Rhode Island. A disruption of the Company's distribution operations for any reason, including theft, government intervention or a natural disaster such as fire, earthquake, flood or other casualty could cause the Company to limit or cease its operations, which would have a material adverse effect on the Company's business, financial condition and results of operations. Although the Company maintains business interruption insurance to cover natural disasters, no assurance can be given that such insurance will continue to be available to the Company on commercially reasonable terms, if at all, or that such insurance would be sufficient to compensate the Company for damages resulting from such casualty. In addition, no assurance can be given that an interruption in the Company's operations would not result in permanent loss of significant customers, which would have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Property." RELIANCE ON KEY PERSONNEL The Company's long-term success and its growth strategy depend on its existing management team. The Company maintains key man life insurance policies on the lives of several of its key executives and has entered into employment agreements with its executive officers. See "Management." However, the loss of the services of any of the key executives could have a material adverse effect on the Company's business, financial condition and results of operations. The Company's continued growth and operations also depends to a significant extent on its ability to retain other key employees and to attract new qualified employees. Competition for highly skilled business, marketing and other personnel is intense, particularly in the strong economic cycle currently prevailing. The loss of one or more key employees or the Company's inability to attract additional qualified employees could have an adverse effect on the Company's business, financial condition and results of operations. In addition, the Company may experience increased compensation costs in order to compete for skilled employees. 17 24 RELIANCE ON LIMITED NUMBER OF DELIVERY COMPANIES The Company primarily relies on a single independent delivery company, United Parcel Service ("UPS"). Although the Company is attempting to establish multiple delivery services to deal with the possibility of a future disruption in these services, there can be no assurance that the precautions taken by the Company will be adequate or that alternate delivery services can be located or developed by the Company in a timely manner. An interruption in service by UPS may have a material adverse effect on the Company's business, financial condition and results of operations. RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS The Company has operations in Canada, Mexico and the United Kingdom and intends to enter additional international markets in the future. No assurance can be given that the Company will be able to maintain or increase its international sales or that the Company's brands and products will be as popular in the various foreign countries as they are in the United States. In addition, the Company purchases a significant portion of its inventory from certain suppliers in Asia through its Hong Kong joint venture. Consequently, the Company is subject to the risks generally associated with conducting business abroad. This includes risks relating to currency exchange rates, new and different legal, tax, accounting and regulatory requirements, "local content" laws and tariff regulations, difficulties in staffing and managing foreign operations, political instability, trade restrictions and other factors. The Company's business could be affected by economic events or political instability that might affect exports, including duties, quotas and work stoppages. Although there are other suppliers of the inventory items purchased and the Company believes that these suppliers could provide similar inventory on fairly comparable terms, a change in suppliers could cause a delay in the Company's distribution process and a possible loss of sales, which would adversely affect the Company's results of operations. As with other companies that denominate purchases in dollars, declines in the dollar relative to foreign currencies could, over time, increase the cost to the Company of merchandise purchased in foreign countries, which could materially adversely affect the Company's business, financial condition and results of operations. UNPREDICTABILITY OF DISCRETIONARY CONSUMER SPENDING The success of the Company's business depends to a significant extent upon a number of factors relating to discretionary consumer spending, including general economic conditions affecting disposable consumer income, such as employment, business conditions, interest rates and taxation. Any significant decline in such general economic conditions or uncertainties regarding future economic prospects that adversely affect discretionary consumer spending generally, or purchasers of accessories or optical products specifically, could have a material adverse effect on the Company's business, financial condition and results of operations. COMPETITION The industries in which the Company operates are highly competitive and price sensitive. The Company competes with other distributors, manufacturers who distribute directly to retailers and vertically integrated retailers that perform their own manufacturing as well as indirectly with alternate channels of distribution to the consumer such as internet commerce. In addition, certain manufacturers and distributors of upscale optical products and accessories have manifested their intention to offer products in the popularly priced segment ($20 or less). Furthermore, many retailers require a new supplier to buy back the retailer's existing inventory as a condition to changing vendors. These inventory costs can be substantial and serve as a barrier to obtaining new customers and entering new distribution channels. The Company is also under continuous pressure from its major customers to reduce product costs. The failure of the Company to compete effectively with respect to product costs or other competitive factors could have a material adverse effect on the Company's business, financial condition and results of operations. DEPENDENCE ON COMPUTER SOFTWARE APPLICATIONS The Company has made a substantial investment in the development and enhancement of its computer and information systems. The Company anticipates that it will continue to make enhancements and 18 25 modifications to its computer systems as it executes its expansion plans and increases the scope of its product and service offerings in response to customer needs and new developments in technology. Such modifications may cause disruptions in operations, delay the integration of acquisitions, or cost more to design, implement or operate than currently budgeted. Any such disruptions, delays or costs could have a material adverse effect on the Company's business, financial condition and results of operations. The Company is currently implementing a substantial information system conversion which is scheduled to be completed by the first quarter of 1999. The Company believes that with planned modifications to existing software and successful conversion to the new software, the Year 2000 issue will not pose significant operational problems for the Company's systems as so modified or converted. Any delays or omissions by AAi or its agents to resolve such issues may have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Year 2000." SEASONALITY Significant portions of the Company's business are seasonal. Sunglasses are shipped primarily during the first half of the fiscal year as retailers build inventory for the spring and summer selling seasons, while costume jewelry and other accessories are shipped primarily during the second half of the fiscal year as retailers build inventory for the holiday season. Reading glasses sales are generally uniform throughout the year. Although the expansion of the Company's optical product line has, in part, offset the seasonality of the costume jewelry and other accessories product lines, the Company's financial condition and results of operations are highly dependent on these two principal shipping seasons. In addition, the Company's quarterly results could be adversely impacted by the timing of customer orders and scheduled shipping dates. SUSCEPTIBILITY TO CHANGING CONSUMER PREFERENCES The sunglasses and accessories industries are subject to changing consumer preferences. A significant portion of the Company's sunglasses, costume jewelry and small synthetic leather goods are susceptible to fashion trends. If the Company misjudges the market for a particular product or is unable to respond quickly to fashion trends, the Company's sales may be adversely affected which may leave the Company with excess inventory. In addition, the Company may be required to provide its customers with a higher level of markdowns and allowances on slow moving products. While the Company has a limited ability to modify slow-moving product lines to satisfy consumer preferences and otherwise utilize excess inventory, the Company cannot ensure that any such actions will be sufficient to redress a market misjudgment. Accordingly, a market misjudgment could adversely affect the Company's business, financial condition and results of operations. CERTAIN REGULATORY MATTERS Certain of the products sold by AAi must comply with quality control standards set by various governmental entities, including the Food and Drug Administration (the "FDA"). The FDA regulates the manufacture and sale of ophthalmic products under the Federal Food, Drug and Cosmetic Act, as amended by the 1976 Medical Device Amendments and certain subsequent amendments. Recently, the FDA has become more restrictive in the regulatory process and has increased its surveillance over existing products and manufacturing facilities. The FDA has authority to suspend or remove a product from the market or to cause a manufacturer to cease operations either at a facility or company-wide if it deems a product or a manufacturing process to be outside regulatory guidelines. Failure of the Company to comply with governmental standards could have a material adverse effect on the Company's business, financial condition and results of operations. POSSIBLE INABILITY TO FUND A CHANGE OF CONTROL OFFER Upon a Change of Control, the Company will be required to offer to repurchase all outstanding Notes at 101% of the principal amount thereof plus accrued and unpaid interest and Liquidated Damages, if any, to the date of repurchase. However, there can be no assurance that sufficient funds will be available at the time of any Change of Control to make any required repurchases of Notes tendered or that restrictions in the Senior Credit Facility will allow the Company to make such required repurchases. Notwithstanding these provisions, 19 26 the Company could enter into certain transactions, including certain recapitalizations, that would not constitute a Change of Control but would increase the amount of debt outstanding at such time. See "Description of Notes -- Repurchase at the Option of Holders." LACK OF A PUBLIC MARKET FOR THE NOTES The New Notes are being offered to holders of the Old Notes. The Old Notes were offered and sold in July 1998 to a small number of institutional investors and are eligible for trading at the PORTAL market. The Notes are a new issue of securities for which there is no existing trading market. There can be no assurance regarding the future development of a market for the Notes or the ability of holders of the Notes to sell their Notes or the price at which such holders may be able to sell their Notes. If such a market were to develop, the Notes could trade at prices that may be higher or lower than the initial offering price depending on many factors, including prevailing interest rates, the Company's operating results and the market for similar securities. The Initial Purchasers have advised the Company that they currently intend to make a market in the New Notes. The Initial Purchasers are not obligated to do so, however, and any market making with respect to the Notes may be discontinued at any time without notice. Therefore, there can be no assurance as to the liquidity of any trading market for the Notes or that an active trading market for the Notes will develop. The Company does not intend to apply for listing or quotation of the Notes on any securities exchange or stock market. Historically, the market for non-investment grade debt has been subject to disruptions that have caused substantial volatility in the prices of such securities. There can be no assurance that the market for the Notes will not be subject to similar disruptions. Any such disruptions may have an adverse effect on holders of the Notes. FRAUDULENT CONVEYANCE Under applicable provisions of federal bankruptcy law or comparable provisions of state fraudulent transfer law, if, among other things, the Company or any Subsidiary Guarantor, at the time it incurred the indebtedness evidences by the Notes or its Subsidiary Guarantee, (i) (a) was or is insolvent or rendered insolvent by reason of such occurrence or (b) was or is engaged in a business or transaction for which the assets remaining with the Company or such Subsidiary Guarantor constituted unreasonably small capital or (c) intended or intends to incur, or believed or believes that it would incur, debts beyond its ability to pay such debts as they mature, and (ii) the Company or such Subsidiary Guarantor received or receives less than reasonably equivalent value or fair consideration for the incurrence of such indebtedness, then the Notes and the Subsidiary Guarantees, and any pledge or other security interest securing such indebtedness, could be voided, or claims in respect of the Notes or the Subsidiary Guarantees could be subordinated to all other debts of the Company or such Subsidiary Guarantor, as the case may be. In addition, the payment of interest and principal by the Company pursuant to the Notes or the payment of amounts by a Subsidiary Guarantor pursuant to a Subsidiary Guarantee could be voided and required to be returned to the person making such payment, or to a fund for the benefit of the creditors of the Company or such Subsidiary Guarantor, as the case may be. The measures of insolvency for purposes of the foregoing considerations will vary depending upon the law applied in any proceeding with respect to the foregoing. Generally, however, the Company or Subsidiary Guarantor would be considered insolvent if (i) the sum of its debts, including contingent liabilities, were greater than the saleable value of all of its assets at a fair valuation or if the present fair saleable value of its assets were less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature or (ii) it could not pay its debts as they become due. On the basis of historical financial information, recent operating history and other factors, the Company and each Subsidiary Guarantor believes that, after giving effect to the indebtedness incurred in connection with the Offering and the Senior Credit Facility, it will not be insolvent, will not have unreasonably small capital for the business in which it is engaged and will not incur debts beyond its ability to pay such debts as they mature. There can be no assurance, however, as to what standard a court would apply in making such determinations or that a court would agree with the Company's or the Subsidiary Guarantors' conclusions in this regard. 20 27 THE COMPANY The Company, which was founded in 1962 as a jewelry manufacturer, was acquired by Gerald F. Cerce and Felix A. Porcaro, Jr. in 1972. Since that time, through a series of acquisitions and internal growth, AAi has evolved from a regional costume jewelry manufacturer into an international value-added distributor of optical products, costume jewelry, watches, clocks and synthetic leather goods with annual net sales of $182.0 million in 1997 on a pro forma basis after giving effect to the Acquisitions. In 1990, AAi partnered with Milagros Corporation Limited, a Hong Kong corporation, to form a joint venture (consisting of three operating entities) through which the Company outsources a majority of its manufacturing to independent manufacturers located in Asia. The Hong Kong joint venture, in which the Company currently holds a 49% interest, monitors contract manufacturing of the Company's products, serves as sourcing agent to certain customers of AAi and manufactures certain other accessories such as scarves, belts and beach towels for distribution directly to retailers. Outsourcing product manufacturing allows AAi to compete as a low cost supplier of its product lines and provides the Company with flexibility in its cost structure. The Hong Kong joint venture had 1997 net sales of $37.0 million, of which $15.2 million or 41.1% were to the Company. In response to a major customer's North American expansion, the Company established operations in Canada in 1994 and Mexico in 1996. The Company's Mexican operations are conducted through a 55% owned joint venture with a local costume jewelry manufacturer. The Company's Canadian operations and the Mexican joint venture had 1997 net sales of $5.3 million and $1.4 million, respectively. In December 1996, AAi acquired Foster Grant US, a major marketer and distributor of sunglasses and reading glasses and owner of the domestic rights to the Foster Grant trademark. This acquisition generated net sales of approximately $66.2 million in 1997 and significantly expanded AAi's optical product line. In March 1998, AAi acquired the European reading glasses and sunglasses business of Foster Grant UK, and the rights to the Foster Grant trademark in Europe, giving AAi worldwide rights to the Foster Grant brand. On June 23, 1998, the Company acquired an 80% interest in Fantasma. The other 20% interest in Fantasma is held by Roger Dreyer, President of that company. Mr. Dreyer and another Fantasma officer have options to acquire in the aggregate an additional 13% interest in Fantasma subject to satisfaction of certain earnings targets in 1998, 1999 and 2000. The Company's acquisition of Fantasma added watches and clocks to AAi's product lines and Disney and Warner Bros. stores to its customer base. AAi was incorporated in Rhode Island in December 1985 and is the successor by merger to a Rhode Island corporation incorporated in 1962. The Company's principal executive offices are located at 500 George Washington Highway, Smithfield, Rhode Island 02917, and its telephone number is (401) 231-3800. 21 28 USE OF PROCEEDS THE EXCHANGE OFFER This Exchange Offer is intended to satisfy certain of the Company's obligations under the Registration Rights Agreement. The Company will not receive any cash proceeds from the issuance of the New Notes offered in the Exchange Offer. In consideration for issuing the New Notes as contemplated in this Prospectus, the Company will receive in exchange the Old Notes in like principal amount, the form and terms of which are the same in all material respects as the form and terms of the New Notes except that the New Notes have been registered under the Securities Act and hence do not include certain rights to registration thereunder or contain transfer restrictions or terms with respect to Liquidated Damages. The Old Notes surrendered in exchange for the New Notes will be retired and canceled and cannot be reissued. Accordingly, issuance of the New Notes will not result in any proceeds to the Company or increase in the indebtedness of the Company. THE SALE OF THE OLD NOTES The net proceeds received by the Company from the Offering, after deducting the discount to the Initial Purchasers and related fees and expenses, were approximately $72.0 million. The Company used the net proceeds as follows: (i) $17.3 million was used to repay borrowings under term loans (the "Term Loans"); (ii) $52.3 million was used to repay borrowings under the Company's Revolving Credit Facility (the "Revolving Credit Facility") under the Senior Credit Facility (see "Description of Senior Credit Facility"); (iii) $2.2 million was used to repay the entire debt due to certain common and preferred shareholders under subordinated notes, less the advances made by the Company to certain shareholders (see "Certain Transactions"); and (iv) $0.2 million was retained as cash proceeds by the Company. The Company expects to use the balance of the net proceeds from the sale of the Old Notes for general corporate purposes, including working capital and capital expenditures. Pending use of such cash, the balance of the net proceeds of the sale of the Old Notes will be invested in cash equivalents. THE EXCHANGE OFFER PURPOSE OF THE EXCHANGE OFFER The Old Notes were sold by the Company on July 21, 1998 (the "Closing Date") through the Initial Purchasers to "qualified institutional buyers" (as defined in Rule 144A under the Securities Act). In connection with the sale of the Old Notes, the Company, the Guarantors and the Initial Purchasers entered into the Registration Rights Agreement pursuant to which the Company and the Guarantors agreed to cause to be filed with the Commission within 45 days after the Closing Date, and use their best efforts to cause to become effective on or prior to 135 days after July 21, 1998, a registration statement with respect to the Exchange Offer. However, if (i) the Company is not required to file an Exchange Offer registration statement or to consummate the Exchange Offer because the Exchange Offer is not permitted by applicable law or Commission policy or (ii) if any Holder of Old Notes shall notify the Company within 20 business days of the consummation of the Exchange Offer (A) that such Holder is prohibited by applicable law or Commission policy from participating in the Exchange Offer, or (B) that such Holder may not resell the New Notes acquired by it in the Exchange Offer to the public without delivering a prospectus and that the Prospectus contained in the Exchange Offer registration statement is not appropriate or available for such resales by such holder, or (C) that such Holder is a broker-dealer and holds Old Notes acquired directly from the Company or one of its affiliates, then the Company and the Guarantors will 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 Exchange Offer is being made by the Company to satisfy its obligations pursuant to the Registration Rights Agreement. A copy of the Registration Rights Agreement has been filed as an exhibit to the Registration Statement of which this Prospectus is a part. Once the Exchange Offer is consummated, the Company will have no further obligations to register any of the Old Notes not tendered by the Holders for exchange, except pursuant to a Shelf Registration Statement filed under the limited circumstances described 22 29 in the immediately preceding paragraph. Thereafter, any Holder of Old Notes who does not tender its Old Notes in the Exchange Offer and which is not eligible to use such a Shelf Registration Statement will continue to hold restricted securities which may not be offered, sold or otherwise transferred, pledged or hypothecated except pursuant to Rule 144 and Rule 144A under the Securities Act or pursuant to any other exemption from registration under the Securities Act relating to the disposition of securities. Based on interpretations by the staff of the Commission set forth in several no-action letters issued to third parties, including the Exchange Offer No-Action Letters, the Company believes that New Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be offered for resale, resold and otherwise transferred by Holders thereof who are not affiliates of the Company (other than a broker-dealer who acquired such Old Notes directly from the Company for resale pursuant to Rule 144A under the Securities Act or any other available exemption under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act; provided that the Holder is acquiring New Notes in its ordinary course of business and has not engaged in, and does not intend to engage in, any distribution (within the meaning of the Securities Act) of the New Notes and has no arrangement or understanding with any person to participate in a distribution of the New Notes. Persons wishing to exchange Old Notes in the Exchange Offer must represent to the Company that such conditions have been met. However, any Holder who may be deemed an "affiliate" (as defined under Rule 405 of the Securities Act) of the Company or who tenders in the Exchange Offer with the intention to participate, or for the purpose of participating, in a distribution of the New Notes cannot rely on the interpretation by the staff of the Commission set forth in such no-action letters, including the Exchange Offer No-Action Letters, and must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction. In addition, any such resale transaction should be covered by an effective registration statement containing the selling security holders information required by Item 507 of Regulation S-K of the Securities Act. Each broker-dealer that receives New Notes for its own account pursuant to the Exchange Offer in exchange for Old Notes where such Old Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities (other than acquisitions directly from the Company) must acknowledge that it will deliver a prospectus in connection with any resale of such New 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 New Notes received as aforesaid. The Company has agreed that for a period of 180 days after the Exchange Offer is consummated, it will, upon reasonable request, make this Prospectus available promptly to such broker-dealers for use in connection with any such resale. See "Plan of Distribution." Except as set forth above, this Prospectus may not be used for an offer to resell, or for a resale or other transfer of New Notes. The Registration Rights Agreement provides that (i) the Company will file an Exchange Offer registration statement with the Commission on or prior to 45 days after the Closing Date, (ii) the Company will use its best efforts to have the Exchange Offer registration statement declared effective by the Commissions on or prior to 135 days after the Closing Date, (iii) unless the Exchange Offer would not be permitted by applicable law or Commission policy, the Company will commence the Exchange Offer and use its best efforts to issue on or prior to 30 business days after the date on which the Exchange Offer registration statement was declared effective by the Commission, New Notes in exchange for all Old Notes tendered prior thereto in the Exchange Offer and (iv) if obligated to file the Shelf Registration Statement, the Company will use its best efforts to file the Shelf Registration Statement with the Commission on or prior to 30 days after such filing obligation arises and to cause the Shelf Registration to be declared effective by the Commission on or prior to 90 days after such obligation arises. If (a) the Company fails to file any of the Registration Statements required by the Registration Rights Agreement on or before the date specified for such filing, (b) any 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"), or (c) the Company fails to consummate the Exchange Offer within 30 business 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 23 30 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 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 the first Registration Default in an amount equal to $.05 per week per $1,000 principal amount of Transfer Restricted Securities held by such Holder. The amount of the Liquidated Damages will increase by an additional $.05 per week per $1,000 principal amount of 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 for all Registration Defaults of $.30 per week per $1,000 principal amount of Transfer Restricted Securities. All accrued Liquidated Damages will be paid by the Company on each interest payment date to the Global Note Holder by wire transfer of immediately available funds or by federal funds check and to Holders of certificated Notes by wire transfer to the accounts specified by them or by mailing checks to their registered addresses if no such accounts have been specified. Following the cure of all Registration Defaults, the accrual of Liquidated Damages will cease. For purposes of the foregoing, "Transfer Restricted Securities" means each Old Note until (i) the date on which such Old Note has been exchanged by a person other than a broker-dealer for a New Note in the Exchange Offer, (ii) following the exchange by a broker-dealer in the Exchange Offer of an Old Note for a New Note, the date on which such New 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 Old Note has been effectively registered under the Securities Act and disposed of in accordance with the Shelf Registration Statement or (iv) the date on which such Old Note is distributed to the public pursuant to Rule 144 under the Act. TERMS OF THE EXCHANGE OFFER General Upon the terms and subject to the conditions of the Exchange Offer set forth in this Prospectus and in the Letter of Transmittal, the Company will accept any and all Old 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 New Notes in exchange for each $1,000 principal amount of outstanding Old Notes accepted in the Exchange Offer. Holders may tender some or all of their Old Notes pursuant to the Exchange Offer. However, Old Notes may be tendered only in integral multiples of $1,000. As of August 5, 1998, there was $75.0 million aggregate principal amount of the Old Notes outstanding. This Prospectus, together with the Letter of Transmittal, is being sent to all registered holders as of , 1998. In connection with the issuance of the Old Notes, the Company arranged for the Old Notes to be issued and transferable in book-entry form through the facilities of DTC, acting as depository. The New Notes exchanged for the Old Notes will initially be issued and transferable in book-entry form through DTC. See "Description of Notes -- Book-Entry Delivery and Form." The Company shall be deemed to have accepted validly tendered Old 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 of Old Notes for the purpose of receiving the New Notes from the Company. If any tendered Old Notes are not accepted for exchange because of an invalid tender, the occurrence of certain other events set forth herein or otherwise, certificates for any such unaccepted Old Notes will be returned, without expense, to the tendering Holder thereof as promptly as practicable after the Expiration Date. Holders of Old Notes who tender 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 Old Notes pursuant to the Exchange Offer. The Company will pay the expenses, other than certain applicable taxes, of the Exchange Offer. See "-- Fees and Expenses." 24 31 EXPIRATION DATE; EXTENSIONS; AMENDMENTS The Company has the right to extend the Exchange Offer but only to the extent necessary to comply with applicable federal and state securities laws or if any action or proceeding is instituted or threatened in any court or by or before any governmental agency with respect to the Exchange Offer which, in the reasonable judgment of the Company, might impair the ability of the Company to proceed with the Exchange Offer. In order to extend the Expiration Date, the Company will notify the Exchange Agent and the record Holders of Old Notes of any extension by oral or written notice, each prior to 9:00 a.m., New York City time, on the next business day after the previously scheduled expiration date. The Expiration Date will not be extended beyond the 30th business day after the date of this Prospectus. The Company reserves the right to delay accepting any Old Notes, to extend the Exchange Offer, to amend the Exchange Offer or to terminate the Exchange Offer and not accept Old Notes not previously accepted if the applicable condition set forth herein under "Conditions" shall have occurred and shall not have been waived by the Company by giving oral or written notice of such delay, extension, amendment or termination to the Exchange Agent. Any such delay in acceptance, extension, amendment or termination will be followed as promptly as practicable by oral or written notice 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 in a manner reasonably calculated to inform the Holders of such amendment and the Company will extend the Exchange Offer as necessary to provide to such Holders a period of five to ten business days after such amendment, depending upon the significance of the amendment and the manner of disclosure to Holders of the Old Notes if the Exchange Offer would otherwise expire during such five to ten business day period. Without limiting the manner in which the Company may choose to make public announcement of any 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. ACCRUED AMOUNTS ON THE NOTES The New Notes will bear interest at a rate equal to 10 3/4% per annum from the last date on which interest was paid on the Old Notes surrendered in exchange therefor or, if no interest has been paid, from the date of original issue of such Old Notes. Interest on the Notes is payable semi-annually on January 15 and July 15 of each year, commencing on January 15, 1999. PROCEDURES FOR TENDERING To tender in the Exchange Offer, a Holder of Old Notes must complete, sign and date the Letter of Transmittal, or a facsimile thereof, have the signatures thereon guaranteed if required by the instructions to the Letter of Transmittal, and mail or otherwise deliver such Letter of Transmittal or such facsimile, together with the Old Notes and any other required documents, so that it is received by the Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration Date. Any financial institution that is a participant in DTC (the "Book-Entry Transfer Facility") may make book-entry delivery of the Old Notes by causing the Book-Entry Transfer Facility to transfer such Old Notes into the Exchange Agent's account in accordance with the Book-Entry Transfer Facility procedure for such transfer. Although delivery of Old Notes may be effected through book-entry transfer into the Exchange Agent's account at the Book-Entry Transfer Facility, the Letter of Transmittal (or facsimile thereof), with any required signature guarantees and any other required documents, must, in any case, be transmitted to and received or confirmed by the Exchange Agent at its address set forth in "-- Exchange Agent" below prior to 5:00 p.m., New York City time, on the Expiration Date. DELIVERY OF DOCUMENTS TO THE COMPANY IN ACCORDANCE WITH ITS PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT. The tender by a Holder 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. 25 32 Delivery of all documents must be made to the Exchange Agent at its address set forth below. Holders may also request their respective brokers, dealers, commercial banks, trust companies or nominees to effect the above transactions for such Holders. The method of delivery of the tendered Old Notes, 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 the Holder use an overnight or hand delivery service. In all cases, sufficient time should be allowed to assure timely delivery. No Letter of Transmittal or Old Notes should be sent to the Company. Only a Holder of Old Notes may tender such Old Notes in the Exchange Offer. The term "Holder" with respect to the Exchange Offer means any person in whose name Old 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. ANY BENEFICIAL HOLDER WHOSE OLD NOTES ARE REGISTERED IN THE NAME OF ITS 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 ITS BEHALF. IF SUCH BENEFICIAL HOLDER WISHES TO TENDER ON ITS OWN BEHALF, SUCH BENEFICIAL HOLDER MUST, PRIOR TO COMPLETING AND EXECUTING THE LETTER OF TRANSMITTAL AND DELIVERING ITS OLD NOTES, EITHER MAKE APPROPRIATE ARRANGEMENTS TO REGISTER OWNERSHIP OF THE OLD NOTES IN SUCH HOLDER'S NAME OR OBTAIN A PROPERLY COMPLETED BOND POWER FROM THE REGISTERED HOLDER. THE TRANSFER OF RECORD OWNERSHIP MAY TAKE CONSIDERABLE TIME. Signatures on a Letter of Transmittal (or a facsimile thereof) or a notice of withdrawal, as the case may be, must be guaranteed by an Eligible Institution (as defined below) unless the Old Notes tendered pursuant thereto are tendered (i) by a registered Holder who has not completed the box entitled "Special Payment 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 facsimile thereof) or a notice of withdrawal, as the case may be, are required to be guaranteed, such guarantee must be by or 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 institution which falls within the definition of "Eligible Guarantor Institution" contained in Rule 17Ad-15 promulgated by the Commission under the Exchange Act (each an "Eligible Institution"). If the Letter of Transmittal (or facsimile thereof) is signed by a person other than the registered Holder of the Old Notes tendered thereby, such Old Notes must be endorsed or accompanied by appropriate bond powers signed as the name of the registered Holder or Holders appears on the Old Notes, with the signatures on the endorsement or bond power guaranteed by an Eligible Institution. If the Letter of Transmittal (or facsimile thereof) or any Old 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. All questions as to the validity, form, eligibility (including time of receipt) and acceptance of tendered Old Notes and withdrawal of tendered Old Notes will be determined by the Company in its sole discretion, which determination will be final and binding on all parties. The Company reserves the absolute right to reject any and all Old Notes not properly tendered or any Old Notes the Company's acceptance of which would, in the opinion of counsel for the Company, be unlawful. The Company also reserves the right to waive any defects, irregularities or conditions of tender as to the Exchange Offer and/or particular Old 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 Old Notes must be cured within such time as the Company shall determine. None of the Company, the Exchange Agent nor any other person shall be under any duty to give notification of 26 33 defect or irregularities with respect to tenders of Old Notes, nor shall any of them incur any liability for failure to give such notification. Tenders of Old Notes will not be deemed to have been made until such defects or irregularities have been cured or waived. Any Old Notes received by the Exchange Agent that are not properly tendered and as to which any defects or irregularities have not been cured or waived will be returned by the Exchange Agent to the tendering Holder(s) of Old Notes, unless otherwise provided in the Letter of Transmittal, as soon as practicable following the Expiration Date. By tendering, each Holder will represent to the Company that, among other things, the New Notes acquired pursuant to the Exchange Offer are being acquired in the ordinary course of such Holder's business, that such Holder has not engaged in, nor intends to engage in, any distribution of the New Notes and has no arrangement or understanding with any person to participate in the distribution of such New Notes, and that such Holder is not an "affiliate" (as defined under Rule 405 of the Securities Act) of the Company or any of its subsidiaries. If the Holder is a broker-dealer that will receive New Notes for is own account in exchange for Old Notes that were acquired as a result of market-making activities or other trading activities, such Holder by tendering will acknowledge that it will deliver a Prospectus in connection with any resale of such New Notes. See "Plan of Distribution." GUARANTEED DELIVERY PROCEDURES Holders who wish to tender their Old Notes and (i) whose Old Notes are not immediately available, or (ii) who cannot deliver their Old Notes, the Letter of Transmittal or any other required documents to the Exchange Agent, or cannot complete the procedure for book-entry transfer, prior to 5:00 p.m. on 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 (by facsimile transmission, mail or hand delivery) setting forth the name and address of the Holder of the Old Notes and the principal amount of Old Notes tendered, stating that the tender is being made thereby and guaranteeing that, within three New York Stock Exchange trading days after the date of execution of the Notice of Guaranteed Delivery, the Letter of Transmittal (or facsimile thereof) together with the certificate(s) representing the Old Notes to be tendered in proper form for transfer (or a confirmation of a book-entry transfer into the Exchange Agent's account at the Book-Entry Transfer Facility of Old Notes delivered electronically) 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 Old Notes in proper form for transfer (or a confirmation of a book-entry transfer into the Exchange Agent's account at the Book-Entry Transfer Facility of Old Notes delivered electronically) 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 date of execution of the Notice of Guaranteed Delivery. Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be sent to Holders who wish to tender their Old Notes according to the guaranteed delivery procedures set forth above. WITHDRAWAL OF TENDERS Except as otherwise provided herein, tenders of Old 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 Old 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 Old Notes to be withdrawn (the "Depositor"), (ii) identify the Old Notes to be withdrawn (including the principal amount of such Old Notes), (iii) be signed by the Holder in the same manner as the original signature on the Letter of Transmittal by which such Old Notes were tendered (including any required signature guarantees) or be 27 34 accompanied by documents of transfer sufficient to have the trustee with respect to the Old Notes register the transfer of such Old Notes into the name of the person withdrawing the tender, and (iv) specify the name in which any such Old 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, which determination shall be final and binding on all parties. Any Old Notes so withdrawn will be deemed not to have been validly tendered for purposes of the Exchange Offer and no New Notes will be issued with respect thereto unless the Old Notes so withdrawn are validly retendered. Any Old Notes which have been tendered but which are not accepted for payment 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 Old 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 may terminate or amend the Exchange Offer as provided herein and will not be required to accept for exchange, or exchange New Notes for, any Old Notes not theretofore accepted for exchange, if any of the following conditions exist: (a) the Exchange Offer, or the making of any exchange by a Holder, violates applicable law or any applicable policy of the Commission; or (b) any action or proceeding is instituted or threatened in any court or by or before any governmental agency with respect to the Exchange Offer which, in the reasonable judgment of the Company, might impair the ability of the Company to proceed with the Exchange Offer; or (c) there shall have been adopted or enacted any law, statute, rule or regulation which, in the reasonable judgment of the Company, might materially impair the ability of the Company to proceed with the Exchange Offer. If any such conditions exist, the Company may (i) refuse to accept any Old Notes and return all tendered Old Notes to exchanging Holders, (ii) extend the Exchange Offer and retain all Old Notes tendered prior to the expiration of the Exchange Offer, subject, however, to the rights of Holders to withdraw such Old Notes (see "-- Withdrawal of Tenders") or (iii) waive certain of such conditions with respect to the Exchange Offer and accept all properly tendered Old Notes which have not been withdrawn or revoked. If such waiver constitutes a material change to the Exchange Offer, the Company will promptly disclose such waiver in a manner reasonably calculated to inform Holders of Old Notes of such waiver. The foregoing conditions are for the sole benefit of the Company and may be asserted by the Company regardless of the circumstances giving rise to any such condition or may be waived by the Company in whole or in part at any time and from time to time in its sole discretion. The failure by the Company at any time to exercise any of the foregoing rights shall not be deemed a waiver of any such right and each such right shall be deemed an ongoing right which may be asserted at any time and from time to time. In addition, (i) if, because of any change in applicable law or applicable policy thereof by the Commission the Company is not permitted to effect the Exchange Offer, (ii) the Exchange Offer is not consummated within 135 days after the date of original issue of the Old Notes or (iii) any Holder of Old Notes notified the Company within 20 business days of the consummation of the Exchange Offer that, for certain specified reasons, such Holder is precluded from participating in the Exchange Offer, then the Company shall file a Shelf Registration Statement. Thereafter, the Company's obligation to consummate the Exchange Offer shall be terminated. EXCHANGE AGENT IBJ Schroder Bank & Trust Company has been appointed as Exchange Agent for the Exchange Offer. Questions and requests for assistance, requests for additional copies of this Prospectus or of the Letter of 28 35 Transmittal and requests for Notices of Guaranteed Delivery should be directed to the Exchange Agent addressed as follows: By registered or certified mail: IBJ Schroder Bank & Trust-Company Bowling Green Station P.O. Box 84 New York, New York 10274-0084 Attention: Reorganization Operations Department By hand or by overnight courier: 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 Attention: Customer Service 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 facsimile, telephone or in person by officers and regular employees of the Company and its affiliates. The Company will not make any payments to brokers, dealers or others soliciting acceptances of the Exchange Offer. The Company, however, will pay the Exchange Agent reasonable and customary fees for its services and will reimburse it for its reasonable out-of-pocket expenses in connection therewith. The Company may also pay brokerage houses and other custodians, nominees and fiduciaries the reasonable out-of-pocket expenses incurred by them in forwarding copies of the Prospectus and related documents to the beneficial owners of the Old Notes, and in handling or forwarding tenders for exchange. The cash expenses to be incurred in connection with the Exchange Offer will be paid by the Company, are estimated in the aggregate not to exceed $300,000, and include fees and expenses of the Exchange Agent and Trustee under the Indenture and accounting and legal fees. The Company will pay all transfer taxes, if any, applicable to the exchange of Old Notes pursuant to the Exchange Offer. If, however, certificates representing New Notes or Old Notes for principal amounts not tendered or accepted for exchange are to be delivered to, or are to be registered or issued in the name of, any person other than the Holder of the Old Notes tendered, or if tendered Old 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 Old Notes pursuant to the Exchange Offer, then the amount of any such transfer taxes (whether imposed on the Holder or any other person(s)) will be payable by the tendering Holder. If satisfactory evidence of payment of such taxes or exemption therefrom is not submitted with the Letter of Transmittal, the amount of such transfer taxes will be billed directly to such tendering Holder. ACCOUNTING TREATMENT The New Notes will be recorded at the same carrying value as the Old Notes, that is, face value as reflected in the Company's accounting records on the date of the exchange. Accordingly, no gain or loss for accounting purposes will be recognized upon the consummation of the Exchange Offer. The issuance costs incurred in connection with the Exchange Offer will be capitalized and amortized over the term of the New Notes. A copy of the Indenture has been filed as an exhibit to the Registration Statement of which this Prospectus is a part. 29 36 CAPITALIZATION The following table sets forth the Company's consolidated capitalization as of April 4, 1998 on a historical basis and on an as adjusted basis after giving effect to the Offering and the application of the net proceeds therefrom as if they had occurred as of April 4, 1998.
APRIL 4, 1998 --------------------- ACTUAL AS ADJUSTED ------- ----------- (IN THOUSANDS) Current portion of long-term obligations: Current maturities of long-term obligations (a)........... $ 3,387 $ 669 Senior credit facility (b)................................ 47,066 -- Long-term obligations: Senior credit facility.................................... 7,975 -- 10 3/4% senior notes due 2006............................. -- 75,000 Subordinated promissory notes payable to shareholders..... 5,575 -- Other long-term obligations(a)............................ 753 753 ------- ------- Total obligations......................................... 64,756 76,422 Redeemable preferred stock: Redeemable preferred stock of a subsidiary................ 847 847 Preferred stock, $.01 par value, 200,000 authorized; 43,700 designated, issued and outstanding as Series A Preferred Stock........................................ 26,766 26,766 ------- ------- Total redeemable preferred stock.......................... 27,613 27,613 ------- ------- Total shareholders' deficit................................. (6,590) (6,590) ------- ------- Total capitalization........................................ $85,779 $97,445 ======= =======
- --------------- (a) Excludes approximately $1.2 million of deferred compensation. (b) Represents borrowings of approximately $45.0 million outstanding under the Revolving Credit Facility and approximately $2.0 million outstanding under the Term Loans. The long-term portion represents the remaining amount outstanding under the Term Loans. 30 37 SELECTED PRO FORMA FINANCIAL INFORMATION The following Unaudited Pro Forma Combined Statements of Operations for the year ended December 31, 1997 and the three and twelve months ended April 4, 1998 give effect to the Acquisitions and the Offering and the application of the net proceeds therefrom as if each had occurred at the beginning of the earliest period presented. The Unaudited Pro Forma Combined Statements of Operations do not include the effects of the Company's acquisition of Donley Company in May 1998 as the Company has determined that its effects are not material. The following Unaudited Pro Forma Combined Balance Sheet as of April 4, 1998 gives effect to the Fantasma Acquisition and the Offering and the application of the net proceeds therefrom. The Unaudited Pro Forma Combined Financial Statements have been prepared using the purchase method of accounting for the Acquisitions whereby the total cost of each acquisition is allocated to the tangible and intangible assets acquired and liabilities assumed based upon their respective fair values at the effective dates of such acquisitions. Such allocations for the Fantasma Acquisition have been made based upon currently available information and management's estimates. Final allocations will be determined upon completion of the analysis of the assets acquired and liabilities assumed. The Unaudited Pro Forma Combined Statement of Operations for the year ended December 31, 1997 is derived from the audited financial statements of the Company for the year ended December 31, 1997, the unaudited financial statements of Fantasma and Foster Grant UK for the year ended December 31, 1997 and the unaudited financial statements of Superior for the six months ended June 30, 1997. The Unaudited Pro Forma Combined Statement of Operations for the twelve months ended April 4, 1998 is derived from the unaudited financial statements of the Company and Fantasma for the twelve months ended April 4, 1998, the unaudited financial statements of Foster Grant UK for the eleven months ended February 28, 1998 and the unaudited financial statements of Superior for the three months ended June 30, 1997. The Unaudited Pro Forma Combined Statement of Operations for the three months ended April 4, 1998 is derived from the unaudited financial statements of the Company for the three months ended April 4, 1998, the unaudited financial statements of Fantasma for the three months ended March 31, 1998 and the unaudited financial statements of Foster Grant UK for the two months ended February 28, 1998. The historical financial information included in the pro forma Statements of Operations for Superior, Fantasma and Foster Grant UK for the above mentioned periods represents the operating results of these entities prior to the Company's acquisition for each period presented. The unaudited financial statements reflect all adjustments, consisting of normal recurring adjustments, which in the opinion of management are necessary for a presentation of results for the respective periods in accordance with the basis of presentation described in Note 1 of the Notes to the Company's Consolidated Financial Statements and similar statements found in the other entities' unaudited financial statements. The Unaudited Pro Forma Combined Financial Statements do not purport to represent what the results of operations or financial position of the Company would actually have been if any of the transactions had occurred on such dates or to project the results of operations or financial positions of the Company for any future date or period. The Unaudited Pro Forma Combined Financial Statements set forth below should be read in conjunction with the respective Consolidated Financial Statements and Notes thereto of the Company included elsewhere in this Prospectus and "Management's Discussion and Analysis of Financial Condition and Results of Operations." 31 38 UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 ------------------------------------------------------------------------- HISTORICAL PRO FORMA -------------------------------------------- COMBINED FOSTER FOR THE AAI SUPERIOR(a) GRANT UK FANTASMA ADJUSTMENTS ACQUISITIONS -------- ----------- -------- -------- ----------- ------------ (DOLLARS IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Net sales..................... $149,411 $6,314 $9,104 $17,163 $ -- $181,992 Cost of goods sold............ 77,928 2,939 4,089 12,750 -- 97,706 -------- ------ ------ ------- ------- -------- Gross profit.................. 71,483 3,375 5,015 4,413 -- 84,286 Operating expenses............ 65,285 2,940 4,336 3,572 53(b) 76,680 166(c) 328(d) -------- ------ ------ ------- ------- -------- Income from operations........ 6,198 435 679 841 (547) 7,606 Interest expense.............. (4,214) (134) (112) (481) (754)(e) (5,695) Other (expense) income, net... 31 21 (101) -- -- (49) -------- ------ ------ ------- ------- -------- Income (loss) before taxes and dividends and accretion on preferred stock............. 2,015 322 466 360 (1,301) 1,862 Income tax benefit (expense)................... (1,177) -- -- (145) 242(h) (1,080) -------- ------ ------ ------- ------- -------- Net income (loss) before dividends and accretion on preferred stock............. 838 322 466 215 (1,059) 782 Dividends and accretion on preferred stock............. 2,496 -- -- -- -- 2,496 -------- ------ ------ ------- ------- -------- Net income (loss) applicable to common shareholders...... $ (1,658) $ 322 $ 466 $ 215 $(1,059) $ (1,714) ======== ====== ====== ======= ======= ======== OTHER OPERATING DATA: Depreciation and amortization................ $ 9,894 $ 319 $ 806 $ 11 $ 547 $ 11,577 EBITDA (i).................... 16,123 775 1,384 852 -- 19,134 Capital expenditures.......... 7,583 298 523 41 -- 8,445 Cash interest expense......... -- -- -- -- -- -- YEAR ENDED DECEMBER 31, 1997 ------------------------------- PRO FORMA COMBINED AS PRO FORMA ADJUSTED FOR THE EFFECTS OF OFFERING AND THE THE OFFERING ACQUISITIONS ------------ ---------------- (DOLLARS IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Net sales..................... $ -- $181,992 Cost of goods sold............ -- 97,706 ------- -------- Gross profit.................. -- 84,286 Operating expenses............ -- 76,680 ------- -------- Income from operations........ -- 7,606 Interest expense.............. (2,594)(f) (8,664) (375)(g) Other (expense) income, net... -- (49) ------- -------- Income (loss) before taxes and dividends and accretion on preferred stock............. (2,969) (1,107) Income tax benefit (expense)................... 1,722(h) 642 ------- -------- Net income (loss) before dividends and accretion on preferred stock............. (1,247) (465) Dividends and accretion on preferred stock............. -- 2,496 ------- -------- Net income (loss) applicable to common shareholders...... $(1,247) $ (2,961) ======= ======== OTHER OPERATING DATA: Depreciation and amortization................ $ -- $ 11,577 EBITDA (i).................... -- 19,134 Capital expenditures.......... -- 8,445 Cash interest expense......... -- 8,269 SELECTED RATIOS: Ratio of EBITDA to cash interest expense.............. 2.31x Ratio of total debt to EBITDA......................... 4.02x Ratio of earnings to fixed charges(j)................. --
- --------------- (a) Includes the results of operations from the beginning of the period reported to July 1, 1997, the date of acquisition by AAi. (b) Reflects the amortization of intangible assets associated with the acquisition of certain assets of Foster Grant UK. (c) Reflects the amortization of intangible assets associated with the acquisition of certain assets of Superior. (d) Reflects the amortization of intangible assets associated with the Fantasma Acquisition. (e) Reflects pro forma interest expense on debt used to finance the Acquisitions calculated using an assumed interest rate of 8.96% per annum on the Revolving Credit Facility and Term Loans. (f) Reflects the estimated additional interest expense associated with the Notes at a rate of 10.75% per annum. (g) Reflects the estimated additional amortization of deferred financing costs associated with the Offering. (h) Reflects pro forma tax impact of pro forma adjustments stated at the Company's effective tax rate. (i) "EBITDA" is defined as earnings before interest, taxes, depreciation and amortization. Although EBITDA is not a measure of performance calculated in accordance with GAAP, AAi believes that EBITDA is accepted as a generally recognized measure of performance in the distribution industry. Nevertheless, this measure should not be considered in isolation or as a substitute for operating income, net income, net cash provided by operating activities or any other measure for determining AAi's operating performance or liquidity which is calculated in accordance with GAAP. (j) For purposes of computing the ratio of earnings to fixed charges, earnings consist of earnings before income taxes plus fixed charges (excluding accretion and noncash dividends on Series A Preferred Stock). Fixed charges consist of interest expense, amortization of debt issuance costs, accretion and noncash dividends on Series A Preferred Stock and the portion of rental expense that is representative of the interest factor. On a pro forma basis, earnings were insufficient to cover fixed charges by $7.2 million. 32 39 UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
THREE MONTHS ENDED APRIL 4, 1998 ------------------------------------------------------------------------------------------ HISTORICAL PRO FORMA --------------------------- PRO FORMA COMBINED AS FOSTER COMBINED PRO FORMA ADJUSTED FOR THE GRANT FOR THE EFFECTS OF OFFERING AND THE AAI UK(A) FANTASMA ADJUSTMENTS ACQUISITIONS THE OFFERING ACQUISITIONS ------- ------ -------- ----------- ------------ ------------ ---------------- (DOLLARS IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Net sales......................... $42,703 $1,883 $ 2,941 $ -- $ 47,527 $ -- $47,527 Cost of goods sold................ 23,431 839 2,030 -- 26,300 -- 26,300 ------- ------ ------- ------- -------- ------ ------- Gross profit...................... 19,272 1,044 911 -- 21,227 -- 21,227 Operating expenses 17,627 941 906 9(b) 19,565 -- 19,565 82(c) ------- ------ ------- ------- -------- ------ ------- Income from operations............ 1,645 103 5 (91) 1,662 -- 1,662 Interest expense.................. (1,178) (15) (102) (168)(d) (1,463) (606)(e) (2,163) (94)(f) Other (expense) income, net....... 76 (18) -- -- 58 -- 58 ------- ------ ------- ------- -------- ------ ------- Income (loss) before taxes and dividends and accretion on preferred stock................. 543 70 (97) (259) 257 (700) (443) Income tax benefit (expense)...... (239) -- -- 126(g) (113) 308(g) 195 ------- ------ ------- ------- -------- ------ ------- Net income (loss) before dividends and accretion on preferred stock........................... 304 70 (97) (133) 144 (391) (248) Dividends and accretion on preferred stock................. 683 -- -- -- 683 -- 683 ------- ------ ------- ------- -------- ------ ------- Net income (loss) applicable to common shareholders............. $ (379) $ 70 $ (97) $ (133) $ (539) $ (391) $ (931) ======= ====== ======= ======= ======== ====== ======= OTHER OPERATING DATA: Depreciation and amortization..... $ 2,972 $ 284 $ 4 $ 91 $ 3,351 -- $ 3,351 EBITDA (h)........................ 4,693 369 9 -- 5,071 -- 5,071 Capital expenditures.............. 9,073 521 2 -- 9,596 -- 9,596 Cash interest expense............. -- -- -- -- -- -- 2,016 SELECTED RATIOS: Ratio of EBITDA to cash interest expense................................................................... 2.52x Ratio of total debt to EBITDA.............................................................................. 3.77x Ratio of earnings to fixed charges(i)...................................................................... --
- --------------- (a) Includes the results of operations from the beginning of the period reported to March 5, 1998, the date of acquisition by AAi. (b) Reflects the amortization of intangible assets associated with the acquisition of certain assets of Foster Grant UK. (c) Reflects the amortization of intangible assets associated with the Fantasma Acquisition. (d) Reflects pro forma interest expense on debt used to finance the acquisitions calculated using an assumed interest rate of 9.00% per annum on the Revolving Credit Facility and Term Loans. (e) Reflects the estimated additional interest expense associated with the Notes at a rate of 10.75% per annum. (f) Reflects the estimated additional amortization of deferred financing costs associated with the Offering. (g) Reflects pro forma tax impact of pro forma adjustments stated at the Company's effective tax rate. (h) "EBITDA" is defined as earnings before interest, taxes, depreciation and amortization. Although EBITDA is not a measure of performance calculated in accordance with GAAP, AAi believes that EBITDA is accepted as a generally recognized measure of performance in the distribution industry. Nevertheless, this measure should not be considered in isolation or as a substitute for operating income, net income, net cash provided by operating activities or any other measure for determining AAi's operating performance or liquidity which is calculated in accordance with GAAP. (i) For purposes of computing the ratio of earnings to fixed charges, earnings consist of earnings before income taxes plus fixed charges (excluding accretion and noncash dividends on Series A Preferred Stock). Fixed charges consist of interest expense, amortization of debt issuance costs, accretion and noncash dividends on the Series A Preferred Stock and the portion of rental expense that is representative of the interest factor. On a pro forma basis, earnings were insufficient to cover fixed charges by $1.7 million. 33 40 UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
TWELVE MONTHS ENDED APRIL 4, 1998 -------------------------------------------------------- HISTORICAL ------------------------------------------ FOSTER GRANT AAI SUPERIOR(A) UK(A) FANTASMA ADJUSTMENTS -------- ----------- ------ -------- ----------- (DOLLARS IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Net sales....................... $157,263 $3,349 $8,334 $18,228 $ -- Cost of goods sold.............. 82,336 1,650 3,677 12,844 -- -------- ------ ------ ------- ------- Gross profit.................... 74,927 1,699 4,657 5,384 -- Operating expenses.............. 68,225 1,696 4,039 3,631 53(b) 83(c) 328(d) -------- ------ ------ ------- ------- Income from operations.......... 6,702 3 618 1,753 (464) Interest expense................ (4,464) (70) (97) (495) (912)(e) Other (expense) income, net..... 59 7 (98) -- -- -------- ------ ------ ------- ------- Income (loss) before taxes and dividends and accretion on preferred stock............... 2,297 (60) 423 1,258 (1,376) Income tax benefit (expense).... (1,320) -- -- (124) 325(h) -------- ------ ------ ------- ------- Net income (loss) before dividends and accretion on preferred stock............... 977 (60) 423 1,134 (1,051) Dividends and accretion on preferred stock............... 2,582 -- -- -- -- -------- ------ ------ ------- ------- Net income (loss) applicable to common shareholders........... $ (1,605) $ (60) $ 423 $ 1,134 $(1,051) ======== ====== ====== ======= ======= OTHER OPERATING DATA: Depreciation and amortization... $ 10,879 $ 110 $ 757 $ 13 $ 464 EBITDA (i)...................... 17,640 120 1,278 1,766 -- Capital expenditures............ 15,164 174 671 294 -- Cash interest expense........... -- -- -- -- -- SELECTED RATIOS: Ratio of EBITDA to cash interest expense.................................................. Ratio of total debt to EBITDA............................................................. Ratio of earnings to fixed charges(j)..................................................... TWELVE MONTHS ENDED APRIL 4, 1998 ----------------------------------------------- PRO FORMA PRO FORMA COMBINED AS COMBINED PRO FORMA ADJUSTED FOR THE FOR THE EFFECTS OF OFFERING AND THE ACQUISITIONS THE OFFERING ACQUISITIONS ------------ ------------ ----------------- (DOLLARS IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Net sales....................... $187,174 $ -- $187,174 Cost of goods sold.............. 100,507 -- 100,507 -------- ------- -------- Gross profit.................... 86,667 -- 86,667 Operating expenses.............. 78,055 -- 78,055 -------- ------- -------- Income from operations.......... 8,612 -- 8,612 Interest expense................ (6,038) (2,244)(f) (8,657) (375)(g) Other (expense) income, net..... (32) -- (32) -------- ------- -------- Income (loss) before taxes and dividends and accretion on preferred stock............... 2,542 (2,619) (77) Income tax benefit (expense).... (1,119) (1,153)(h) 34 -------- ------- -------- Net income (loss) before dividends and accretion on preferred stock............... 1,423 (1,466) (43) Dividends and accretion on preferred stock............... 2,582 -- 2,582 -------- ------- -------- Net income (loss) applicable to common shareholders........... $ (1,159) $(1,466) $ (2,625) ======== ======= ======== OTHER OPERATING DATA: Depreciation and amortization... $ 12,223 $ -- $ 12,223 EBITDA (i)...................... 20,802 -- 20,802 Capital expenditures............ 16,303 -- 16,303 Cash interest expense........... -- -- 8,260 SELECTED RATIOS: Ratio of EBITDA to cash interest 2.52x Ratio of total debt to EBITDA... 3.67x Ratio of earnings to fixed charg --
- --------------- (a) Includes the results of operations of the acquired businesses from the beginning of the period reported to the respective dates of acquisition by AAi (Superior on July 1, 1997 and Foster Grant UK on March 5, 1998). (b) Reflects the amortization of intangible assets associated with the acquisition of certain assets of Foster Grant UK. (c) Reflects the amortization of intangible assets associated with the acquisition of Superior. (d) Reflects the amortization of intangible assets associated with the Fantasma Acquisition. (e) Reflects pro forma interest expense on debt used to finance the acquisitions calculated using an assumed average interest rate of 8.97% per annum on the Revolving Credit Facility and Term Loans. (f) Reflects the estimated additional interest expense associated with the Notes at a rate of 10.75% per annum. (g) Reflects the estimated additional amortization of deferred financing costs associated with the Offering. (h) Reflects pro forma tax impact of pro forma adjustments stated at the Company's effective tax rate. (i) "EBITDA" is defined as earnings before interest, taxes, depreciation and amortization. Although EBITDA is not a measure of performance calculated in accordance with GAAP, AAi believes that EBITDA is accepted as a generally recognized measure of performance in the distribution industry. Nevertheless, this measure should not be considered in isolation or as a substitute for operating income, net income, net cash provided by operating activities or any other measure for determining AAi's operating performance or liquidity which is calculated in accordance with GAAP. (j) For purposes of computing the ratio of earnings to fixed charges, earnings consist of earnings before income taxes plus fixed charges (excluding accretion and noncash dividends on Series A Preferred Stock). Fixed charges consist of interest expense, amortization of debt issuance costs, accretion and noncash dividends on the Series A Preferred Stock and the portion of rental expense that is representative of the interest factor. On a pro forma basis, earnings were insufficient to cover fixed charges by $6.4 million. 34 41 UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF APRIL 4, 1998 ------------------------------------------------------------------------------------------ HISTORICAL PRO FORMA PRO FORMA --------------------------- PRO FORMA EFFECTS OF COMBINED AAI CONSOLIDATED FANTASMA ADJUSTMENTS(a) COMBINED THE OFFERING(b) AS ADJUSTED ---------------- -------- -------------- --------- --------------- ----------- (IN THOUSANDS) ASSETS Cash and cash equivalents... $ 439 $ -- $ -- $ 439 $ 3,911 $ 4,350 Accounts receivable......... 34,928 2,198 442 37,568 -- 37,568 Inventories................. 34,873 1,507 -- 36,380 -- 36,380 Prepaids.................... 609 103 -- 712 -- 712 Deferred tax assets, net.... 8,755 -- -- 8,755 -- 8,755 -------- ------ ------ -------- -------- -------- Total current assets.... 79,604 3,808 442 83,854 3,911 87,765 -------- ------ ------ -------- -------- -------- Property and equipment -- net....................... 18,177 65 -- 18,242 -- 18,242 Deferred costs -- net....... 1,703 -- -- 1,703 -- 1,703 Investments in affiliates... 1,486 -- -- 1,486 -- 1,486 Intangibles, net............ 17,340 -- 3,446 20,786 -- 20,786 Advances to officers/shareholders..... 2,215 -- -- 2,215 (2,215) -- Other....................... 1,234 3 -- 1,237 3,000(c) 4,237 -------- ------ ------ -------- -------- -------- Total assets............ $121,759 $3,876 $3,888 $129,523 $ 4,696 $134,219 ======== ====== ====== ======== ======== ======== LIABILITIES AND SHAREHOLDERS' (DEFICIT) Borrowings under revolver... $ 45,041 $ -- $3,992 $ 49,033 $(49,033) $ -- Current maturities -- long term obligations.......... 5,442 2,978 -- 8,420 (7,721) 699 Accounts payable............ 22,184 70 -- 22,254 -- 22,254 Accrued income taxes........ 2,100 -- -- 2,100 -- 2,100 Accrued expenses............ 9,788 698 -- 10,486 -- 10,486 -------- ------ ------ -------- -------- -------- Total current liabilities........... 84,555 3,746 3,992 92,293 (56,754) 35,539 -------- ------ ------ -------- -------- -------- Notes....................... -- -- -- -- 75,000 75,000 Long term obligations less current maturities... 9,917 -- -- 9,917 (7,975) 1,942 Deferred tax liabilities.... 689 -- -- 689 -- 689 Subordinated notes payable................... 5,575 -- -- 5,575 (5,575) -- -------- ------ ------ -------- -------- -------- Total liabilities....... 100,736 3,746 3,992 108,474 4,696 113,170 Minority interest........... -- -- 26 26 -- 26 Redeemable preferred stock -- subsidiary............. 847 -- -- 847 -- 847 Redeemable preferred stock..................... 26,766 -- -- 26,766 -- 26,766 Common stock................ 6 -- -- 6 -- 6 Additional paid in capital................... 270 183 (183) 270 -- 270 Cumulative foreign currency translation adjustment.... (55) -- -- (55) -- (55) Accumulated deficit......... (6,811) (53) 53 (6,811) -- (6,811) -------- ------ ------ -------- -------- -------- Total shareholders' equity (deficit)............... (6,590) 130 (130) (6,590) -- (6,590) -------- ------ ------ -------- -------- -------- Total liabilities and shareholders' deficit............... $121,759 $3,876 $3,888 $129,523 $ 4,696 $134,219 ======== ====== ====== ======== ======== ========
- --------------- (a) Reflects the Company's investment in Fantasma and related purchase accounting adjustments. (b) Reflects the impact of the sources and uses of funds related to the Company's cash and debt from the Offering. (c) Reflects deferred financing costs of $3.0 million associated with the Offering. 35 42 SELECTED HISTORICAL FINANCIAL INFORMATION The following table sets forth selected historical consolidated financial information of AAi as of the end of and for each of the five years ended December 31, 1997, for the three months ended March 31, 1997 and April 4, 1998 and as of April 4, 1998. The selected historical consolidated financial data as of December 31, 1996 and 1997 and for each of the three years in the period ended December 31, 1997, were derived from the Consolidated Financial Statements of the Company, which have been audited by Arthur Andersen LLP, independent public accountants, and are included elsewhere in this Prospectus. The selected historical consolidated financial data as of December 31, 1993, 1994 and 1995 and for the years ended December 31, 1993 and 1994 were derived from audited consolidated financial statements of the Company that are not included in this Prospectus. The selected historical consolidated financial data as of April 4, 1998 and for the three months ended March 31, 1997 and April 4, 1998 are unaudited, but have been prepared on the same basis as the audited Consolidated Financial Statements, which, in the opinion of management, contain all adjustments (consisting only of normal recurring adjustments) necessary for the fair presentation of the information set forth therein. The results of operation for the three months ended April 4, 1998 are not necessarily indicative of the results that may be expected for the full year. The following table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's Consolidated Financial Statements and the Notes thereto included elsewhere in this Prospectus.
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, -------------------- ---------------------------------------------------- MARCH 31, APRIL 4, 1993 1994 1995 1996(a) 1997(a) 1997 1998(a) ------- ------- ------- ------- -------- --------- -------- (DOLLARS IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Net sales........................................ $68,703 $76,611 $88,050 $86,336 $149,411 $34,851 $42,703 Cost of goods sold............................... 30,932 37,096 43,690 47,871 77,928 19,023 23,431 ------- ------- ------- ------- -------- ------- ------- Gross profit..................................... 37,771 39,515 44,360 38,465 71,483 15,828 19,272 Operating expenses............................... 32,785 36,441 34,782 35,678 65,285 14,687 17,627 ------- ------- ------- ------- -------- ------- ------- Income from operations........................... 4,986 3,074 9,578 2,787 6,198 1,141 1,645 Interest expense................................. (491) (342) (1,031) (1,469) (4,214) (928) (1,178) Other (expense) income, net...................... 459 88 (80) (331) 31 (48) 76 ------- ------- ------- ------- -------- ------- ------- Income before taxes.............................. 4,954 2,820 8,467 987 2,015 165 543 Income tax benefit (expense)..................... -- -- (42) 204 (1,177) (96) (239) ------- ------- ------- ------- -------- ------- ------- Net income....................................... 4,954 2,820 8,425 1,191 838 69 304 Dividends and accretion on preferred stock(b).... -- -- -- 1,123 2,496 597 683 ------- ------- ------- ------- -------- ------- ------- Net income (loss) applicable to common shareholders................................... 4,954 2,820 8,425 68 (1,658) (528) (379) Pro forma income tax adjustment(c)............... (1,982) (1,128) (3,370) (598) -- -- -- ------- ------- ------- ------- -------- ------- ------- Pro forma net income (loss) applicable to common shareholders................................... $ 2,972 $ 1,692 $ 5,055 $ (530) $ (1,658) $ (528) $ (379) ======= ======= ======= ======= ======== ======= ======= OTHER DATA: Depreciation and amortization.................... $ 473 $ 628 $ 783 $ 2,400 $ 9,894 $ 1,987 $ 2,972 EBITDA (d)....................................... 5,918 3,790 10,281 4,856 16,122 3,080 4,693 Capital expenditures (e)......................... 680 1,552 1,555 1,572 7,583 1,492 9,073 Ratio of earnings to fixed charges (f)........... 8.30x 5.69x 8.12x -- -- -- -- AS OF DECEMBER 31, AS OF --------------------------------------------------- APRIL 4, 1993 1994 1995 1996 1997 1998 ------- ------- ------- ------- ------- -------- (IN THOUSANDS) BALANCE SHEET DATA: Working capital (deficit)......................... $ 4,003 $ 4,436 $ 7,795 $ 722 $ 5,222 $ (4,951) Total assets...................................... 14,730 16,773 25,187 83,666 94,915 121,759 Total debt(g)..................................... 683 2,593 5,542 35,588 44,959 64,756 Preferred securities(h)........................... -- -- -- 23,587 26,083 26,766 Total shareholders' equity(deficit)............... 4,848 4,890 11,523 (4,179) (6,234) (6,590)
- --------------- (a) Includes the results of operations of the acquired businesses from the respective dates of acquisition: Tempo in June 1996, Foster Grant US in December 1996, Superior in July 1997 and Foster Grant UK in March 1998. (b) Reflects a reduction from net income for the accretion and noncash dividends on Series A Preferred Stock. See Note 9 of the Notes to the Company's Consolidated Financial Statements. (c) The Company was an S corporation under Section 1362 of the Internal Revenue Code until May 31, 1996. Pro forma income taxes, assuming the Company was subject to C corporation income taxes, have been provided, in the accompanying statement of operations for 1993, 1994, 1995 and 1996, at an estimated statutory rate of 40%. (d) "EBITDA" is defined as earnings before interest, taxes, depreciation and amortization. Although EBITDA is not a measure of performance calculated in accordance with GAAP, AAi believes that EBITDA is accepted as a generally recognized measure of performance in the distribution industry. Nevertheless, this measure should not be considered in isolation or as a substitute for operating income, net income, net cash provided by operating activities or any other measure for determining AAi's operating performance or liquidity which is calculated in accordance with GAAP. (e) Does not include capital assets acquired in connection with the acquisitions of the Foster Grant US, Tempo, Superior and Foster Grant UK. (f) For purposes of computing the ratio of earnings to fixed charges, earnings consist of earnings before income taxes plus fixed charges (excluding accretion and noncash dividends on Series A Preferred Stock). Fixed charges consist of interest expense, amortization of debt issuance costs and the portion of rental expense that is representative of the interest factor. Earnings were insufficient to cover fixed charges by $0.9 million, $4.1 million, $1.3 million and $0.7 million for the years ended December 31, 1996 and 1997 and the three months ended March 31, 1997 and April 4, 1998, respectively. (g) Includes amounts outstanding under Revolving Credit Facility, various long-term obligations and subordinated promissory notes payable to shareholders at each applicable period. (h) Does not include preferred stock of Foster Grant Holdings, Inc. 36 43 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL AAi is a value-added distributor of optical products, costume jewelry, watches, clocks and other accessories primarily to mass merchandisers, variety stores, chain drug stores and supermarkets in North America and the United Kingdom. As a value-added distributor, the Company provides customized store displays, merchandising management and a store-level field service force to replenish and restock displays, reorder product and attend to markdowns and allowances. Upon shipment to the customer the Company estimates agreed upon future allowances, returns and discounts, taking into account historical experience, and reflects revenue net of these estimates. The Company believes its relationships with retailers is dependent upon its ability to efficiently utilize allocated floor space to generate satisfactory returns for its customers. To meet this end, the Company strives to consistently deliver competitively priced products and service programs which provide retailers with attractive gross margins and inventory turnover rates. Certain segments of the retail industry, particularly mass merchandisers, variety stores, drugstores and supermarkets, are experiencing significant consolidation and in recent years many major retailers have experienced financial difficulties. These industry wide developments have had and may continue to have an impact on the Company's results of operations. For example, net sales were adversely affected in 1997 by the loss of two customers, one as a result of a merger into a retail chain that does not carry costume jewelry and the other due to the retailer ceasing operations. In addition, also as a result of financial pressures, many major retailers have sought to reduce inventory levels in order to reduce their operating costs. For example, in 1996 certain mass merchandisers adopted inventory management programs which adversely impacted the Company's sales and net income in that year. During the first quarter of 1998, the Company elected to change its fiscal year end from December 31 to the Saturday closest to December 31. The Company has also applied this change to its quarterly interim periods during 1998 whereby each interim period will end on the last Saturday of the thirteen week period. Net Sales. The Company offers optical products, costume jewelry, small synthetic leather goods and other accessories, generally at retail price points of $20 or less. In December 1996, the Company acquired Foster Grant US, a major marketer and distributor of sunglasses and reading glasses, a product line in which the Company had only minimal sales before the acquisition. Foster Grant US represented approximately $66.0 million or 44.2% of the Company's net sales in 1997. Accordingly, the Company's product mix changed dramatically as a result of this acquisition. Net sales of the Company's optical products accounted for approximately 17.4% and 50.7% of the Company's net sales in 1996 and 1997, respectively; net sales of the Company's costume jewelry accounted for approximately 74.6% and 43.5% of the Company's net sales in 1996 and 1997, respectively, and the balance represented sales of synthetic leather goods and other accessories. Optical products generally have slightly higher gross margins than the Company's other product lines. Cost of Goods Sold. The Company outsources manufacturing for all of its products, 75% of which is sourced to manufacturers in Asia through its joint venture in Hong Kong, with the remainder outsourced to independent domestic manufacturers. Accordingly, the principal element comprising the Company's cost of goods sold is the price of manufactured goods purchased through the Company's joint venture or from independent manufacturers. The Company believes outsourcing manufacturing allows it to reliably deliver competitively priced products to the retail market while retaining considerable flexibility in its cost structure. Operating Expenses. Operating expenses are comprised primarily of payroll and occupancy costs related to the Company's selling, general and administrative activities as well as depreciation and amortization. The Company incurs various costs in connection with the acquisition of new customers and new stores for existing customers, principally the cost of new product display fixtures and costs related to the purchase of the customer's existing inventory. The Company makes substantial investments in the design, production and installation of display fixtures in connection with establishing and maintaining customer relationships. The 37 44 Company capitalizes the production cost of these display fixtures as long as it retains ownership of them. These costs are amortized to selling expenses on a straight-line basis over their estimated useful life, which is one to three years. If the Company does not retain title to the displays, the display costs are expensed as shipped. In addition, in connection with initial merchandise shipments to new customers and new store locations, the Company may issue credits to the customer for the cost to purchase the previous vendors' unsold merchandise (buyback credits or stocklifting credits). These costs are expensed as incurred unless there is an agreement regarding the term of relationship over which the estimated gross margin from anticipated product sales is sufficient to recover the Company's purchase of the previous vendor's unsold merchandise. In the latter case, the costs are amortized over a period that matches these costs with the related revenue. Dividends and Accretion on Preferred Stock. The Company has 43,700 shares of Series A Redeemable Convertible Preferred Stock ("Series A Preferred Stock") outstanding, of which 34,200 were issued in May 1996 for gross proceeds of $18.0 million, and an additional 9,500 shares were issued for gross proceeds of $5.0 million in connection with the December 1996 acquisition of Foster Grant US. Beginning on June 30, 2002, shares of the Series A Preferred Stock are redeemable at the option of the holder for an amount equal to the original issue price plus accrued and unpaid dividends yielding a 10% compounded annual rate of return provided, however, that the right to require redemption is suspended as long as any Restrictive Indebtedness (as defined) is outstanding. Net income applicable to common shareholders represents net income less accretion of original issuance costs and cumulative dividends due on the Series A Preferred Stock. See "Description of Capital Stock." RECENT SIGNIFICANT ACQUISITIONS The Company has grown rapidly through strategic acquisitions in recent years and expects to continue this strategy into the future. See "Risk Factors--Risks Associated with Acquisitions." In June 1998, the Company acquired 80% of the membership interests of Fantasma for $3.5 million in cash. The remaining 20% membership interest of Fantasma is held by Roger Dreyer, president of that company. Mr. Dreyer and another officer of Fantasma have options to acquire in the aggregate an additional 13% membership interest in Fantasma subject to satisfaction of certain earnings targets in 1998, 1999 and 2000. AAi's acquisition of Fantasma added watches and clocks to AAi's product lines and Disney and Warner Bros. stores to its customer base. As a result of this transaction, the Company will record approximately $3.4 million in intangible assets which will be amortized over 10 years. In March 1998, the Company acquired certain assets of Foster Grant UK for the aggregate book value of certain acquired assets, including inventory items of $3.3 million and accounts receivable of $1.7 million, less the aggregate amount of trade payables assumed of $1.1 million and bank debt assumed of $1.7 million. In addition, the Company acquired the Foster Grant trademark in the United Kingdom and Europe for $0.7 million, which amount is subject to upward adjustment at the end of 1998 and 1999 based on annual sales, up to a maximum additional payment of $0.7 million. As a result of this acquisition, the Company recorded approximately $1.1 million of intangible assets which are being amortized over 20 years. In July 1997, the Company acquired the assets of Superior, a distributor of costume jewelry to chain drug stores and mass merchandisers in the United States. The Company paid $2.7 million in cash, including a contingent cash payment of $875,000 and assumed certain liabilities in the amount of $4.1 million. The purchase price is subject to upward adjustment based on 1998 earnings attributable to Superior operations, up to a maximum amount of $2.0 million. As a result of this acquisition, the Company recorded approximately $3.5 million of goodwill which is being amortized over 10 years. In December 1996, the Company, through a newly-formed subsidiary, Foster Grant Holdings, Inc. ("FG Holdings") acquired Foster Grant US, a marketer and distributor of sunglasses, reading glasses and eyewear accessories in the United States and Canada. The consideration consisted of $10.0 million in cash, assumed liabilities in the amount of $34.0 million and 100 shares of redeemable non-voting preferred stock of FG Holdings (the "FG Preferred Stock") initially valued at $750,000. The redemption value of the FG Preferred Stock is subject to upward adjustment, based on annual sales of the Foster Grant US operations through the year ending January 1, 2000 or, upon the occurrence of certain specified capital transactions, based upon the valuation of the Company at the time of the transaction. The maximum redemption amount is $4.0 million. 38 45 As a result of this acquisition, the Company recorded approximately $11.0 million of intangible assets which are being amortized over 40 years. Any difference in the redemption amount from the carrying value of the FG Preferred Stock immediately prior to redemption may be recorded as additional purchase price. EFFECTS OF ACQUISITIONS Historically, the Company has selected acquisition candidates based, in part, on the opportunity to improve their operating results. The Company seeks to leverage its purchasing power, distribution capabilities and lower operating costs to improve the financial performance of its acquired businesses. Results of operations reported herein for each period only include the results of operations for acquired businesses from their respective dates of acquisition. Full year operating results, therefore, could differ materially from those presented. The Company has accounted for its acquisitions, and intends to account for the Fantasma Acquisition, using the purchase method of accounting. As a result, these acquisitions have affected, and will prospectively affect, the Company's results of operations in certain significant respects. The aggregate acquisition costs are allocated to the tangible and intangible assets acquired and liabilities assumed by the Company based upon their respective fair values as of the acquisition date. The cost of such assets are then amortized according to the classes of assets and the useful lives thereof. The acquisitions necessitating payment of purchase price in excess of the fair value of the net assets acquired results in intangible assets consisting of goodwill and trademarks which are being amortized on a straight-line basis over a period of 10 to 40 years. Similar future acquisitions or additional consideration paid for existing acquisitions may result in additional amortization expense. In addition, due to the effects of the increased borrowing to finance any future acquisitions, the Company's interest expense may increase in future periods. As of April 4, 1998, net intangible assets as a result of acquisitions was $21.2 million. Amortization of these intangibles will result in quarterly noncash charges of $411,000 for the next 28 quarters, $329,000 for the next four quarters, $246,000 for the next four quarters, $150,000 for the following 34 quarters, $146,000 for the following five quarters and $133,000 for the final 75 quarters. CONSOLIDATION OF DISTRIBUTION OPERATIONS In the second quarter of 1998, the Company adopted a plan to consolidate distribution operations at its expanded Rhode Island facility and close its Texas distribution center in the fourth quarter of 1998. AAi expects this restructuring will generate permanent annual operating expense savings of approximately $2.8 million commencing in 1999. The Company expects to record a $2.6 million charge in the second quarter of 1998 in connection with closure of the Texas distribution center. See Note 1 of the Notes to the Company's Consolidated Financial Statements included elsewhere within. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentage relationship to net sales of certain items included in the Company's statement of operations:
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, -------------------- ----------------------- MARCH 31, APRIL 4, 1995 1996 1997 1997 1998 ----- ----- ----- --------- -------- Net sales.................................. 100.0% 100.0% 100.0% 100.0% 100.0% Cost of goods sold......................... 49.6 55.4 52.2 54.6 54.9 ----- ----- ----- ----- ----- Gross profit............................... 50.4 44.6 47.8 45.4 45.1 Operating expenses......................... 39.5 41.4 43.7 42.1 41.3 ----- ----- ----- ----- ----- Income from operations..................... 10.9 3.2 4.1 3.3 3.8 Interest expense........................... 1.2 1.7 2.8 2.7 2.8 Other (expense) income, net................ (0.1) (0.4) -- (0.1) 0.2 ----- ----- ----- ----- ----- Income before taxes and dividends and accretion on preferred stock............. 9.6 1.1 1.3 0.5 1.2 Dividends and accretion on preferred stock.................................... -- 1.3 1.7 1.7 1.5
39 46
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, -------------------- ----------------------- MARCH 31, APRIL 4, 1995 1996 1997 1997 1998 ----- ----- ----- --------- -------- Income tax benefit (expense)............... -- 0.2 (0.7) (0.3) (0.6) ----- ----- ----- ----- ----- Net income (loss) applicable to common shareholders............................. 9.6 -- (1.1) (1.5) (0.9) Pro forma tax expense...................... (3.9) (0.7) -- -- -- ----- ----- ----- ----- ----- Pro forma net income (loss) applicable to common shareholders...................... 5.7% (0.7)% (1.1)% (1.5)% (0.9)% ===== ===== ===== ===== =====
Three Months Ended April 4, 1998 compared to Three Months Ended March 31, 1997 Net Sales. Consolidated net sales were $42.7 million for the three months ended April 4, 1998 compared to $34.9 million for the three months ended March 31, 1997, an increase of 22.6% or $7.8 million. The increase was due, in part, to an additional $4.0 million of sales attributable to the Superior acquisition and the balance is attributable to increased international sales of costume jewelry and the inclusion of an additional three business days in the 1998 reporting period. Gross Profit. Gross profit reflects net sales less cost of goods sold. Gross profit was $19.3 million for the three months ended April 4, 1998 compared to $15.8 million for the three months ended March 31, 1997, an increase of 21.8% or $3.5 million, which was primarily attributable to increased sales volume. Gross margin decreased to 45.1% for the three months ended April 4, 1998, from 45.4% for the three months ended March 31, 1997, primarily due to an increase in sales of costume jewelry which carries lower margins. Operating Expenses. Operating expenses were $17.6 million for the three months ended April 4, 1998 compared to $14.7 million for the three months ended March 31, 1997, an increase of 20.0% or $2.9 million. The increase was due to costs associated with acquisitions and expanded operations. Interest Expense. Interest expense was $1.2 million for the three months ended April 4, 1998 compared to $928,000 for the three months ended March 31, 1997, an increase of 26.9% or $250,000. This resulted from additional borrowings under the Company's credit facilities to fund acquisitions and expanded operations. Income Tax (Expense) Benefit. Income tax expense was $239,000 for the three months ended April 4, 1998 compared to $96,000 for the three months ended March 31, 1997, an increase of 149.0% or $143,000. The Company's estimated consolidated effective income tax rate is 44.0% for 1998 compared to a consolidated effective income tax rate of 58.4% in 1997. The higher effective rate in 1997 is due to the effect of nondeductible amortization of intangible assets in that year, which is expected to be substantially less in 1998. Net Income. As a result of the factors discussed above, net income was $304,000 for the three months ended April 4, 1998 compared to $69,000 net income for the three months ended March 31, 1997, an increase of 340.6% or $235,000. Net Income (Loss) Applicable to Common Shareholders. Net loss applicable to common shareholders was $379,000 for the three months ended April 4, 1998, compared to a loss of $528,000 for the three months ended March 31, 1997, a decrease of $149,000. The decrease was attributable to the $235,000 increase in net income for the 1998 period which was partially offset by an increase of $86,000 in dividends and accretion on Series A Preferred Stock due to the compounding of accrued dividends. Year Ended December 31, 1997 compared to Year Ended December 31, 1996 Net Sales. Consolidated net sales were $149.4 million for 1997 compared to $86.3 million for 1996, an increase of 73.1% or $63.1 million. The increase was primarily due to a full year of sales attributable to Foster Grant US operations and six months of sales attributable to Superior operations in 1997, which accounted for $60.6 million and $5.2 million of the increase, respectively. This increase was partially offset by the loss of two customers in 1997, one as a result of the customer's merger into a retailer that does not offer costume jewelry and the other due to a retailer ceasing operations, which together accounted for an estimated $5.1 million decrease in net sales. 40 47 Gross Profit. Gross profit was $71.5 million in 1997 compared to $38.5 million in 1996, an increase of 85.8% or $33.0 million. Gross profit from sales generated from the aforementioned acquisitions accounted for a $35.3 million increase which was partially offset by the decline in gross profit on the two lost customers. Gross profit increased as a percentage of net sales from 44.6% to 47.8%, primarily as a result of an increase in the net sales of optical products (which carry higher margins) and savings related to consolidated purchasing efficiencies. Operating Expenses. Operating expenses were $65.3 million or 43.7% of net sales in 1997 compared to $35.7 million or 41.3% of net sales in 1996, an increase of 83.0% or $29.6 million. The acquisitions accounted for 98.0% or $29.0 million of the increase in operating expenses. Interest Expense. Interest expense was $4.2 million in 1997 compared to $1.5 million in 1996, an increase of 186.9% or $2.7 million. This resulted from interest charged on additional borrowings under the Company's credit facilities to fund acquisitions and expanded working capital and capital expenditure requirements. Income Tax (Expense) Benefit. Income tax expense was $1.2 million in 1997 compared to an income tax benefit of $204,000 in 1996, an increase of $1.4 million. The Company's consolidated effective income tax rate was 58.4% for 1997, reflecting the impact of nondeductible amortization of intangible assets for income tax purposes. The Company was operated as a subchapter S corporation under Section 1362 of the Internal Revenue Code until May 31, 1996, and as a result, taxable income or loss of the Company was passed through to the shareholders and reported on their individual tax returns. Accordingly, the Company did not incur federal and state income taxes (except with respect to certain states) for the period prior to June 1, 1996. Net Income. As a result of the factors discussed above, net income was $838,000 in 1997 compared to $1.2 million in 1996, a decrease of 29.6% or $353,000. Net Income (Loss) Applicable to Common Shareholders. Net loss applicable to common shareholders was $1.7 million for the year ended December 31, 1997 compared to net income of $68,000 for the year ended December 31, 1996, an increase of $1.8 million. The increased loss is primarily attributable to a $1.4 million increase in dividends and accretion on Series A Preferred Stock as well as a $353,000 decrease in net income from 1996. The increase in dividends and accretion on Series A Preferred Stock is due to an increased number of shares (43,700) being outstanding for the entire year in 1997, as compared to fewer shares (34,200) being outstanding for less than seven months in 1996. Year Ended December 31, 1996 compared to Year Ended December 31, 1995 Net Sales. Consolidated net sales were $86.3 million for 1996 compared to $88.1 million for 1995, a decrease of 2.0% or $1.8 million. The decrease in net sales was due to reduced sales within the mass merchandiser and chain drugstore channels of distribution, as a result of customers' desire to decrease in-store inventories and increase inventory turnover rates. The product lines most affected were costume jewelry and synthetic leather goods. This decrease was partially offset by a $5.4 million increase in net sales of optical products as a result of the Foster Grant US acquisition in mid-December 1996. Gross Profit. Gross profit was $38.5 million in 1996 compared to $44.4 million in 1995, a decrease of 13.3% or $5.9 million. Gross margin decreased as a percentage of net sales from 50.4% to 44.6% primarily due to discounting of synthetic leather goods within the aforementioned channels and providing product to the mass merchandiser channel of distribution at lower gross margins as part of promotional programs. Operating Expenses. Operating expenses were $35.7 million in 1996 compared to $34.8 million in 1995, an increase of 2.6% or $0.9 million. This increase was due to increased depreciation and amortization. Interest Expense. Interest expense was $1.5 million in 1996 compared to $1.0 million in 1995, an increase of 42.5% or $0.5 million. This resulted from additional borrowings under the Company's credit facilities to fund acquisitions and expanded operations. Income Tax (Expense) Benefit. Income tax benefit was $204,000 in 1996 and a provision of $42,000 was provided in 1995. The Company was operated as a subchapter S corporation under Section 1362 of the Internal Revenue Code until May 31, 1996, and as a result, the taxable income or loss of the Company was 41 48 passed through to the shareholders and reported on their individual tax returns. Accordingly, the Company did not incur federal and state income taxes (except with respect to certain states) for periods prior to June 1, 1996. Net Income. As a result of the factors discussed above, net income was $1.2 million in 1996 compared to $8.4 million in 1995, a decrease of 85.9% or $7.2 million. Net Income (Loss) Applicable to Common Shareholders. Net income applicable to common shareholders was $68,000 for the year ended December 31, 1996 compared to net income of $8.4 million for the year ended December 31, 1995, a decrease of $8.3 million. The decrease reflects the $7.2 million decrease in net income and the absence of any dividends and accretion on Series A Preferred Stock in 1995. LIQUIDITY AND CAPITAL RESOURCES At April 4, 1998 the Company had cash and cash equivalents of $439,000 and a working capital deficit of $5.0 million. To date, the Company has funded its operations through credit facilities, equity issuances and cash generated from operations. The Company generated $3.5 million of cash from operations during 1997, compared to $486,000 in 1996 and $1.8 million in 1995. The increase in cash generated from operations in 1997 over 1996 was primarily attributable to the increase in noncash expenses partially offset by cash used to reduce accounts payable and accrued expenses. The decrease in cash generated from operations in 1996 as compared to 1995 was primarily attributable to a decrease in net income partially offset by an increase in noncash expenses and accounts payable. During the three months ended April 4, 1998, the Company used $4.8 million of cash to fund operations. The Company used $11.0 million of cash in investing activities during 1997, compared to $15.2 million in 1996 and $2.1 million in 1995. Cash used in investing activities decreased in 1997 as compared to 1996 as a result of a decrease in cash used in acquisitions partially offset by an increase in deferred costs and the purchases of property and equipment. Cash used in investing activities increased in 1996 as compared to 1995 as a result of an increase in cash used in acquisitions and deferred costs and purchases of property and equipment. During the three months ended April 4, 1998, the Company used $17.2 million of cash in investing activities. The uses included the $2.1 million purchase of the Company's Smithfield, Rhode Island headquarters, $4.6 million for display fixtures and $5.5 million to acquire certain assets of Foster Grant UK and to acquire the Foster Grant trademark for the United Kingdom and Europe. The Company anticipates additional capital expenditures in 1998 of $5.2 million, consisting primarily of additional costs associated with the expansion of its Smithfield, Rhode Island distribution facility and its information system conversion. The Company expects its annual maintenance capital expenditure level (excluding costs of display fixtures) to be approximately $1.0 million for the next two years. The Company generated $8.8 million of cash from financing activities during 1997, compared to $16.2 million in 1996 and $259,000 in 1995. Cash generated from financing activities decreased in 1997 as compared to 1996 primarily as a result of the Company's $22.5 million issuance of Series A Preferred Stock in 1996 partially offset by a 1996 cash distribution to the Company's shareholders of $12.9 million and an increase in borrowings during 1997. During the three months ended April 4, 1998, the Company generated $19.7 million of cash from financing activities. The Series A Preferred Stock is redeemable for an aggregate of $23.0 million. Shares of Series A Preferred Stock are convertible into Common Stock at a rate of 10 for 1, adjustable for certain dilutive events. Conversion is at the option of the shareholder, but is automatic upon the consummation of a Qualified Public Offering (as defined). The holders of Series A Preferred Stock have the right to require redemption for cash for any unconverted shares, beginning June 30, 2002, provided, however, that the right to require redemption is suspended as long as any Restrictive Indebtedness (as defined) is outstanding. The Notes constitute Restrictive Indebtedness. The redemption price of the Series A Preferred Stock is an amount equal to the original issue price, $526.32 per share, plus any accrued and unpaid dividends yielding a 10% compounded annual rate of return. See "Description of Capital Stock." 42 49 As described under "Recent Significant Acquisitions," in connection with the purchase of Foster Grant US, the Company's wholly-owned subsidiary, FG Holdings issued 100 shares of FG Preferred Stock, which are redeemable on February 28, 2000, or earlier upon the occurrence of certain specified capital transactions. The redemption price will range between $1.0 million and $4.0 million depending upon the net sales of sunglasses, reading glasses and accessories by FG Holdings and AAi, and upon the total transaction value. See "Certain Transactions". The Company is continually engaged in evaluating potential acquisitions. The Company expects that funding for future acquisitions may come from a variety of sources, depending on the size and nature of any such acquisition. Potential sources of capital include cash generated from operations, borrowings under the Senior Credit Facility, or other external debt or equity financings. There can be no assurance that such additional capital sources will be available to the Company, if at all, on terms which the Company finds acceptable. The Company has substantial indebtedness and significant debt service obligations. As of April 4, 1998, on a pro forma basis after giving effect to the Acquisitions and the Offering and the application of the net proceeds therefrom, the Company would have had long-term indebtedness, including current maturities, in the aggregate principal amount of $76.4 million. The Indenture permits the Company to incur additional indebtedness, including secured indebtedness, subject to certain limitations. See "Description of Notes--Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock." In addition, the Company has up to $60.0 million available for borrowings under the Senior Credit Facility. Interest rates on the revolving loans under the Senior Credit Facility are based, at the Company's option, on the Base Rate (as defined) or LIBOR plus an applicable margin. The Senior Credit Facility contains certain restrictions and limitations, including financial covenants that require the Company to maintain and achieve certain levels of financial performance and limit the payment of cash dividends and similar restricted payments. See "Description of Senior Credit Facility." The Company's ability to make scheduled payments of principal of, or to pay the interest or Liquidated Damages, if any, on, or to refinance, its indebtedness (including the Notes), or to fund planned capital expenditures will depend on its future performance, which, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond its control. Based upon the current level of operations and anticipated cost savings and revenue growth, the Company believes that cash flow from operations and available cash, together with available borrowings under the Senior Credit Facility, will be adequate to meet the Company's future liquidity needs for at least the next several years. The Company may, however, need to refinance all or a portion of the principal of the Notes on or prior to maturity. There can be no assurance that the Company's business will generate sufficient cash flow from operations, that anticipated cost savings and revenue growth will be realized or that future borrowings will be available under the Senior Credit Facility in an amount sufficient to enable the Company to service its indebtedness, including the Notes, or to fund its other liquidity needs. In addition, there can be no assurance that the Company will be able to effect any such refinancing on commercially reasonable terms or at all. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." See "Risk Factors." IMPACT OF INFLATION The Company believes that inflation has not had a material effect on its results of operations or financial condition during the past three years. SEASONALITY AND QUARTERLY INFORMATION Significant portions of the Company's business are seasonal. Sunglasses are shipped primarily during the first half of the fiscal year as retailers build inventory for the spring and summer selling seasons, while costume jewelry and other accessories are shipped primarily during the second half of the fiscal year as retailers build inventory for the holiday season. Reading glasses sales are generally uniform throughout the year. As a result of these shipping trends, the Company's historical working capital requirements grow through the first three 43 50 quarters of the year to fund inventory purchases and the growth in accounts receivable. Historically, in the fourth quarter, the Company's working capital requirements have decreased as accounts receivable are collected. The following table sets forth selected quarterly financial information. This information is derived from unaudited financial statements of the Company and includes, in the opinion of management, all normal and recurring adjustments that management considers necessary for a fair statement of the results for such periods. The operating results for any quarter are not necessarily indicative of results for any future period.
1996 1997 1998 ---------------------------------------- ---------------------------------------- ------- 1ST Q 2ND Q 3RD Q 4TH Q 1ST Q 2ND Q 3RD Q 4TH Q 1ST Q ------- ------- ------- ------- ------- ------- ------- ------- ------- Net Sales................ $17,372 $20,749 $24,659 $23,556 $34,851 $41,034 $34,213 $39,313 $42,703
Quarterly results may also be materially affected by the timing and magnitude of acquisitions, costs related to acquisitions, fluctuations in product cost, changes in product mix, timing of customer orders and shipments and general economic conditions. YEAR 2000 The Company uses several application programs written over many years using two-digit fields to define the applicable year, rather than four-digit year fields. Programs that are time-sensitive may recognize a date using "00" as the year 1900 rather than the year 2000. This misinterpretation of the year could result in an incorrect computation or a computer shutdown. The Company is currently implementing a substantial information system conversion which is scheduled to be completed by the first quarter of 1999. The Company believes that with planned modifications to existing software and successful conversion to the new software, the Year 2000 issue will not pose significant operational problems for the Company's systems as so modified or converted. Any delays or omissions by AAi or its agents to resolve such issues may have a material adverse effect on the Company's business, results of operations and financial condition. See "Risk Factors--Dependence on Computer Software Applications." RECENT ACCOUNTING PRONOUNCEMENTS In July 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for the reporting of information about operating segments by public business enterprises in their annual and interim financial reports issued to shareholders. SFAS No. 131 requires that a public business enterprise report financial and descriptive information, including profit or loss, certain specific revenue and expense items, and segment assets, about its reportable operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-makers in deciding how to allocate resources and in assessing performance. The Company will adopt SFAS No. 131 in its financial statements for the fiscal year ending January 2, 1999. SFAS No. 131 is a disclosure requirement and therefore will not have an effect on the Company's financial position or results of operations. In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5 Reporting on the Costs of Start Up Activities, (SOP 98-5). SOP 98-5 provides guidance on the financial reporting of start up activities and organization costs to be expensed as incurred. The Company does not believe that the adoption of SOP 98-5 will have a material impact on its financial statements. 44 51 BUSINESS AAi is a leading value-added distributor of optical products, costume jewelry, watches, clocks and other accessories to mass merchandisers, variety stores, chain drug stores and supermarkets in North America and the United Kingdom. The Company sells its products in over 30,000 retail locations, including Wal-Mart, Target, Kmart, Eckerd Drugstores, Walgreens, Rite Aid, Albertsons, Dollar General and Family Dollar stores. The Company markets its products under its own brand names such as Foster Grant as well as customers' private labels. AAi also has the right to distribute products under numerous licensed brand names, including Ironman Triathalon, Revlon, Mickey's Stuff for Kids, Winnie the Pooh, Barbie and Crayola. The Company outsources all of its manufacturing. On a pro forma basis after giving effect to the Acquisitions, the Company would have generated net sales and EBITDA of $182.0 million and $19.1 million, respectively, for fiscal 1997 and $187.2 million and $20.8 million, respectively, for the twelve months ended April 4, 1998. The Company's product lines contain a large number of SKUs with low retail price points and typically represent a small percentage of retailers' total sales. As a result, many of AAi's customers have chosen to outsource the merchandising of these products to the Company. AAi's award-winning service program provides retailers with customized displays and product packaging and store-level merchandising designed to maximize sales and inventory turnover. The Company employs over 1,500 field service representatives who regularly visit program customers' stores to arrange, replenish and restock displays, reorder product and attend to markdowns and allowances. By providing retailers with in-store product management, the Company retains control of its product marketing and pricing, allowing AAi to maximize product sales and increase the floor space allocated to its product lines. In 1997, sales to customers utilizing the Company's service program accounted for 73% of AAi's net sales. AAi has grown rapidly through strategic acquisitions and internal growth, principally by expanding its product offerings, entering new domestic and international markets, adding new customers, cross-selling existing product lines to current customers and supporting its U.S.-based customers' international expansion. In the last five years, net sales have grown at a compounded annual rate of 22.9%, from $53.4 million in 1992 to $149.4 million in 1997. INDUSTRY OVERVIEW The Sunglass Association of America reports that 1997 domestic retail sales of sunglasses totaled $2.6 billion. Accessories Magazine estimates that 1997 domestic retail sales of fashion jewelry and watches totaled $4.8 billion and $3.0 billion, respectively. As a result of industry-wide consolidation among mass merchandisers and discount retailers, a small number of large companies dominate the Company's primary channels of distribution. These retailers have sought to reduce their purchasing and administrative costs by limiting the number of their suppliers and have utilized their market position to obtain minimum sell-throughs, reduced in-store inventory levels and price concessions. These retailers tend to require a high level of service, including customized sales and service programs, reliable delivery services and electronic interfaces. These trends have contributed to the growth of larger national and regional distributors, such as AAi, that have the service organizations, product offering, distribution technology and capital necessary to meet the demands of these customers. COMPETITIVE STRENGTHS In order to increase its sales and profitability, the Company relies on the following competitive strengths: Innovative Service Program. Since many of its product sales are impulse driven, AAi believes that a well-positioned, visually appealing display is critical to making the sale to the consumer. In addition, the SKU-intensive nature of optical products and accessories and their low retail price points have led many retailers to outsource the merchandising of such products. AAi has responded by offering its customers a service program that includes store-level merchandise mix planning and in-store display maintenance and inventory stocking, balancing and reordering by the Company's field service representatives. AAi's service program is consistently recognized as one of the best in the mass retail industry. The Company has received several vendor-of-the-year awards from its retail customers, including Wal-Mart, as well as numerous Supplier 45 52 Performance Awards by Retail Category (S.P.A.R.C.) from the International Mass Retail Institute. As part of its service program, the Company makes a significant investment in the design, production and installation of display fixtures in its customers' retail stores. The Company believes that its award-winning service program and store-level investment in display fixtures solidify its customer relationships and create opportunities to cross-sell its products and increase the Company's allotted display space. Diverse Product Offering. AAi offers a comprehensive selection of popularly priced optical products and accessories with over 15,000 SKUs. AAi's product lines include sunglasses, reading glasses, costume jewelry, small synthetic leather goods, handbags, hair accessories, cosmetic bags and key rings. With the Fantasma Acquisition, the Company added watches and clocks to its product lines. The substantial majority of the Company's products have retail price points at less than $20, with 57% at $10 or less. The diversity of AAi's product lines enables retailers to satisfy a substantial portion of their optical products and accessories needs from a single source and allows the Company to achieve operating efficiencies for low price point products. Powerful Proprietary and Licensed Brand Names. Branded products provide entry to new customers and retail channels and generally allow for higher gross margins on product sales. The Company owns several brands, most notably Foster Grant. In the 1998 annual Women's Wear Daily survey, the Foster Grant brand was ranked the third most recognized name in accessories by consumers. In addition to its own brands, AAi holds licenses for a variety of Disney, Sesame Street, Warner Bros. and Mattel characters (e.g., Winnie the Pooh, Mickey Mouse, Minnie Mouse, Elmo, Tweety, Barbie and others) as well as for several well-recognized brands such as Ironman Triathlon, Revlon, Almay and Crayola for terms generally ranging from one to three years. During 1997, the sales of the Company's own branded products and licensed branded products represented approximately 29% and 15%, respectively, of AAi's net sales. State-of-the-Art Distribution Capabilities. The Company's flexible distribution systems are capable of processing virtually any small package. AAi utilizes a high velocity fulfillment system that enables the Company to provide its customers with short delivery times and high order fulfillment rates, allowing retailers to maintain lower inventory levels. On average, the Company ships over 98% of all restocking orders within 24 hours of receipt of the order. AAi is currently expanding its Smithfield, Rhode Island distribution center and installing an inventory management system that utilizes radio frequency and bar-coding technologies to optimize supply chain operations, improve customer service, increase inventory turns and lower operating costs. The Company believes that its small package distribution capabilities provide a platform to add complementary product lines without requiring significant capital investment or additional fixed costs. Efficient Low-Cost Sourcing. The Company outsources manufacturing for all of its products. Approximately 75% of AAi's manufacturing is sourced to manufacturers in Asia through its joint venture in Hong Kong, with the remainder outsourced to independent domestic manufacturers. The Hong Kong joint venture monitors the contract manufacturing process, maintains relations with manufacturers, ensures quality control and serves as a sourcing agent to certain U.S. and European customers. AAi's sourcing capabilities allow it to reliably deliver competitively priced products to the retail market while retaining considerable flexibility in its cost structure. Experienced Management Team. AAi's senior management team averages over 22 years in the industry and 18 years experience with the Company. Over the Company's 26 year history, its senior management team has developed strong relationships with suppliers and retailers. This team of seasoned managers has led the Company's transition from a small costume jewelry manufacturer to a leading distributor of optical products and accessories and has successfully completed six acquisitions over the past three years. BUSINESS STRATEGY The Company's objective is to increase sales and profitability by enhancing its position as a leading distributor of optical products and accessories. The key elements of the Company's business strategy are: Promote and Expand Branded Product Offering. Branded products enable the Company to reach new customers and enter new distribution channels which, in turn, present the Company with expanded cross-selling opportunities. The Company intends to actively promote its Foster Grant name through advertising as 46 53 well as co-branding with licensed names. For example, AAi plans to roll out the Ironman Triathlon by Foster Grant co-branded line of sunglasses in the fourth quarter of 1998. The Company also plans to pursue licensing and acquisition of additional brands. Expand Product Lines. AAi believes it can increase sales to existing customers and access new distribution channels by expanding its product lines to include other accessories and small package products. The Company intends to achieve this goal by developing and acquiring new products and brands that deepen and broaden its product offering. By diversifying its product lines, the Company can enhance its capacity to provide regional and national retailers with convenient "one-stop" shopping for optical products and accessories. In addition, a diverse product offering provides cross-selling opportunities and permits the Company to achieve operating efficiencies in distribution and service programs. Expand Internationally. The Company's goal is to grow with its customers, particularly internationally, as they add new stores and expand into new geographic markets. For example, during the past several years, Wal-Mart has opened over 350 new stores in foreign markets, including Canada, Mexico, Germany and Argentina. In response, the Company established operations in Canada and Mexico to serve Wal-Mart and other potential customers in these markets. The Company's international net sales have grown from $1.3 million in 1995 to $6.7 million in 1997. Diversify Customer Base and Distribution Channels. Through its small package distribution capabilities, diverse product offering and unique service program, the Company has increased its customer base and sales to certain existing customers desiring more centralized and efficient distribution. The Company seeks to expand its distribution to additional retail channels such as department stores through internal growth and strategic acquisitions. Pursue Strategic Acquisitions. The Company intends to acquire complementary businesses and product lines in order to diversify its product offering, gain access to new customers and retail channels, penetrate international markets, lower operating cost margins and improve service to existing customers. For example, through the acquisitions in December 1996 and March 1998 of the Foster Grant businesses, AAi expanded its optical product line and extended operations to the United Kingdom. The June 1998 Fantasma Acquisition added watches, clocks and several brand licenses to AAi's product offering and provided the Company with access to new customers. The Company seeks to leverage its purchasing power and distribution capabilities to improve the financial performance of its acquired businesses and product lines. 47 54 DISTRIBUTION CHANNELS AND CUSTOMERS AAi sells its products to over 200 customers, primarily in three distribution channels: (1) mass merchandisers, (2) chain drug stores, combo stores (stores combining general merchandise, food and drug items) and supermarkets and (3) variety stores. To a lesser extent, AAi also distributes its products through department stores, military post exchanges, card and gift shops, specialty stores and catalogues. PERCENTAGE OF 1997 REVENUE BY DISTRIBUTION CHANNEL [AAI DISTRIBUTION PIE CHART] The Company customizes its product and service program offerings to meet the distinctive characteristics and requirements of each of these retail distribution channels. Mass Merchandisers. AAi's sales to mass merchandisers accounted for approximately $83.9 million, or 56.1%, of net sales in 1997. These customers include large discount retailers such as Wal-Mart, Target, Kmart, Fred Meyer, Meijer, Ames, Hills and Zellers Canada. As a result of substantial consolidation, mass merchandisers have increased leverage over their suppliers and have utilized their market position to obtain minimum sell-throughs, reduced in-store inventory levels and price concessions. The mass merchandisers have begun to expand their market internationally, particularly in Mexico, Canada, Europe and South America, which affords their suppliers access to these new markets. These customers demand a high level of merchandise support as well as national and, as they expand overseas, international distribution capability. Chain Drug Stores/Combo Stores/Supermarkets. AAi's sales to this channel accounted for approximately $43.7 million, or 29.1%, of net sales in 1997. These customers include Eckerd Drugstores, Walgreens, Rite Aid, Thrifty Payless Drug, Albertsons, Publix, Smith Food & Drug, Tesco (U.K.), Boots and Arbor Drugs. This industry is experiencing substantial consolidation similar to that which occurred in the mass merchandiser channel several years ago. This consolidation activity presents both opportunities and risks for suppliers such as AAi, as the Company may gain or lose accounts depending on whether its existing customer is an acquiror or is acquired. These stores tend to be smaller than mass merchandisers and attract a broader class of trade, which is often less price sensitive and more convenience-oriented than the mass merchandiser or variety store customer. Variety Stores. AAi's sales to variety stores accounted for approximately $14.8 million, or 9.9%, of net sales in 1997. These customers include national and regional chains such as Family Dollar, Dollar General and Fred's. They tend to be more price sensitive but less fashion driven than mass merchandisers and cater to 48 55 consumers with limited budgets for discretionary or impulse purchases. The stores are generally smaller than the typical mass merchandiser outlet which makes it difficult for suppliers without broad product lines to service this channel profitably. The Company's extensive product lines enable it to provide service programs on a cost-effective basis, which affords the Company a significant competitive advantage in this market. Department Stores and Others. The Company's sales to department stores, armed forces' PX stores, boutique stores, gift shops, book stores and catalogue sales accounted for $7.3 million, or 4.9%, of its 1997 net sales. These include sales of its Tempo jewelry line to J.C. Penney as well as sales to customers such as Waldenbooks, Avon, Sears Canada, OfficeMax, Montgomery Ward and The Bay. Each of these channels has different characteristics and product and service requirements and caters to different types of consumers. For example, department stores generally offer higher-end products with higher price points and sales of accessories at such outlets represent a larger percentage of total store sales. These channels present opportunities for growth as the Company implements its strategy to diversify its product lines through the acquisition of new products and brands. Three customers accounted for approximately 39% of the Company's net sales in fiscal 1997. In 1997, Wal-Mart accounted for approximately 25% of the Company's net sales. No other customer accounted for 10% or more of the Company's total net sales in 1997. PRODUCTS The Company offers sunglasses, reading glasses, costume jewelry, small synthetic leather goods and other accessories generally at retail price points of $20 or less. In June 1998, the Company added watches and clocks to its product lines with the acquisition of an 80% interest in Fantasma. The percentage of net sales for each product category for 1995, 1996 and 1997 are set forth in the following table:
1995 1996 1997 ---- ---- ---- Optical Products.................................. 10.0% 17.4% 50.6% Costume Jewelry................................... 75.2 74.6 43.5 Small synthetic leather goods and other........... 14.8 8.0 5.9 ---- ---- ---- 100% 100% 100% ==== ==== ====
Optical Products. The Company's optical product line includes sunglasses and non-prescription reading glasses which are sold on both a program and non-program basis. As a result of its acquisition of Foster Grant US, AAi has become a leading seller of popularly priced sunglasses (retail price points of $8 to $30). The Company is pursuing co-branding opportunities for its Foster Grant name. For example, AAi plans to distribute the Ironman Triathlon by Foster Grant co-branded line of sunglasses in the fourth quarter of 1998. The Company also sells sunglasses under licensed brand names such as Mickey's Stuff for Kids, Sesame Street and Revlon. The Company offers a variety of styles as well as color options for both frames and lenses. Sunglasses have a significant fashion component and positive or negative consumer response in any year can impact not only that year's profitability but also sales for the following year since retailers' orders tend to mirror the prior year's sales. Such sales are also highly seasonal, with initial orders placed in the first quarter and, depending on consumer response, restocking orders in the second quarter. The Company also offers a variety of styles of non-prescription reading glasses marketed under Foster Grant, Revlon or private labels at price points of $6 to $13. The reading glasses business has no significant fashion component and is non-cyclical and non-seasonal. Since magnification strength is the primary purchasing consideration for this product line, proper stocking and restocking is essential to maximizing sales. As a result, reading glasses are typically marketed through the Company's service program. Costume Jewelry. AAi offers a wide variety of ladies' and children's costume jewelry with low retail price points (between $3 and $20), including earrings, necklaces and bracelets. The Company's jewelry line includes private labeled products and branded products distributed pursuant to arrangements with licensors such as Disney Enterprises, Inc., Warner Bros. and Revlon Consumer Products Corporation as well as under the Company's Tempo name. Tempo is the opening retail price point costume jewelry line at J.C. Penney. 49 56 Most of the Company's jewelry line is basic (non-seasonal) and approximately one-third has a fashion or holiday component. The Company's costume jewelry line is typically sold through its service program. Small Synthetic Leather Goods and Other. Through a 1986 acquisition, AAi expanded its product lines to include small synthetic leather goods with retail price points of $6 to $10, such as small backpacks, handbags, wallets and purses. Many of the lines of small accessories are designed to complement AAi's costume jewelry and are likewise often sold under licensed brands such as Revlon, Hawaiian Tropic and Wet 'N Wild. The bulk of these products are sold on a non-program basis and are shipped direct from the Company's suppliers to the customer. The Company recently added watches and clocks (with average retail price points between $10 and $20) to its product lines. DISTRIBUTION The Company distributes its products primarily from its distribution centers in Rhode Island (costume jewelry and other accessories) and Texas (optical products). AAi is currently expanding its distribution center in Smithfield, Rhode Island. The plant expansion will more than double the capacity of the Rhode Island distribution center and, together with the scheduled systems enhancements, will enable the Company to optimize supply chain operations, improve customer service, increase inventory turns and lower operating costs and will position the Company to add complementary product lines without incurring significant added fixed costs or capital expenditures. AAi intends to consolidate distribution at its Rhode Island facility in the fourth quarter of 1998. AAi has made a substantial investment in the development and enhancement of its computer and information systems. These systems enable the Company to rapidly respond to marketplace demands, permitting the Company to restock retailers' inventory on a just-in-time basis. The Company believes that this technology-based system has been a significant factor in reducing its inventory costs. In 1998, the Company plans to invest in new inventory management software that utilizes voice recognition technology to increase order flow. The Company's flexible distribution systems are capable of processing virtually any small package. AAi's Rhode Island facility utilizes a high velocity fulfillment system that allows the Company to provide its customers short delivery times and high order fulfillment rates. AAi typically delivers its products to its high volume customers on a bi-weekly basis and, on average, ships over 98% of all restocking orders within 24 hours of receipt. A VNA (very narrow aisle) facility configuration serviced by wire guided stock pickers resupplies a rapid response order picking line. After receiving a customer order, the Company's computer system automatically generates a list of the ordered items, also known as a "picking" order, which the distribution staff utilizes in packing the customer's shipment. With the planned improvements to the Company's inventory management computer system, "picking" orders will be arranged according to the location of the ordered items within the Company's distribution center, improving the efficiency of employees in filling orders. The Company delivers ordered items to customers using unaffiliated delivery companies, primarily UPS. In addition, the Company uses an electronic data interchange ("EDI") system between the Company and certain of its major customers, particularly for the distribution of its small synthetic leather goods. Using the EDI system, the Company's computer system automatically generates orders based on point of sale ("POS") information received from customers and the products are sent directly to the customer from the Hong Kong joint venture. SERVICE PROGRAM The Company believes that an attractive, well-positioned display is critical to maximizing sales to the ultimate consumer. The SKU-intensive nature of the Company's product line and the low retail price points (ranging from $3 to $20 on costume jewelry) relative to the required display space has led many retailers to outsource the merchandising function to the Company for its product lines. To better serve these customers, in 1982 the Company initiated an innovative sales program through which AAi provides its program customers with store-level management of its products. In 1997, the sales to customers who utilize the Company's service program accounted for approximately 73% of net sales. 50 57 Program customers select the products to be sold in their stores and, in consultation with AAi sales and service personnel, determine the initial order and display requirements. Thereafter, based on POS information, the Company's management adjusts product mix, generates display planograms and determines discounts and markdowns. This information is transmitted to AAi's field service representatives who regularly visit the retailers' stores to replenish and restock displays, reorder product and attend to markdowns and allowances, thereby providing customers with a real-time response to the market. The frequency of service visits is dictated by the size of the store and the number of the Company's products carried by the retailer. The Company has over 1,500 field service representatives. SALES AND MARKETING The Company's six sales managers have an average of over 20 years of industry experience. The sales force is organized by both distribution channel and product line. The product-based sales approach is dictated by customers since most retailers divide their buyers' responsibilities by product. Sales representatives service existing customers and are responsible for increasing product penetration and solving customer problems. The Company markets its products to the retailers by attending trade shows and advertising in industry trade magazines. The Company also maintains showrooms and sales offices domestically in New York City, New York, Cincinnati, Ohio and Bentonville, Arkansas as well as internationally in Toronto, Canada, Mexico City, Mexico, London, England and Hong Kong. The marketing staff is responsible for sales and marketing efforts directed at new customers and for negotiating contract terms for existing and prospective customers. Marketing focuses on designing a customized product and service package for each customer after determining the retailer's specific needs. Often, branded products provide AAi with initial access to a new customer. The Company then leverages the strength of the Company's field service and breadth of its product lines to increase product penetration. Since acquiring the Foster Grant brand, the Company has begun to advertise directly to the end-consumer. In the 1998 annual Women's Wear Daily survey, the Foster Grant brand was ranked the third most recognized name in accessories by consumers. In 1997, the Company launched an Elvis Presley promotion that featured a televised performance by the Flying Elvi, a skydiving team of Elvis look-alikes, as well as a sweepstakes to win a pair of Foster Grants actually worn by Elvis. For the 1998 sunglasses season, AAi has teamed with the Warner Bros. TV Network for a summer retail promotion that combines the brand's classic advertising theme, "Who's That Behind Those Foster Grants?" with a $1 million sweepstakes. INTELLECTUAL PROPERTY AND LICENSES Proprietary Trademarks. The Company owns trademarks in the words and designs used on or in connection with many of its products. The Company has registered a variety of trademarks under which it sells a number of its products, including Foster Grant. The level of copyright and trademark protection available to the Company for proprietary words, phrases and designs varies depending on several factors including the degree of originality and the distinctiveness of the associated trademarks and design. Licenses. In 1992, AAi began distributing licensed products pursuant to an agreement with Disney Enterprises, Inc. The Company currently holds numerous non-exclusive licenses from various licensors to market products with classic cartoon characters and other images or under other brand names and trademarks. Many of the Company's license agreements limit sales of products to certain market categories. The Company pays each of these licensors a royalty on sales of licensed products. The Company's material licenses generally are for a term of one to three years. The license agreements generally require minimum annual payments and certain quality control procedures and give the licensor the right to approve products licensed by the Company. Typically, the licensor may terminate the license if specified minimum levels of annual net sales for licensed products are not met or for failure by the Company to comply with the material terms of the license. Certain licenses require minimum advertising expenditures by the Company and also require the Company to make lump-sum payments in the event of a change of ownership. Accordingly, the Company's licensing arrangements are dependent primarily upon maintaining a good relationship between the Company and its licensors. The Company believes it has good relationships with its licensors and has generally been able to obtain renewals of expired licenses and to obtain the required approval for licensed products. 51 58 PRODUCT DESIGN, SOURCING AND ASSEMBLY Product Design. AAi's in-house design staff develops new products in line with the current and anticipated trends for each season. For licensed brands, the Company works extensively with the licensor in approving each detail of the new products. The Company believes that its future success will depend, in part, on its ability to enhance its existing product lines and develop new styles and products to meet an expanding range of customer requirements. Sourcing and Assembly. The Company outsources manufacturing for all of its products, 75% of which is sourced to manufacturers in Asia through its joint venture in Hong Kong, with the remainder outsourced to independent domestic manufacturers. The joint venture is co-owned with a Hong Kong investor who provides on-site management. See "The Company." The joint venture monitors production and ensures that products meet the Company's quality standards. The Company also utilizes domestic manufacturers to accommodate short delivery lead times or when otherwise necessary. The Company believes that the quality and cost of the products manufactured by its suppliers provide it with a significant competitive advantage. In addition, sourcing the majority of its products through the joint venture enables the Company to better control costs, monitor product quality, manage inventory and provide efficient order fulfillment. COMPETITION The optical products and accessories industries are highly competitive. Although none of the Company's competitors compete across all of the Company's product lines, there are numerous competitors for each of its product lines both in the retail channels serviced by the Company and in its other channels of distribution. Competitors include numerous accessory vendors, including those with their own retail stores, smaller independent specialty manufacturers, and in the case of costume jewelry and reading glasses, divisions or subsidiaries of large companies with greater financial or other resources than those of the Company. Certain of these competitors control licenses for widely recognized images, such as cartoon or movie characters which could provide them with a competitive advantage. The Company may also experience increased competition from suppliers of upscale fashion accessories seeking to enter the mass merchandise market. There are significant costs associated with the design, production and installation of display fixtures for new customers. Furthermore, many retailers require a new supplier to buy back the retailer's existing inventory as a condition to changing vendors. These inventory costs can be substantial and serve as a barrier to entry for both competitors in attempting to reach the Company's existing customers as well as for the Company in obtaining new customers. AAi competes on the basis of diversity and quality of its product designs, the breadth of its product lines, product availability, price and reputation as well as customer service and support programs. The Company has many competitors with respect to one or more of its products but believes that there are few competitors that distribute products with the same product diversity and service quality as the Company. EMPLOYEES As of August 5, 1998, the Company had approximately 650 full-time employees and 1,350 part-time employees, none of whom were represented by a labor union. The Company considers its relationship with its employees to be good. PROPERTY The Company's principal executive office is located at 500 George Washington Highway, Smithfield, Rhode Island. The Company's primary distribution facilities are adjacent to the Company's recently expanded headquarters, which together are 115,000 square feet. AAi is currently constructing a 65,000 square foot, 40 foot clearance addition to its Smithfield, Rhode Island distribution center, which will more than double the capacity of the Rhode Island facility. The Company also leases a 200,000 square foot distribution center in Dallas, Texas. Upon completion of the Rhode Island expansion (scheduled for the fourth quarter of 1998), the Company plans to consolidate its distribution activities and move the Texas operations to Rhode Island. For discussion of the costs and savings associated with the consolidation of distribution operations, see "Manage- 52 59 ment's Discussion and Analysis of Financial Condition and Results of Operations -- Consolidation of Distribution Operations." The following table describes the material properties owned and leased by the Company:
USE ---------------------------------- OWNED PROPERTY: Smithfield, Rhode Island Warehousing & Distribution, Product Showroom and Sales Office and Office Administration LEASED PROPERTIES: Dallas, Texas(a) Warehousing & Distribution Office Administration New York, New York Product Showroom and Sales Office Bentonville, Arkansas Product Showroom and Sales Office Cincinnati, Ohio Sales Office Warren Avenue, Providence, Rhode Island(b) Warehousing Carpenter St., Providence, Rhode Island(b) Warehousing Toronto Canada Product Showroom and Sales Office Newcastle Under Lyme, Staffordshire, United Kingdom Warehousing & Distribution and Office Administration
- --------------- (a) Upon completion of the expansion at AAi's Rhode Island facility, the Company plans to move the Texas operations to Rhode Island and close the Texas distribution center. The Texas facility was leased from a related party until May 1998 when it was sold to an independent third party. See "Certain Transactions." (b) Leased to the Company from related parties. See "Certain Transactions." LEGAL PROCEEDINGS The Company is subject to legal proceedings in the ordinary course of business. While the outcome of law suits or other proceedings cannot be predicted with certainty, management does not expect these matters to have a material adverse effect on the financial condition, results of operation or cash flow of the Company. 53 60 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS Each director of the Company is elected for a period of one year at the Company's annual meeting of shareholders and serves until his successor is duly elected by the shareholders. Vacancies and newly created directorships resulting from any increase in the number of authorized directors may be filled by a majority vote of directors then remaining in office. The holders of the Series A Preferred Stock (the "Preferred Holders") have the right, at their option, to designate up to two directors to the Board of Directors, as well as the right to vote on the election of directors at the annual meeting of shareholders. The Company's shareholders have entered into an agreement that requires them to vote to fix the number of directors of the Company at seven and elect as directors two persons designated by the Preferred Holders and five persons designated by certain management shareholders. In addition, Weston Presidio Capital II, L.P., the record holder of 17,100 shares (39.1%) of the Series A Preferred Stock, has agreed to vote in favor of Martin E. Franklin (or in the event of his death or disability, the designee of Marlin Capital, L.P.) as a director. See "Certain Transactions -- Shareholders Agreement." Officers are elected by and serve at the discretion of the Board of Directors. The following table sets forth information with respect to each person who is currently a director or executive officer of the Company.
NAME AGE POSITION WITH THE COMPANY ---- --- ------------------------- Gerald F. Cerce...................... 51 Chairman, President and Chief Executive Officer John H. Flynn, Jr.................... 48 Director and Executive Vice President -- Sales and Customer Service Stephen J. Carlotti.................. 56 Director and Secretary (a) Michael F. Cronin *.................. 45 Director (a), (b) Martin E. Franklin *................. 34 Director George Graboys....................... 65 Director (a), (b) Felix A. Porcaro, Jr................. 43 Executive Vice President -- Marketing and Product Development Robert V. Lallo...................... 58 Executive Vice President -- Distribution Daniel A. Triangolo.................. 63 Executive Vice President -- International Duane M. DeSisto..................... 44 Treasurer, Assistant Secretary and Chief Financial Officer
- --------------- * Designated by the Preferred Holders. All other directors were designated by certain management shareholders pursuant to the Shareholders Agreement. See "Certain Transactions -- Shareholders Agreement." (a) Member of the Compensation Committee. (b) Member of the Audit Committee. The following is a brief summary of the background of each director and executive officer. Unless otherwise indicated, each individual has served in his current position for the past five years. Gerald F. Cerce co-founded the Company in 1985 with Mr. Porcaro and has served as the Company's Chairman of the Board since that time. Mr. Cerce also served as Chairman of the Board of AAi's predecessor company, Femic, Inc., a Rhode Island jewelry manufacturer which Mr. Cerce and Mr. Porcaro acquired in 1972. Mr. Cerce serves on the Board of Trustees of Bryant College and is a former member of the Advisory Board of Citizens Savings Bank. John H. Flynn, Jr. joined AAi's predecessor company in 1981 as Vice President. He served as President and Chief Executive Officer of the Company from 1985 to 1998 and has been a Director since 1985. As Executive Vice President of Sales and Customer Service, Mr. Flynn directly manages all sales and service operations for the Company in the U.S. Prior to joining the Company, Mr. Flynn was a service director for K&M Associates, a costume jewelry distributor, and also served as Vice President of Puccini Accessories where he supervised all sales and service operations. 54 61 Stephen J. Carlotti has been a Director of the Company since June 1996. He is an attorney and has been a partner of the firm Hinckley, Allen & Snyder since 1992 and from 1972 to 1989. From 1989 to 1992, he served as Chief Operating Officer and General Counsel of The Mutual Benefit Life Insurance Company. He is also a director of WPI Group, Inc. (a manufacturer of hand held computers and electronic components) and Fleet National Bank. Michael F. Cronin has been a Director of the Company since June 1996. Mr. Cronin also serves on the boards of directors of Casella Waste System, Inc. (a refuse systems company), Tekni Plex, Inc. (a manufacturer of packaging materials), Tweeter Home Entertainment Group, Inc. (a retailer of audio and video consumer electronics products) and Physician Health Corporation (a physician management company). Since 1991, Mr. Cronin has been the Managing General Partner of Weston Presidio Capital, a venture capital investment firm. Martin E. Franklin has been a Director of the Company since 1996. Mr. Franklin is Chairman and Chief Executive Officer of Marlin Holdings, Inc. which is the general partner of Marlin Capital, L.P., a private investment partnership. He also serves as Chairman of the respective boards of directors of Lumen Technologies, Inc. (formerly BEC Group, Inc.) and Bolle, Inc. In addition, he is non-executive Chairman of Eyecare Products plc and a Director of Specialty Catalog Corp. From May 1996 to March 1998, Mr. Franklin was Chairman and Chief Executive Officer of BEC Group, Inc. ("BEC") and served as Chairman and Chief Executive Officer of BEC's predecessor, Benson Eyecare Corporation from October 1992 to May 1996. George Graboys has served as a Director of the Company since 1996. Mr. Graboys served as Chief Executive Officer of Citizens Bank and Citizens Financial Group, Inc. until he retired in October 1992. From January 1993 to June 1995, Mr. Graboys was Adjunct Professor and Executive-in-Residence at the University of Rhode Island School of Business. From March 1995 to June 1998, Mr. Graboys served as Chairman of the Board of Governors for Higher Education. The Board oversees the state's three institutions of higher education conducted on eight campuses throughout the state. Felix A. Porcaro, Jr. co-founded the Company with Mr. Cerce (his brother-in-law)in 1985, and served as its Vice Chairman of the Board of Directors until 1996. Mr. Porcaro is now the Executive Vice President of Marketing and Product Development and is responsible for the design and merchandising departments and all advertising and public relations activities. Robert V. Lallo joined AAi's predecessor company in 1979 as Vice President. He served as the Company's Chief Operating Officer from 1985 to 1998. As Executive Vice President -- Distribution, Mr. Lallo is responsible for all manufacturing, distribution and internal operations of the Company's facilities. Prior to his association with AAi and its predecessor company, Mr. Lallo was Production and Inventory Control Manager, Materials Manager and Director of Operations for Uncas Manufacturing Company. Daniel A. Triangolo has been the Executive Vice President of AAi's international operations since 1995. Mr. Triangolo was the founder and President of Danal Jewelry Corporation prior to its acquisition by AAi in 1983. Duane M. DeSisto has served as the Company's Vice President and Chief Financial Officer since 1995. Prior to joining AAi, Mr. DeSisto was Chief Financial Officer of Zoll Medical Corporation for nine years. DIRECTOR COMPENSATION Directors who are not employees of the Company receive an annual fee of $10,000, as well as reimbursement for their reasonable expenses. Messrs. Cerce and Flynn do not receive any directors' fees. 55 62 EXECUTIVE COMPENSATION The following table sets forth the compensation paid or accrued to the Company's Chief Executive Officer and each of the other four most highly compensated executive officers of the Company (together, the "Named Executive Officers") for the year ended December 31, 1997. SUMMARY COMPENSATION TABLE
LONG TERM ANNUAL COMPENSATION(a) COMPENSATION ALL OTHER NAME AND PRINCIPAL POSITION SALARY($) OPTIONS(#) COMPENSATION($)(b) - --------------------------- ---------------------- ------------ ------------------ Gerald F. Cerce,.................. $661,024 -- $211,988 Chairman, President and Chief Executive Officer John H. Flynn, Jr.,............... 299,898 -- 11,151 Executive Vice President -- Sales and Customer Service Felix A. Porcaro, Jr.,............ 204,213 -- 14,695 Executive Vice President -- Product Development and Marketing Michael Aviles,................... 197,490 -- 90,950(d) President Foster Grant Division(c) Daniel A. Triangolo,.............. 162,162 2,000 2,375 Executive Vice President -- International Division
- --------------- (a) The aggregate amount of perquisites and other personal benefits received from the Company by each of the Named Executive Officers was less than the lesser of $50,000 or 10% of the total of annual salary and bonus reported. (b) Amounts represent the following: (1) medical payments reimbursed by the Company to: Mr. Cerce ($4,909), Mr. Flynn ($6,343) and Mr. Porcaro ($10,279); (2) the Company's matching contributions under its Qualified 401(k) Plan and Non-Qualified 401(k) Excess Plan for Named Executive Officers as follows: Mr. Cerce ($6,929), Mr. Flynn ($4,658), Mr. Porcaro ($4,266), Mr. Aviles ($950) and Mr. Triangolo, ($2,375); (3) premiums paid by the Company for term life insurance purchased for the Named Executive Officers and not made available generally to salaried employees in the amount of $150 for each of Messrs. Cerce, Flynn and Porcaro; and (4) premium of $200,000 paid with respect to life insurance purchased by the Company in connection with Mr. Cerce's Supplemental Executive Retirement Plan. (c) Mr. Aviles' employment with the Company terminated effective December 31, 1997. (d) Includes a stay bonus of $90,000 paid in connection with the Company's acquisition of Foster Grant US. STOCK PLAN The Company has established the 1996 Incentive Stock Plan (the "1996 Plan") which provides for the grant of awards covering a maximum of 50,000 shares of Common Stock to officers and other key employees of the Company and non-employees who provide services to the Company or its subsidiaries. Awards under the 1996 Plan may be granted in the form of incentive stock options, non-qualified stock options, shares of common stock that are restricted, units to acquire shares of Common Stock that are restricted, or in the form of stock appreciation rights or limited stock appreciation rights. As of July 15, 1998, incentive stock options to purchase 12,000 shares of Common Stock which have been granted under the 1996 Plan were outstanding. The options have an exercise price equal to the market value of the Common Stock at the time of the grant, are immediately exercisable and will expire ten years after the date of grant. To date, no non-qualified stock options, restricted shares, restricted units or stock appreciation rights have been granted under the 1996 Plan. The following table sets forth certain information concerning the grant of stock options under the 1996 Plan to the Named Executive Officers during fiscal 1997. No options were granted to Messrs. Cerce, Flynn, Porcaro or Aviles in fiscal 1997. 56 63 OPTION GRANTS IN LAST FISCAL YEAR
NUMBER OF % OF TOTAL SECURITIES OPTIONS EXERCISE OR UNDERLYING GRANTED TO BASE OPTIONS EMPLOYEES IN PRICE EXPIRATION GRANT DATE NAME GRANTED FISCAL YEAR ($/Sh)(a) DATE VALUE (a) ---- ---------- ------------ ----------- ---------- ---------- Daniel A. Triangolo.............. 2,000 33.3% $50.00 12/29/2007 $41,200.00
- --------------- (a) Represents the fair value of the option granted and was estimated as of the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions: expected volatility of 35.53%; expected life of five years; and risk-free interest rate of 5.77%. No dividends on Common Stock were assumed for purposes of this estimate. The following table contains information with respect to aggregate stock options held by the Named Executive Officers as of December 31, 1997. Messrs. Cerce, Flynn and Porcaro do not hold any stock options. All such options were exercisable as of such date. No stock options were exercised by any Named Executive Officers during fiscal 1997. AGGREGATE YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY NAME AT FISCAL YEAR 1997 OPTION/SARS($)(a) - ---- ------------------------------ -------------------- Michael Aviles (b).................................. 2,000 -- Daniel A. Triangolo................................. 4,000 --
- --------------- (a) Based on the December 31, 1997 price of the Common Stock being equal to the exercise price of $50.00. (b) Mr. Aviles' options expired during the first quarter of 1998. EMPLOYMENT AGREEMENTS The Company has entered into employment agreements, dated as of May 31, 1996, with certain of its executive officers, including Messrs. Cerce, Flynn, Porcaro, Lallo and DeSisto (collectively, the "Executives," each an "Executive"). Each employment agreement provides that during the term of the contract the Executive's base salary will not be reduced, will be increased on each anniversary date of the agreement based upon the consumer price index and may be increased based on the Company's performance and the Executive's particular contributions. The employment agreements also stipulate that the Executives will remain eligible for participation in the Company's Executive Bonus Plan and other benefit programs, and that the Company will provide each Executive with an automobile consistent with past practice. The employment agreement of Mr. Cerce further provides for the reimbursement of certain membership and service fees as well as reasonable expenses associated with the performance of his duties in New York City and specifies that the Company will make all annual payments for his Supplemental Employment Retirement Plan. Mr. Cerce's agreement provides for an initial ten year term expiring on May 31, 2006, and the employment agreements of Messrs. Flynn, Porcaro, Lallo and DeSisto each stipulate an initial three year term expiring on May 31, 1999, with automatic renewals for successive one year terms thereafter (the "Employment Period"). Upon prior written notice to the Executive, the Company may terminate the agreement "with cause" for (a) the conviction of the Executive for a crime involving fraud or moral turpitude; (b) deliberate dishonesty of the Executive with respect to the Company or its subsidiaries; or, (c) except under certain circumstances as specified in the agreement, the Executive's refusal to follow the reasonable and lawful written instructions of the Board of Directors with respect to the services to be rendered and the manner of rendering such services by the Executive. In addition, an Executive may terminate his agreement at any time by providing written notice to the Company, and the Company may terminate the agreement at any time "without cause" by providing written notice to the Executive. Mr. Cerce's agreement provides that the Company must provide such written notice at least six months prior to termination. Termination "without 57 64 cause" means termination for any reason other than "cause" as defined and specifically includes the Company's material reduction of the Executive's duties or authority, the disability of the Executive or the Executive's death. Under the employment agreements, if the Company terminates an agreement "without cause," the Company is obligated to provide the Executive monthly severance benefits consisting of one-twelfth of the sum of Executive's then current annual base salary and the Executive's most recent bonus and to continue coverage under the Company's insurance programs and any ERISA benefit plans. Such payments, insurance coverage and plan participation will continue for at least two years from the date of the Executive's termination, and may be extended for a longer period depending on the Executive's "Non-compete Period" as described below. For Messrs. Cerce and Flynn, the maximum period for severance benefits is five years, for Messrs. Lallo and DeSisto, the comparable maximum period is four years, and for Mr. Porcaro, the comparable maximum period is three years. The employment agreements contain confidentiality provisions and provide that during the Employment Period and after termination of the agreement, the Company may restrict the Executive's subsequent involvement in Restricted Business Activities for two years for Messrs. Cerce, Flynn and Lallo and for one year for Messrs. Porcaro and DeSisto following the date of the termination (the "Non-compete Period"). As used in the agreements, "Restricted Business Activities" means the marketing and sale of ladies' and men's consumer soft lines to retail stores, which the Company sold and marketed during the Executive's employment with the Company. Other than with the written approval of the Company, the Executive may not enter into or engage in or have a proprietary interest in the Restricted Business Activities other than the ownership of (a) the stock of the Company held by the Executive, and (b) no more than five percent of the securities of any other company which is publicly held. The Non-compete Period may be extended, at the Company's option, by three years for Messrs. Cerce and Flynn and by two years for Messrs. Porcaro, Lallo and DeSisto, provided that the Company continues to make the payments and provide the benefits described in the preceding paragraph. EXECUTIVE BONUS PLAN The Company maintains an Executive Bonus Plan for the purpose of providing incentives in the form of an annual cash bonus to officers and other key employees. Awards are equal to a percentage of base salaries specified in an annual plan by reference to the Company's target for sales and net income. Bonuses awarded to senior executives are equal to 50% of compensation if the sales and income targets are met. If the targets are not met, the amount of the bonuses, if any, is subject to the discretion of the Board of Directors. QUALIFIED 401(k) Plan The Company has a qualified 401(k) plan (the "Qualified Plan") that permits all employees to defer, on an elective basis, up to 15% of their salary or wages. Presently, the Company matches 25% of the first 6% of compensation that an employee defers under the Qualified Plan. The amount of elective deferrals for any one employee under the Qualified Plan is limited by the Internal Revenue Code of 1986, as amended (the "Code"). In addition, the amount that an executive employee may defer is subject to nondiscrimination rules which may prevent the executive from deferring the maximum amount. Further, the Qualified Plan may not take into account compensation in excess of specified amounts for any employee in computing contributions under the Qualified Plan. If an employee's elective contributions are reduced or capped under the Qualified Plan, the amount of matching employer contribution also is restricted. NON-QUALIFIED EXCESS 401(k) Plan In May 1997, the Company established the Non-Qualified Excess 401(k) Plan (the "Non-Qualified Plan") effective as of June 1, 1997. The purpose of the Non-Qualified Plan is to provide deferred compensation to a select group of management or highly compensated employees of the Company as designated by the Board of Directors. Presently, five individuals, including the Named Executive Officers, participate in the Non-Qualified Plan. Under the Non-Qualified Plan, a participant may elect to defer up to 15% of his or her compensation on an annual basis. This amount is credited to the employee's deferred 58 65 compensation account (the "Deferred Amount"). Under the Non-Qualified Plan, the Company also credits the participant's deferred compensation account for the amount of the matching contribution the Company would have made under the Qualified Plan with respect to the Deferred Amount. All amounts contributed by the employee and by the Company under the Non-Qualified Plan are immediately vested. A participant under the Non-Qualified Plan is entitled to receive a distribution of his or her account upon retirement, death, disability or termination of employment. An executive also is eligible to withdraw funds credited to the executive's deferred compensation account in the event of unforeseeable financial hardship. This policy is consistent with the ability of an employee to obtain hardship withdrawals under the Qualified Plan. The amount deferred under the Non-Qualified Plan is not includible in the income of the executive until paid and, accordingly, the Company is not entitled to a deduction for any liabilities established under the Non-Qualified Plan until the amount credited to the participant's deferred compensation account is paid to him or her. The Company has established a grantor trust effective June 1, 1997 to hold assets to be used for payment of benefits under the Non-Qualified Plan. In the event of the Company's insolvency, any assets held by the trust are subject to claims of general creditors of the Company under federal and state law. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN The Company has entered into a Supplemental Executive Retirement Plan (the "Supplemental Plan") with Mr. Cerce the purpose of which is to provide supplemental retirement, death, disability and severance benefits to Mr. Cerce in consideration for his performance of services as a key executive of the Company. In order to fund the Company's obligations under the Supplemental Plan, the Company has purchased an insurance policy insuring the life of Mr. Cerce (the "Policy"). Under the terms and subject to the conditions contained in the Supplemental Plan, upon Mr. Cerce's voluntary termination of employment for any reason on or after age 60 ("Retirement") or by reason of disability, the Company will pay to Mr. Cerce the existing cash surrender value of the Policy. At the discretion of the Board of Directors of the Company, payment may be made either in a single lump sum or in monthly installments over a ten year period; provided, however, in the event that Retirement occurs within one year after a change of control, the retirement benefit will be paid in a single lump sum. In the event that Mr. Cerce dies while employed by the Company, the Company will pay a death benefit to Mr. Cerce's surviving spouse or designated beneficiary equal to the death benefit payable under the Policy. The death benefit will be paid in monthly installments over a fifteen year period unless Mr. Cerce's death occurs within one year after a change of control, in which event, the death benefit will be paid in a single lump sum no later than ninety days after his death. In the event that Mr. Cerce's employment with the Company is terminated for any reason other than Retirement, death or disability, Mr. Cerce will be entitled to receive the existing cash surrender value of the Policy, payable at the discretion of the Board of Directors of the Company in a single lump sum or in monthly installments over a ten year period. However, if Mr. Cerce's termination occurs within one year after a change of control, the severance benefit will be paid in a single lump sum. 59 66 SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS The following table sets forth certain information regarding beneficial ownership of the Company's capital stock as of August 5, 1998, by (i) each person who is known by the Company to beneficially own more than 5% of the outstanding shares of Common Stock or Series A Preferred Stock; (ii) each of the Company's directors and Named Executive Officers; and (iii) all directors and executive officers of the Company as a group:
SERIES A COMMON STOCK PREFERRED STOCK COMMON STOCK DILUTED (b) ------------------------ ------------------------ ----------------------- NUMBER OF NUMBER OF NUMBER OF SHARES SHARES SHARES BENEFICIALLY PERCENT BENEFICIALLY PERCENT BENEFICIALLY PERCENT NAME AND ADDRESS (A) OWNED OF CLASS OWNED OF CLASS OWNED OF CLASS -------------------- ------------ -------- ------------ -------- ------------ -------- Gerald F. Cerce(c).................... -- -- 323,953 53.3% 323,953 31.0% Felix A. Porcaro, Jr.(c).............. -- -- 171,000 28.1 171,000 16.4 John H. Flynn, Jr..................... -- -- 28,500 4.7 28,500 2.7 Stephen J. Carlotti(d)(e)............. -- -- 36,094 5.9 36,094 3.5 Michael F. Cronin(f).................. 17,100 39.1% 19,000 3.1 190,000 18.2 Martin E. Franklin(g)................. 4,750 10.9 -- -- 47,500 4.5 George Graboys........................ -- -- -- -- -- -- David J. Syner(e)(h).................. -- -- 36,094 5.9 36,094 3.5 Daniel A. Triangolo(i)................ -- -- 4,000 * 4,000 * Weston Presidio Capital II, L.P.(j)... 17,100 39.1 19,000 3.1 190,000 18.2 St. Paul Fire and Marine Insurance Company(k).......................... 6,840 15.7 7,600 1.3 76,000 7.3 BancBoston Ventures, Inc.(l).......... 6,840 15.7 7,600 1.3 76,000 7.3 Marlin Capital, L.P.(m)............... 4,750 10.9 -- -- 47,500 4.5 National City Capital Corporation(n)...................... 3,420 7.8 3,800 * 38,000 3.6 Brahman Group(o)...................... 3,117 7.1 -- -- 31,170 3.6 All executive officers and directors as a group (10 persons)(p).......... 21,850 50.0 597,000 96.9 815,500 78.2
- --------------- * Less than one percent (a) If applicable, beneficially owned shares include shares owned by the spouse, children and certain other relatives of the director or officer, as well as shares held by trusts of which the person is a trustee or in which he has a beneficial interest. All information with respect to beneficial ownership has been furnished by the respective directors and officers. (b) Includes full conversion of all outstanding shares of Series A Preferred Stock into Common Stock at the current ratio of 1 for 10. (c) Messrs. Cerce's and Porcaro's business address is 500 George Washington Highway, Smithfield, Rhode Island 02917. (d) Mr. Carlotti's business address is 1500 Fleet Center, Providence, Rhode Island 02903. (e) Represents shares of Common Stock held by Mr. Carlotti and David J. Syner, as trustees of the benefit of Mr. Cerce's children. (f) Mr. Cronin's business address is 1 Federal Street, 21(st) Floor, Boston, Massachusetts 02110. Includes 19,000 shares of Common Stock and 17,100 shares of Series A Preferred Stock held in the name of Weston Presidio Capital II, L.P. of which Mr. Cronin is a general partner. (g) Mr. Franklin's business address is 555 Theodore Fremd Avenue, Suite B-302, Rye, New York 10580. Includes 4,750 shares of Series A Preferred Stock held in the name of Marlin Capital, L.P., of which Mr. Franklin's majority-owned company is the sole general partner. (h) Mr. Syner's business address is 35 Sockanesset Crossroads, Cranston, Rhode Island 02920. (i) Represents shares that may be acquired pursuant to options which are or will become exercisable within 60 days. (j) The address of Weston Presidio Capital II, L.P. is 1 Federal Street, 21(st) Floor, Boston, Massachusetts 02110. (k) The address of St. Paul Fire and Marine Insurance Company is c/o St. Paul Venture Capital, Inc., 8500 Normandale Lake Boulevard, Suite 1940, Bloomington, Minnesota 55437. (l) The address of BancBoston Ventures, Inc. is 175 Federal Street, 10th Floor, Boston, Massachusetts 02110. (m) The address of Marlin Capital, L.P. is 555 Theodore Fremd Avenue, Suite B-302, Rye, New York 10580. (n) The address of National City Capital Corporation is 1965 E. 6th Street, Suite 1010, Cleveland, Ohio 44114. (o) The Brahman Group includes Brahman Partners II, L.P., B.Y. Partners, L.P. and Brahman Partners II Offshore Ltd., which are a "group" as that term is used in Section 13(d)(3) of the Exchange Act of 1934, as amended (the "Exchange Act"). The address for these shareholders is c/o Brahman Capital Corp., 277 Park Avenue, New York, New York 10172. (p) Includes 8,000 shares that may be acquired pursuant to options which are or will become exercisable within 60 days. All of the Company's shareholders are party to an agreement that requires the parties thereto to vote to fix the number of directors of the Company at seven and elect as directors two persons designated by the Preferred Holders and five persons designated by certain management shareholders. See "Certain Transactions -- Shareholders Agreement." 60 67 CERTAIN TRANSACTIONS NOTES PAYABLE TO PREFERRED SHAREHOLDERS On May 31, 1996, in connection with the Company's sale of shares of its Series A Preferred Stock, the Company issued subordinated promissory notes in the aggregate amount of $2.0 million to certain Preferred Holders (Weston Presidio Capital II, L.P., BancBoston Ventures, Inc., St. Paul Fire and Marine Insurance Company and National City Capital Corporation). BancBoston Ventures, Inc., an affiliate of BancBoston Securities Inc., one of the Initial Purchasers, was a holder of a subordinated note in the principal amount of $400,000. The subordinated notes bore interest at an annual rate of 7.04% and were due in 2002. These notes were repaid with a portion of the net proceeds from the sale of the Old Notes. See "Use of Proceeds." TERMINATION OF S CORPORATION STATUS Until the issuance of its Series A Preferred Stock on May 31, 1996, the Company was an S corporation under the Code and comparable state tax laws. As an S corporation, earnings through the date of termination of S corporation status were taxed directly to the S corporation shareholders (Messrs. Cerce, Flynn, Lallo and Porcaro). Upon termination of its S corporation status, the Company issued to the S corporation shareholders previously taxed undistributed earnings in the aggregate amount of $13.3 million. Of the $13.3 million, $10.3 million was paid in cash and $3.0 million was paid by the issuance of subordinated promissory notes, which bore interest at an annual rate of 7.04% and were due in 2006. These notes were also repaid with a portion of the net proceeds of the sale of the Old Notes. See "Use of Proceeds." The Company has entered into an indemnification agreement with the S Corporation shareholders relating to potential income tax liabilities resulting from adjustments to reported S corporation taxable income. The S corporation shareholders will continue to be liable for personal income taxes on the Company's income for all periods during which the Company was an S corporation, while the Company will be liable for all income taxes for subsequent periods. The indemnification agreement provides that the Company will distribute to the S corporation shareholders 40% of the amount of additional deductions permitted to be taken by the Company as a C corporation for expenditures made while an S corporation, which result from adjustments initiated by tax authorities. During the first and second quarters of 1998, in connection with an income tax audit, the Company made advances totaling $3.4 million to the S corporation shareholders to pay a portion of the income tax owed by them with respect to the Company's S corporation earnings. Upon completion of the sale of the Old Notes, the shareholders repaid these advances. LEASES OF RHODE ISLAND WAREHOUSE SITES The Company has an operating lease agreement for warehouse facilities with Sunrise Properties, LLC ("Sunrise Properties"), a Rhode Island limited liability company, of which Mr. Porcaro and Linda Cerce, wife of Mr. Cerce and sister of Mr. Porcaro, are members. The Company also has an operating lease agreement for warehouse facilities with 299 Carpenter Street Associates, LLC, a Rhode Island limited liability company of which Sunrise Properties and Messrs. Lallo and Flynn are members. The leased properties are located at 4 Warren Avenue, North Providence, Rhode Island and at 299 Carpenter Street, Providence, Rhode Island. The present annual rental rates for the Warren Avenue and Carpenter Street properties are $191,412 and $279,840, respectively. The Company is responsible for real estate taxes and utilities. Each lease has a three year term ending on December 31, 2001, and grants the Company an option to extend the lease for an additional three year term at the greater of the then fair market rent or the current rent adjusted for the cumulative increase in the consumer price index. GUARANTY OF MORTGAGE NOTE The Company has guaranteed a mortgage note payable by Sunrise Properties in the aggregate amount of $200,000, the outstanding balance of which was approximately $118,000 as of August 5, 1998. The mortgage note has a remaining maturity of three years, and bears interest at a rate of 9.5% annually. 61 68 LEASE OF DALLAS, TEXAS SITE In December 1996, in conjunction with the purchase of Foster Grant US, the Company entered into a property lease with BEC Group, Inc. (now named Lumen Technologies, Inc.) ("BEC/Lumen"), the former owner of the Foster Grant US office and distribution center. In March 1998, BEC/Lumen transferred the Texas property to Bolle, Inc. an affiliated corporation at the time of transfer. Martin E. Franklin, a director of the Company, is the chairman of Lumen Technologies, Inc. and Bolle, Inc. Rental expense for this property was approximately $494,000 in 1997. In May 1998, Bolle, Inc. sold the Texas property to an independent third party. The Company gave notice of termination of the lease effective December 1998. SHAREHOLDERS AGREEMENT The Company, the current shareholders and Daniel A. Triangolo, Duane M. DeSisto and Thomas McCarthy are parties to a Tag-along, Transfer Restriction and Voting Agreement (the "Shareholders Agreement") which requires the parties thereto to vote to fix the number of directors at seven and to elect as directors two persons nominated by the Preferred Holders and five persons nominated by the other parties to the Shareholders Agreement (the "Management Shareholders"). In a related Letter Agreement, Weston Presidio Capital II, L.P., a Preferred Holder, has agreed to use its best efforts to cause the nomination of and to vote all of its shares of Series A Preferred Stock for the election of Martin E. Franklin (or, in the event of his death or incapacity, the designee of Marlin Capital, L.P.) as a director of the Company, for so long as the Preferred Holders, in the aggregate, own at least 10% or 4,750 shares of Series A Preferred Stock. The Shareholders Agreement also provides that upon the death of a Management Shareholder, the Company will purchase, at an appraised value determined by an independent investment banker, all or a portion of the shares owned by the Management Shareholder at his death. The Company has funded its obligations under the Shareholders Agreement with life insurance policies on the lives of the Management Shareholders in the aggregate amount of $27 million. The Company's obligation to purchase shares upon the death of a Management Shareholder is limited to the life insurance proceeds received upon the death of such Management Shareholder. The Company may not decrease the amount of life insurance coverage without the prior written consent of the affected Management Shareholder. The Shareholders Agreement terminates on the earlier of the following: (i) the time immediately prior to the consummation of a Qualified Public Offering as defined in the Articles of Incorporation (see "Description of Capital Stock") or (ii) when no shares of the Series A Preferred Stock and no warrants issuable to the Preferred Holders are outstanding, except as a result of the conversion, exchange or exercise of the Series A Preferred Stock or warrants. OWNERSHIP OF PREFERRED SHARES OF FG HOLDINGS BY BEC/LUMEN In connection with the purchase of Foster Grant US, the Company's wholly-owned subsidiary, FG Holdings, issued BEC/Lumen 100 shares of FG Preferred Stock which represents all of the issued and outstanding shares of FG Preferred Stock. By its terms, the FG Preferred Stock must be redeemed on February 28, 2000 (the "FG Redemption Date") by payment of an amount ranging from $10,000 to $40,000 per share (the "FG Redemption Amount"), determined with reference to the combined net sales of sunglasses, reading glasses and accessories by FG Holdings and the Company for the year ending January 1, 2000, excluding an amount equal to the net sales by the Company for such items for the year ending December 31, 1996. The Certificate of Incorporation of FG Holdings also provides for early redemption of the FG Preferred Stock if the Company completes either (i) an initial public offering where the pre-money valuation of the Company equals or exceeds $75.0 million, (ii) a merger or similar transaction where the transaction value equals or exceeds $75.0 million or (iii) a private placement of equity securities representing more than 50% of the outstanding capital stock for consideration of not less than $37.5 million (each a "Redemption Event") prior to the FG Redemption Date. Upon completion of a Redemption Event, in lieu of the FG Redemption Amount, holders of FG Preferred Stock will receive a payment ranging from $35,000 to $40,000 per share (the "Redemption Event Amount"), to be determined with reference to, as the case may be, either the pre- 62 69 money valuation of the Company immediately prior to the initial public offering or the proceeds of the merger or similar transaction or private equity placement. If a Redemption Event occurs after the FG Redemption Date, in addition to the FG Redemption Amount, holders of FG Preferred Stock will receive a supplemental payment equal to the difference, if any, between the FG Redemption Amount paid to such holders on the FG Redemption Date and Redemption Event Amount that would have been received had the Redemption Event occurred on or prior to the FG Redemption Date. INITIAL PURCHASERS BancBoston Ventures, Inc., an affiliate of BancBoston Securities Inc., one of the Initial Purchasers, is the beneficial owner of 15.7% of the Company's Series A Preferred Stock and 1.3% of the Common Stock and was a holder of a $400,000 subordinated note. See "Security Ownership of Management and Certain Beneficial Owners" and "Plan of Distribution." NationsBank, an agent and lender under the Senior Credit Facility and lender of the Term Loans, is an affiliate of NationsBanc Montgomery Securities LLC, one of the Initial Purchasers. The Company used a portion of the net proceeds from the Offering to repay all of the outstanding indebtedness under the subordinated notes, Senior Credit Facility and the Term Loans. See "Use of Proceeds," "Description of Senior Credit Facility" and "Plan of Distribution." 63 70 DESCRIPTION OF SENIOR CREDIT FACILITY The Company has a Senior Credit Facility provided by a group of banks and other financial institutions led by NationsBank as a lender and as agent (the "Agent"). The Agent is an affiliate of NationsBanc Montgomery Securities LLC, one of the Initial Purchasers. The following summary of certain provisions of the Senior Credit Facility does not purport to be complete and is subject to and is qualified in its entirety by reference to the provisions of the Senior Credit Facility. The Senior Credit Facility currently provides for loans in an aggregate principal amount not to exceed $60.0 million on a revolving credit basis (the "Revolving Credit Facility") to fund permitted acquisitions, capital expenditures and working capital needs. The Revolving Credit Facility includes a $3.0 million letter of credit sublimit. Advances under the Revolving Credit Facility are limited to up to 85% of eligible accounts receivable plus the lesser of (i) 55% of eligible inventory (other than optical inventory) plus 65% of eligible inventory consisting of optical inventory or (ii) $30.0 million (the "Borrowing Base Requirements"). The full $60.0 million (subject to Borrowing Base Requirements) is currently available under the Revolving Credit Facility. The Senior Credit Facility has an initial expiration date of July 31, 2003, with automatic annual renewals thereafter (subject to the lenders' continued credit approval). The Company's obligations under the Senior Credit Facility are guaranteed by the Subsidiary Guarantors and are secured by the accounts receivable and inventory of the Company and its Domestic Subsidiaries. The Notes and the Subsidiary Guarantees are effectively subordinated to the obligations under the Senior Credit Facility to the extent of the value of the assets securing the Senior Credit Facility. See "Description of Notes -- Subordination" and "Risk Factors -- Effective Subordination of the Notes." Loans under the Senior Credit Facility bear interest, at the Company's option, at either (i) a "Base Rate" equal to the Agent's prime lending rate, plus up to 0.50% (determined based on the Company's fixed charge coverage ratio); or (ii) a "LIBOR Rate," plus an applicable margin of between 1.50% and 2.25% (determined based on the Company's fixed charge coverage ratio). The Senior Credit Facility contains a number of covenants that, among other things, restrict the ability of the Company and its subsidiaries to dispose of assets, incur additional indebtedness, incur guaranty obligations, repay other indebtedness, including the Notes, or amend other debt instruments, pay dividends, create liens on assets, enter into leases, make investments, make acquisitions, engage in mergers or consolidations, make capital expenditures, engage in certain transactions with subsidiaries and affiliates and otherwise restrict corporate activities. In addition, the Senior Credit Facility requires compliance with certain financial covenants, including requiring the Company to maintain a minimum EBITDA level, funded debt to EBITDA ratio and fixed charge coverage ratio, in each case tested at the end of each fiscal quarter of the Company. The Company does not expect that such covenants will materially impact the Company's ability to operate its business. In addition, the Senior Credit Facility requires the Company to meet certain Borrowing Base Requirements in order to draw under the Revolving Credit Facility. The Company is also obligated to pay certain fees with respect to the Senior Credit Facility, including a revolving credit unused line fee of 0.375% on the average daily unused amount. 64 71 DESCRIPTION OF NOTES GENERAL The Notes are issued pursuant to the Indenture dated July 21, 1998 (the "Indenture"), among the Company, the Guarantors and IBJ Schroder Bank & Trust Company, as trustee (the "Trustee"). The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). The Notes are subject to all such terms, and Holders of Notes are referred to the Indenture and the Trust Indenture Act for a statement thereof. The following summary of the material provisions of the Indenture and Registration Rights Agreement does not purport to be complete and is qualified in its entirety by reference to the Indenture and Registration Rights Agreement, including the definitions therein of certain terms used below. The definitions of certain terms used in the following summary are set forth below under the caption "--Certain Definitions." For purposes of this "Description of Notes," the term "Company" refers only to AAi.FosterGrant, Inc. and not to any of its Subsidiaries. The Notes are general unsecured obligations of the Company and rank pari passu in right of payment to all current and future unsubordinated Indebtedness of the Company, including indebtedness under the Senior Credit Facility. The obligations of the Company under the Senior Credit Facility, however, are secured by the accounts receivable and inventory of the Company and are guaranteed by the Guarantors, which guarantees are secured by the accounts receivable and inventory of the Guarantors. Accordingly, the Notes and the Subsidiary Guarantees are effectively subordinated to the borrowings outstanding under the Senior Credit Facility and the guarantees of such borrowings, respectively, to the extent of the value of the assets securing such borrowings and guarantees. As of April 4, 1998, on a pro forma basis giving effect to the Acquisitions and the Offering and the application of net proceeds therefrom, the Company and its Subsidiaries would have had approximately $1.4 million senior Indebtedness outstanding other than the Notes, all of which would have been secured debt. The Indenture permits the incurrence of additional senior Indebtedness (including secured Indebtedness) in the future. PRINCIPAL, MATURITY AND INTEREST The Notes are limited in aggregate principal amount to $150.0 million, of which $75.0 million were issued in the Offering. The Notes mature on July 15, 2006. Interest on the New Notes accrues at the rate of 10 3/4% per annum from the last date of which interest was paid on the Old Notes surrendered in exchange therefor, or if no interest has been paid, from the date of the original issuance of such Old Notes. Interest on the New Notes is payable semi-annually in arrears on January 15 and July 15, commencing on January 15, 1999, to Holders of record on the immediately preceding January 1 and July 1. Notes having identical terms and conditions to the Notes offered hereby (the "Additional Notes") may be issued from time to time after the date hereof, subject to the provisions of the Indenture, including those described below under the caption "--Certain Covenants -- Incurrence of Indebtedness and Issuance of Preferred Stock." For purposes of this "Description of Notes," references to the Notes do not include Additional Notes. The Notes and any Additional Notes subsequently issued under the Indenture would be treated as a single class for all purposes under the Indenture, including, without limitation, waivers, amendments, redemptions and offers to purchase. Interest is computed on the basis of a 360-day year comprised of twelve 30-day months. Principal of and premium, interest and Liquidated Damages, if any, on the Notes is payable at the office or agency of the Company maintained for such purpose within the City and State of New York or, at the option of the Company, payment of interest and Liquidated Damages, if any, may be made by check mailed to the Holders of the Notes at their respective addresses set forth in the register of Holders of Notes; provided that all payments of principal, premium, interest and Liquidated Damages, if any, with respect to Notes the Holders of which have given wire transfer instructions to the Company 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 is the office of the Trustee maintained for such purpose. The Notes are issued in denominations of $1,000 and integral multiples thereof. 65 72 SUBSIDIARY GUARANTEES The Company's payment obligations under the Notes are jointly and severally guaranteed (the "Subsidiary Guarantees") by each of the Company's current and future Domestic Subsidiaries (collectively, the "Guarantors"). The Subsidiary Guarantee of each Guarantor ranks senior in right of payment to all future subordinated Indebtedness of the Guarantors and ranks pari passu in right of payment to all unsubordinated Indebtedness of such Guarantors and the amounts for which the Guarantors are liable under the guarantees issued from time to time with respect to unsubordinated Indebtedness. The guarantees by the Guarantors of borrowings under the Senior Credit Facility are secured by the accounts receivable and inventory of the Guarantors. Accordingly, the Subsidiary Guarantees are effectively subordinated to such guarantees under the Senior Credit Facility to the extent of the value of the assets securing such guarantees. As of April 4, 1998, on a pro forma basis giving effect to the Acquisitions and the Offering and the application of net proceeds therefrom, the Guarantors would have had no senior Indebtedness, other than the Subsidiary Guarantees, outstanding. The obligations of each Guarantor under its Subsidiary Guarantee is limited so as not to constitute a fraudulent conveyance under applicable law. See "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 corporation, Person or entity 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 Notes, the Indenture and the Registration Rights Agreement; and (ii) immediately after giving effect to such transaction, no Default or Event of Default exists. The Indenture provides that in the event of a sale or other disposition of all of the assets of any Guarantor, by way of merger, consolidation or otherwise, or a sale or other disposition 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, of all of the capital stock of such Guarantor) or the corporation acquiring the property (in the event of a sale or other disposition of all of the assets of such Guarantor) will be released and relieved of any obligations under its Subsidiary Guarantee; provided that the Net Proceeds of such sale or other disposition are applied in accordance with the applicable provisions of the Indenture. See " -- Repurchase at the Option of Holders -- Asset Sales." OPTIONAL REDEMPTION The Notes are not redeemable at the Company's option prior to July 15, 2002. Thereafter, the Notes are subject to redemption at any time at the option of the Company, in whole or in part, upon not less than 30 nor more than 60 days' notice, at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the applicable redemption date, if redeemed during the twelve-month period beginning on July 15 of the years indicated below:
YEAR PERCENTAGE ---- ---------- 2002........................................................ 105.375% 2003........................................................ 102.688% 2004 and thereafter......................................... 100.000%
Notwithstanding the foregoing, at any time on or before July 15, 2001, the Company may redeem up to 35% of the aggregate principal amount of Notes originally issued under the Indenture at a redemption price of 110.750% of the principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the redemption date, with the net cash proceeds of a public sale of common stock of the Company; provided that at least 65% of the aggregate principal amount of Notes originally issued under the Indenture remains outstanding immediately after the occurrence of such redemption (excluding Notes held by the Company or any of its Subsidiaries); and provided, further, that such redemption shall occur within 45 days after the date of the closing of such public sale. 66 73 SELECTION AND NOTICE If less than all of the Notes are to be redeemed at any time, selection of Notes for redemption will be made by the Trustee in compliance with the requirements of the principal national securities exchange, if any, on which the Notes are listed, or, if the Notes are not so listed, on a pro rata basis, by lot or by such method as the Trustee shall deem fair and appropriate; provided that no Notes of $1,000 or less shall be redeemed in part. Notices of redemption shall be mailed by first class mail at least 30 but not more than 60 days before the redemption date to each Holder of Notes to be redeemed at its registered address. Notices of redemption may not be conditional. If any Note is to be redeemed in part only, the notice of redemption that relates to such Note shall state the portion of the principal amount thereof to be redeemed. A new Note in principal amount equal to the unredeemed portion thereof will be issued in the name of the Holder thereof upon cancellation of the original Note. Notes called for redemption become due on the date fixed for redemption. On and after the redemption date, interest ceases to accrue on Notes or portions of them called for redemption. MANDATORY REDEMPTION The Company is not required to make mandatory redemption or sinking fund payments with respect to the Notes. REPURCHASE AT THE OPTION OF HOLDERS Change of Control Upon the occurrence of a Change of Control, each Holder of Notes has the right to require the Company to repurchase all or any part (equal to $1,000 or an integral multiple thereof) of such Holder's Notes pursuant to the offer described below (the "Change of Control Offer") at an offer price in cash equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the date of purchase (the "Change of Control Payment"). Within ten days following a Change of Control, the Company will mail a notice to each Holder describing the transaction or transactions that constitute the Change of Control and offering to repurchase Notes on the date specified in such notice, which date shall be no earlier than 30 days and no later than 60 days from the date such notice is mailed (the "Change of Control Payment Date"), pursuant to the procedures required by the Indenture and described in such notice. The Company will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of the Notes as a result of a Change of Control. On the Change of Control Payment Date, the Company will, to the extent lawful, (i) accept for payment all Notes or portions thereof properly tendered pursuant to the Change of Control Offer, (ii) deposit with the Paying Agent an amount equal to the Change of Control Payment in respect of all Notes or portions thereof so tendered and (iii) deliver or cause to be delivered to the Trustee the Notes so accepted together with an Officers' Certificate stating the aggregate principal amount of Notes or portions thereof being purchased by the Company. The Paying Agent will promptly mail to each Holder of Notes so tendered the Change of Control Payment for such Notes, and the Trustee will promptly authenticate and mail (or cause to be transferred by book entry) to each Holder a new Note equal in principal amount to any unpurchased portion of the Notes surrendered, if any; provided that each such new Note will be in a principal amount of $1,000 or an integral multiple thereof. 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 are applicable whether or not any other provisions of the Indenture are applicable. Except as described above with respect to a Change of Control, the Indenture does not contain provisions that permit the Holders of the Notes to require that the Company repurchase or redeem the Notes in the event of a takeover, recapitalization or similar transaction. The Senior Credit Facility contains prohibitions of certain events that would constitute a Change of Control and restricts the Company's ability to repurchase the Notes. Any future credit agreements or other agreements relating to senior Indebtedness to which the Company becomes a party may contain similar restrictions and provisions. In the event a Change of Control occurs at a time when the Company is prohibited 67 74 from purchasing Notes, the Company could seek the consent of its lenders to the purchase of Notes or could attempt to refinance the borrowings that contain such prohibition. If the Company does not obtain such a consent or repay such borrowings, the Company will remain prohibited from purchasing Notes. In such case, the Company's failure to purchase tendered Notes would constitute an Event of Default under the Indenture which would, in turn, constitute a default under the Senior Credit Facility or other agreements relating to senior Indebtedness. Furthermore, the exercise by the Holders of Notes of their right to require the Company to repurchase the Notes could cause a default under such other senior Indebtedness (even if the Change of Control itself does not or the terms of the senior Indebtedness do not prohibit such repurchases) due to the financial effect of such repurchases on the Company. Finally, the Company's ability to pay cash to the Holders of Notes upon a repurchase may be limited by the Company's then existing financial resources. See "Risk Factors -- Change of Control." The Company is not required to make a Change of Control Offer upon a Change of Control if a third party makes the Change of Control Offer in the manner, at the times and otherwise in compliance with the requirements set forth in the Indenture applicable to a Change of Control Offer made by the Company and purchases all Notes validly tendered and not withdrawn under such Change of Control Offer. The definition of Change of Control includes a phrase relating to the sale, lease, transfer, conveyance or other disposition of "all or substantially all" of the assets of the Company and its Subsidiaries taken as a whole. Although there is a developing body of case law interpreting the phrase "substantially all," there is no precise established definition of the phrase under applicable law. Accordingly, the ability of a Holder of Notes to require the Company to repurchase such Notes as a result of a sale, lease, transfer, conveyance or other disposition of less than all of the assets of the Company and its Subsidiaries taken as a whole to another Person or group may be uncertain. Asset Sales The Indenture provides that the Company will not, and will not permit any of its Subsidiaries to, consummate an Asset Sale unless (i) the Company (or the Subsidiary, as the case may be) receives consideration at the time of such Asset Sale at least equal to the fair market value (evidenced by a resolution of the Board of Directors set forth in an Officers' Certificate delivered to the Trustee) of the assets or Equity Interests issued or sold or otherwise disposed of and (ii) at least 75% of the consideration therefor received by the Company or such Subsidiary is in the form of cash or Cash Equivalents; provided that the amount of (a) any liabilities (as shown on the Company's or such Subsidiary's most recent balance sheet), of the Company or any Subsidiary (other than contingent liabilities and liabilities that are by their terms subordinated to the Notes or any guarantee thereof) that are assumed by the transferee of any such assets pursuant to a customary novation agreement that releases the Company or such Subsidiary from further liability and (b) any securities, notes or other obligations received by the Company or any such Subsidiary from such transferee that are contemporaneously (subject to ordinary settlement periods) converted by the Company or such Subsidiary into cash (to the extent of the cash received) shall be deemed to be cash for purposes of this provision; provided, further that the provisions of this paragraph do not apply to transactions pursuant to the Fantasma Agreement, as in effect on the date of the Indenture. Within 270 days after the receipt of any Net Proceeds from an Asset Sale, the Company may apply such Net Proceeds, at its option, (a) to permanently repay Indebtedness of the Company under a Credit Facility or (b) to acquire all or substantially all of the assets of, or a majority of the Voting Stock of, another business, (c) to make a capital expenditure or (d) to acquire other long-term assets. Pending the final application of any such Net Proceeds, the Company may temporarily reduce revolving credit borrowings or otherwise invest such Net Proceeds in any manner that is not prohibited by the Indenture. Any Net Proceeds from Asset Sales that are not applied or invested as provided in the first sentence of this paragraph will be deemed to constitute "Excess Proceeds." When the aggregate amount of Excess Proceeds exceeds $5.0 million, the Company will be required to make an offer to all Holders of Notes and all holders of other Indebtedness that is pari passu with the Notes containing provisions similar to those set forth in the Indenture with respect to offers to purchase or redeem with the proceeds of sales of assets (an "Asset Sale Offer") to purchase the maximum principal amount of Notes and such other pari passu Indebtedness that may be purchased out of the Excess 68 75 Proceeds, at an offer price in cash in an amount equal to 100% of the principal amount thereof plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the date of purchase, in accordance with the procedures set forth in the Indenture and such other pari passu Indebtedness. To the extent that any Excess Proceeds remain after consummation of an Asset Sale Offer, the Company may use such Excess Proceeds for any purpose not otherwise prohibited by the Indenture. If the aggregate principal amount of Notes and such other pari passu Indebtedness tendered into such Asset Sale Offer surrendered by Holders thereof exceeds the amount of Excess Proceeds, the Trustee shall select the Notes and such other pari passu Indebtedness to be purchased on a pro rata basis. Upon completion of an Asset Sale Offer, the amount of Excess Proceeds shall be reset at zero. CERTAIN COVENANTS Restricted Payments The Indenture provides that the Company will not, and will not permit any of its 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 Subsidiaries' Equity Interests (including, without limitation, any payment in connection with any merger or consolidation involving the Company or any of its Subsidiaries) or to the direct or indirect holders of the Company's or any of its Subsidiaries' Equity Interests in their capacity as such (other than dividends or distributions (a) payable in Equity Interests (other than Disqualified Stock) of the Company or (b) to the Company or a Wholly Owned Subsidiary of the Company); (ii) purchase, redeem or otherwise acquire or retire for value (including, without limitation, in connection with any merger or consolidation involving the Company) any Equity Interests of the Company or any direct or indirect parent of the Company (other than any such Equity Interests owned by the Company or any Wholly Owned Subsidiary of the Company); (iii) make any payment on or with respect to, or purchase, redeem, defease or otherwise acquire or retire for value any Indebtedness of the Company or any of its Subsidiaries that is subordinated to the Notes or any Subsidiary Guarantee thereof, except a payment of interest or principal 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; and (b) the Company would, at the time of such Restricted Payment and after giving pro forma effect thereto as if such Restricted Payment had been made at the beginning of the applicable four-quarter period, have been permitted to incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of the covenant described below under the caption "--Incurrence of Indebtedness and Issuance of Preferred Stock;" and (c) such Restricted Payment, together with the aggregate amount of all other Restricted Payments made by the Company and its Subsidiaries after the date of the Indenture (excluding Restricted Payments permitted by clauses (ii), (iii), (iv), (v)(a) and (vi) of the next succeeding paragraph), is less than the sum, without duplication, 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 received by the Company since the date of the Indenture as a contribution to its common equity capital or from the issue or sale of Equity Interests of the Company (other than Disqualified Stock) or Disqualified Stock or debt securities of the Company that have been converted into such Equity Interests (other than Equity Interests (or Disqualified Stock or convertible debt securities) sold to a Subsidiary of the Company), plus (iii) to the extent that any Restricted Investment that was made after the date of the Indenture is sold for cash or otherwise liquidated or repaid for cash, the lesser of (A) the cash return of capital with respect to such Restricted Investment (less the cost of disposition, if any) and (B) the initial amount of such Restricted Investment, plus (iv) $3.0 million. 69 76 The foregoing provisions do 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, defeasance or other acquisition of any subordinated Indebtedness of the Company or any Guarantor or Equity Interests of the Company in exchange for, or out of the net cash proceeds of the substantially concurrent sale (other than to a Subsidiary of the Company) of, other Equity Interests of the Company (other than any Disqualified Stock); provided that the amount of any such net cash proceeds that are utilized for any such redemption, repurchase, retirement, defeasance or other acquisition shall be excluded from clause (c) (ii) of the preceding paragraph; (iii) the defeasance, redemption, repurchase or other acquisition of subordinated Indebtedness of the Company or any Guarantor with the net cash proceeds from an incurrence of Permitted Refinancing Indebtedness; (iv) the payment of any dividend by a Subsidiary of the Company to the holders of its common Equity Interests on a pro rata basis; (v) the repurchase, redemption or other acquisition or retirement for value of any Equity Interests of the Company or any Subsidiary of the Company held by any member of the Company's (or any of its Subsidiaries') management pursuant to any stock purchase, stock redemption, stock option or similar agreement; provided that the aggregate price paid for all such repurchased, redeemed, acquired or retired Equity Interests in any twelve-month period shall not exceed the sum of (a) any amounts available to the Company under insurance policies insuring the lives of such member of management and (b) $250,000 in any twelve-month period and no Default or Event of Default shall have occurred and be continuing immediately after such transaction; and (vi) repurchases of Capital Stock deemed to occur upon exercise of stock options if such Capital Stock represents a portion of the exercise price of such options. 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) or securities proposed to be transferred or issued by the Company or such Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair market value of any asset or securities that are required to be valued by this covenant shall be determined by the Board of Directors whose resolution with respect thereto shall be delivered to the Trustee, such determination to be based upon an opinion or appraisal issued by an accounting, appraisal or investment banking firm of national standing if such fair market value exceeds $1.0 million. 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, together with a copy of any fairness opinion or appraisal required by the Indenture. Incurrence of Indebtedness and Issuance of Preferred 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, guarantee or otherwise become directly or indirectly liable, contingently or otherwise, with respect to (collectively, "incur") any Indebtedness (including Acquired Debt) and that the Company will not issue any Disqualified Stock and will not permit any of its Subsidiaries to issue any shares of preferred stock; provided, however, that the Company may incur Indebtedness (including Acquired Debt) or issue shares of Disqualified Stock if the Fixed Charge Coverage Ratio for the Company's most recently ended four full fiscal quarters for which internal financial statements are available immediately preceding the date on which such additional Indebtedness is incurred or such Disqualified Stock or preferred stock is issued would have been at least 2 to 1, 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 or preferred stock had been issued, as the case may be, at the beginning of such four-quarter period. The provisions of the first paragraph of this covenant do not apply to the incurrence of any of the following items of Indebtedness (collectively, "Permitted Debt"): (i) the incurrence by the Company or a Foreign Subsidiary of Indebtedness (including letters of credit, with letters of credit being deemed to have a principal amount equal to the maximum potential liability of the Company and its Subsidiaries thereunder) under Credit Facilities and the Guarantee thereof by the Guarantors; provided that the aggregate principal amount of all Indebtedness of the Company and its Subsidiaries (including letters of credit) outstanding under Credit Facilities after giving 70 77 effect to such incurrence does not exceed an amount equal to the greater of (a) $60.0 million less the aggregate amount of all Net Proceeds of Asset Sales applied to permanently repay any Indebtedness under a Credit Facility pursuant to the covenant described above under the caption "--Repurchase at the Option of Holders -- Asset Sales" or (b) the sum of 85% of the accounts receivable plus 55% of the jewelry inventory, 65% of the optical inventory and 55% of all other inventory, in each case of the Company and its Subsidiaries net of reserves, as shown on the most recent balance sheet of the Company and its Subsidiaries; (ii) the incurrence by the Company and its Subsidiaries of the Existing Indebtedness; (iii) the incurrence by the Company of Indebtedness represented by the Notes (other than any Additional Notes) and the Exchange Notes (other than any Additional Notes) and the incurrence by the Guarantors of Indebtedness represented by the Subsidiary Guarantees; (iv) the incurrence by the Company or any of its Subsidiaries of Indebtedness represented by Capital Lease Obligations, mortgage financings or purchase money obligations, in each case incurred for the purpose of financing all or any part of the purchase price or cost of construction or improvement of property, plant or equipment used in the business of the Company or such Subsidiary, in an aggregate principal amount, together with any Attributable Debt with respect to the Smithfield Property permitted under the caption "--Sale and Leaseback Transactions," not to exceed $10.0 million at any time outstanding, including any Permitted Refinancing Indebtedness incurred pursuant to clause (v) below to refund, refinance or replace any Indebtedness incurred pursuant to this clause (iv); (v) the incurrence by the Company or any of its Subsidiaries of Permitted Refinancing Indebtedness in exchange for, or the net proceeds of which are used to refund, refinance or replace Indebtedness (other than intercompany Indebtedness) that was permitted by the Indenture to be incurred by the first paragraph of this covenant, or by clauses (ii), (iii) or (iv) of this covenant; (vi) the incurrence by the Company or any of its Subsidiaries of intercompany Indebtedness between or among the Company and any of its Subsidiaries; provided, however, that (a) if the Company is the obligor on such Indebtedness, such Indebtedness is expressly subordinated to the prior payment in full in cash of all Obligations with respect to the Notes and (b)(1) any subsequent issuance or transfer of Equity Interests that results in any such Indebtedness being held by a Person other than the Company or a Subsidiary thereof and (2) any sale or other transfer of any such Indebtedness to a Person that is not either the Company or a Subsidiary thereof shall be deemed, in each case, to constitute an incurrence of such Indebtedness by the Company or such Subsidiary, as the case may be, that was not permitted by this clause (vi); (vii) the incurrence by the Company or any of its Subsidiaries of Hedging Obligations that are incurred for the purpose of (a) fixing or hedging interest rate risk with respect to any floating rate Indebtedness that is permitted by the terms of this Indenture to be outstanding or (b) limiting currency exchange rate risks in connection with transactions entered into in the ordinary course of business; (viii) the guarantee by the Company or any of the Guarantors of Indebtedness of the Company or a Subsidiary of the Company that was permitted to be incurred by another provision of this covenant; (ix) the incurrence by the Company of Indebtedness in connection with a repurchase of Notes or Exchange Notes following a Change of Control; provided that the principal amount of such Indebtedness does not exceed 101% of the aggregate principal amount of the Notes and the Exchange Notes repurchased, and such Indebtedness (a) has a Weighted Average Life to Maturity equal to or greater than the Weighted Average Life to Maturity of the Notes and the Exchange Notes and (b) does not mature prior to the Stated Maturity of the Notes and the Exchange Notes; (x) the incurrence of Indebtedness arising from agreements providing for indemnification, adjustment of purchase price or similar obligations, incurred in connection with the disposition of any business, assets or Subsidiary of the Company (other than Guarantees of Indebtedness incurred by any Person acquiring all or any portion of such business, assets or Subsidiary for the purpose of financing such 71 78 acquisition), provided that none of the foregoing results in Indebtedness required to be reflected as Indebtedness on the balance sheet of the Company or any such Subsidiary in accordance with GAAP and the maximum aggregate liability in respect of all such Indebtedness shall at no time exceed 100% of the gross proceeds actually received by the Company and its Subsidiaries in connection with such disposition; and (xi) the incurrence by the Company of additional Indebtedness in an aggregate principal amount (or accreted value, as applicable) at any time outstanding not to exceed $7.5 million. For purposes of determining compliance with this covenant, in the event that an item of proposed Indebtedness meets the criteria of more than one of the categories of Permitted Debt described in clauses (i) through (xi) above or is entitled to be incurred pursuant to the first paragraph of this covenant, the Company shall, in its sole discretion, classify such item of Indebtedness on the date of its incurrence in any manner that complies with this covenant. Accrual of interest, the accretion or amortization of original issue discount, the payment of interest on any Indebtedness in the form of additional Indebtedness with the same terms, and the payment of dividends on Disqualified Stock in the form of additional shares of the same class of Disqualified Stock will not be deemed to be an incurrence of Indebtedness or an issuance of Disqualified Stock for purposes of this covenant; provided, in each such case, that the amount thereof is included in Fixed Charges of the Company as accrued. Liens The Indenture provides that the Company will not, and will not permit any of its Subsidiaries to, directly or indirectly, create, incur, assume or suffer to exist any Lien securing Indebtedness, Attributable Debt or trade payables on any asset now owned or hereafter acquired, except Permitted Liens. Sale and Leaseback Transactions The Indenture provides that the Company will not, and will not permit any of its Subsidiaries to, enter into any sale and leaseback transaction; provided that the Company may enter into a sale and leaseback transaction if (i) the Company could have (a) incurred Indebtedness in an amount equal to the Attributable Debt relating to such sale and leaseback transaction pursuant to the Fixed Charge Coverage Ratio set forth in the first paragraph of the covenant described above under the caption "--Incurrence of Indebtedness and Issuance of Preferred Stock" and (b) incurred a Lien to secure such Indebtedness pursuant to the covenant described above under the caption "--Liens," (ii) the gross cash proceeds of such sale and leaseback transaction are at least equal to the fair market value (as determined in good faith by the Board of Directors and set forth in an Officers' Certificate delivered to the Trustee) of the property that is the subject of such sale and leaseback transaction and (iii) the transfer of assets in such sale and leaseback transaction is permitted by, and the Company applies the proceeds of such transaction in compliance with, the covenant described above under the caption "--Repurchase at the Option of Holders -- Asset Sales." The foregoing provisions do not apply to a sale and leaseback transaction relating to the Smithfield Property resulting in Attributable Debt with respect to such transaction in an aggregate amount not to exceed $5.0 million at any time outstanding. Dividend and Other Payment Restrictions Affecting Subsidiaries The Indenture provides that the Company will not, and will not permit any of its 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 Subsidiary to (i)(a) pay dividends or make any other distributions to the Company or any of its 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 Subsidiaries, (ii) make loans or advances to the Company or any of its Subsidiaries or (iii) transfer any of its properties or assets to the Company or any of its Subsidiaries. However, the foregoing restrictions will not apply to encumbrances or restrictions existing under or by reason of (a) Existing Indebtedness as in effect on the date of the Indenture, (b) the Senior Credit Facility as in effect as of the date of the Indenture, and any amendments, modifications, restatements, renewals, increases, supplements, refundings, replacements or refinancings thereof, provided that such amendments, modifications, restatements, renewals, increases, 72 79 supplements, refundings, replacement or refinancings are no more restrictive, taken as a whole, with respect to such dividend and other payment restrictions than those contained in the Senior Credit Facility as in effect on the date of the Indenture, (c) the Notes and the Subsidiary Guarantees, (d) applicable law, (e) any instrument governing Indebtedness or Capital Stock of a Person acquired by the Company or any of its 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 provisions in leases 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) any agreement for the sale or other disposition of a Subsidiary that restricts distributions by that Subsidiary pending its sale or other disposition, (i) Permitted Refinancing Indebtedness, provided that the restrictions contained in the agreements governing such Permitted Refinancing Indebtedness are no more restrictive, taken as a whole, than those contained in the agreements governing the Indebtedness being refinanced, (j) Liens securing Indebtedness otherwise permitted to be incurred pursuant to the provisions of the covenant described above under the caption "--Liens" that limits the right of the debtor to dispose of the assets securing such Indebtedness, (k) provisions with respect to the disposition or distribution of assets or property in joint venture agreements and other similar agreements entered into in the ordinary course of business and (l) restrictions on cash or other deposits or net worth imposed by customers under contracts entered into in the ordinary course of business. Merger, Consolidation, or Sale of Assets The Indenture provides that the Company may not, directly or indirectly, consolidate or merge with or into (whether or not the Company is the surviving corporation), or sell, assign, transfer, 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, 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 the Person to which such sale, assignment, transfer, conveyance or other disposition shall have been made assumes all the obligations of the Company under the Registration Rights Agreement, the Notes and the Indenture pursuant to a supplemental indenture in a 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 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, conveyance or other disposition shall have been made (a) will have Consolidated Net Worth immediately after the transaction equal to or greater than the Consolidated Net Worth of the Company immediately preceding the transaction and (b) will, immediately after such transaction after giving pro forma effect thereto and any related financing transaction as if the same had occurred at the beginning of the applicable four-quarter period, be permitted to incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of the covenant described above under the caption "--Incurrence of Indebtedness and Issuance of Preferred Stock." The Indenture also provides that the Company may not, directly or indirectly, lease all or substantially all of its properties or assets, in one or more related transactions, to any other Person. The provisions of this covenant are not applicable to a sale, assignment, transfer, conveyance or other disposition of assets between or among the Company and its Wholly Owned Subsidiaries. Transactions with Affiliates The Indenture provides that the Company will not, and will not permit any of its Subsidiaries to, make any payment to, or sell, lease, transfer or otherwise dispose of any of its properties or assets to, or purchase any property or assets from, or enter into or make or amend any transaction, contract, agreement, understanding, 73 80 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 such Subsidiary than those that would have been obtained in a comparable transaction by the Company or such 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 $1.0 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 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 $5.0 million, an opinion as to the fairness to the Holders of such Affiliate Transaction from a financial point of view issued by an accounting, appraisal or investment banking firm of national standing. Notwithstanding the foregoing, the following items shall not be deemed to be Affiliate Transactions: (i) any employment agreement or benefit plan entered into by the Company or any of its Subsidiaries in the ordinary course of business and consistent with the past practice of the Company or such Subsidiary, (ii) transactions between or among the Company and/or its Subsidiaries, (iii) payment of reasonable directors fees to Persons who are not otherwise Affiliates of the Company, (iv) any sale or other issuance of Equity Interests (other than Disqualified Stock) of the Company, (v) loans or advances to employees in the ordinary course of business consistent with past practices of the Company or its Subsidiaries in an aggregate amount at any time outstanding not to exceed $1.0 million, (vi) transactions pursuant to Existing Leases, (vii) purchases of Common Stock of deceased shareholders pursuant to the Shareholders Agreement, (viii) reasonable indemnities of officers, directors and employees of the Company or any Subsidiary permitted by applicable law and (ix) Restricted Payments that are permitted by the provisions of the Indenture described above under the caption "--Restricted Payments." Limitation on Issuances and Sales of Equity Interests in Wholly Owned Subsidiaries The Indenture provides that the Company (i) will not, and will not permit any Subsidiary of the Company to, transfer, convey, sell, lease or otherwise dispose of any Equity Interests in any Wholly Owned Subsidiary of the Company to any Person (other than the Company or a Wholly Owned Subsidiary of the Company), unless (a) such transfer, conveyance, sale, lease or other disposition is of all the Equity Interests in such Wholly Owned Subsidiary and (b) the cash Net Proceeds from such transfer, conveyance, sale, lease or other disposition are applied in accordance with the covenant described above under the caption "--Repurchase at the Option of Holders -- Asset Sales," and (ii) will not permit any Wholly Owned Subsidiary of the Company to issue any of its Equity Interests (other than, if necessary, shares of its Capital Stock constituting directors' qualifying shares) to any Person other than to the Company or a Wholly Owned Subsidiary of the Company. Payments for Consent The Indenture provides that neither the Company nor any of its Subsidiaries will, directly or indirectly, pay or cause to be paid any consideration, whether by way of interest, fee or otherwise, to any Holder of any Notes for or as an inducement to any consent, waiver or amendment of any of the terms or provisions of the Indenture or the Notes unless such consideration is offered to be paid or is paid to all Holders of the Notes that consent, waive or agree to amend in the time frame set forth in the solicitation documents relating to such consent, waiver or agreement. Reports The Indenture provides that, whether or not required by the rules and regulations of the Commission, so long as any Notes are outstanding, the Company will furnish to the Holders of 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 74 81 each case within the time periods specified in the Commission's rules and regulations. In addition, following the consummation of the Exchange Offer, whether or not required by the rules and regulations of the Commission, the Company will file a copy of all such information and reports with the Commission for public availability within the time periods specified in the Commission's rules and regulations (unless the Commission will not accept such a filing) and make such information available to securities analysts and prospective investors upon request. In addition, the Company and the Guarantors have agreed that, for so long as any Notes remain outstanding, they will furnish to the Holders and to securities analysts and prospective investors, upon their request, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act. Additional Subsidiary Guarantees The Indenture provides that if the Company or any of the Guarantors shall acquire or create another Domestic Subsidiary after the date of the Indenture, or if any Subsidiary of the Company becomes a Domestic Subsidiary, then such newly acquired or created Domestic Subsidiary shall become a Guarantor and execute a Supplemental Indenture and deliver an opinion of counsel, in accordance with terms of the Indenture. EVENTS OF DEFAULT AND REMEDIES The Indenture provides that each of the following constitutes an Event of Default: (i) default for 30 days in the payment when due of interest on, or Liquidated Damages, if any, with respect to, the Notes; (ii) default in payment when due of the principal of or premium, if any, on the Notes; (iii) failure by the Company or any of its Subsidiaries to comply with the provisions described under the captions "--Repurchase at the Option of Holders -- Change of Control," "--Repurchase at the Option of Holders -- Asset Sales," "--Certain Covenants -- Restricted Payments," "--Certain Covenants -- Incurrence of Indebtedness and Issuance of Preferred Stock" and "--Certain Covenants -- Merger, Consolidation of Sale of Assets;" (iv) failure by the Company or any of its Subsidiaries for 60 days after notice by the Trustee or the Holders of at least 25% in principal amount of the then outstanding Notes to comply with any of its other agreements in the Indenture or the Notes; (v) default under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by the Company or any of its Subsidiaries (or the payment of which is guaranteed by the Company or any of its Subsidiaries) whether such Indebtedness or guarantee now exists, or is created after the date of the Indenture, which default (a) is caused by a failure to pay principal of or premium, if any, or interest on such Indebtedness prior to the expiration of the grace period provided in such Indebtedness on the date of such default (a "Payment Default") or (b) results in the acceleration of such Indebtedness prior to its express maturity and, in each case, the principal amount of any such Indebtedness, together with the principal amount of any other such Indebtedness under which there has been a Payment Default or the maturity of which has been so accelerated, aggregates $5.0 million or more; (vi) failure by the Company or any of its Subsidiaries to pay final judgments aggregating in excess of $5.0 million, which judgments are not paid, discharged or stayed for a period of 60 days; (vii) except as permitted by the Indenture, any Subsidiary 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 or any Guarantor, or any Person acting on behalf of any Guarantor, shall deny or disaffirm its obligations under its Subsidiary Guarantee; and (viii) certain events of bankruptcy or insolvency with respect to the Company or any of its Subsidiaries. If any Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the then outstanding Notes may declare all the Notes to be due and payable immediately. 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 of its Subsidiaries that would constitute a Significant Subsidiary or any group of Subsidiaries that, taken together, would constitute a Significant Subsidiary, all outstanding Notes will become due and payable without further action or notice. Holders of the Notes may not enforce the Indenture or the Notes except as provided in the Indenture. Subject to certain limitations, Holders of a majority in principal amount of the then outstanding Notes may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Holders of the Notes notice of any continuing Default or Event of 75 82 Default (except a Default or Event of Default relating to the payment of principal or interest) if it determines that withholding notice is in their interest. In the case of any Event of Default occurring by reason of any willful action (or inaction) taken (or not taken) by or on behalf of the Company with the intention of avoiding payment of the premium that the Company would have had to pay if the Company then had elected to redeem the Notes pursuant to the optional redemption provisions of the Indenture, an equivalent premium shall also become and be immediately due and payable to the extent permitted by law upon the acceleration of the Notes. If an Event of Default occurs prior to July 15, 2002 by reason of any willful action (or inaction) taken (or not taken) by or on behalf of the Company with the intention of avoiding the prohibition on redemption of the Notes prior to July 15, 2002 then the premium specified in the Indenture shall also become immediately due and payable to the extent permitted by law upon the acceleration of the Notes. The Holders of a majority in aggregate principal amount of the Notes then outstanding by notice to the Trustee may on behalf of the Holders of all of the Notes waive any existing Default or Event of Default and its consequences under the Indenture except a continuing Default or Event of Default in the payment of interest on, or the principal of, the Notes. The Company is required to deliver to the Trustee annually a statement regarding compliance with the Indenture, and the Company is required upon becoming aware of any Default or Event of Default, to deliver to the Trustee a statement specifying such Default or Event of Default. NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND SHAREHOLDERS No director, officer, employee, incorporator or shareholder of the Company or any Guarantor, as such, shall have any liability for any obligations of the Company or any Guarantor under the Notes, the Subsidiary Guarantees or the Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder of Notes by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Notes. Such waiver may not be effective to waive liabilities under the federal securities laws and it is the view of the Commission that such a waiver is against public policy. LEGAL DEFEASANCE AND COVENANT DEFEASANCE The Company may, at its option and at any time, elect to have all of its obligations discharged with respect to the outstanding Notes and to have each Guarantor's obligations discharged with respect to its Subsidiary Guarantee ("Legal Defeasance") except for (i) the rights of Holders of outstanding Notes to receive payments in respect of the principal of, and premium, interest and Liquidated Damages, if any, on such Notes when such payments are due from the trust referred to below, (ii) the Company's obligations with respect to the Notes concerning issuing temporary Notes, registration of Notes, mutilated, destroyed, lost or stolen Notes and the maintenance of an office or agency for payment and money for security payments held in trust, (iii) the rights, powers, trusts, duties and immunities of the Trustee, and the Company's obligations in connection therewith and (iv) the Legal Defeasance provisions of the Indenture. In addition, the Company may, at its option and at any time, elect to have the obligations of the Company and the Guarantors released with respect to certain covenants that are described in the Indenture ("Covenant Defeasance") and thereafter any omission to comply with such obligations shall not constitute a Default or Event of Default with respect to the Notes. In the event Covenant Defeasance occurs, certain events (not including non-payment, bankruptcy, receivership, rehabilitation and insolvency events) described under the caption "--Events of Default and Remedies" will no longer constitute an Event of Default with respect to the Notes. In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the Company must irrevocably deposit with the Trustee, in trust, for the benefit of the Holders of the Notes, cash in U.S. dollars, non-callable Government Securities, or a combination 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, interest and Liquidated Damages, if any, on the outstanding Notes on the stated maturity or on the applicable redemption date, as the case may be, and the Company must specify whether the Notes are being defeased to maturity or to a particular redemption date; (ii) in the case of Legal Defeasance, the Company shall have 76 83 delivered to the Trustee an opinion of counsel in the United States reasonably acceptable to the Trustee confirming that (a) the Company has received from, or there has been published by, the Internal Revenue Service a ruling or (b) since the date of the Indenture, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such opinion of counsel shall confirm that, the Holders of the outstanding Notes will not recognize income, gain or loss for federal income tax purposes as a result of such Legal Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance had not occurred; (iii) in the case of Covenant Defeasance, the Company shall have delivered to the Trustee an opinion of counsel in the United States reasonably acceptable to the Trustee confirming that the Holders of the outstanding Notes will not recognize income, gain or loss for federal income tax purposes as a result of such Covenant Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Covenant Defeasance had not occurred; (iv) no Default or Event of Default shall have occurred and be continuing on the date of such deposit (other than a Default or Event of Default resulting from the borrowing of funds to be applied to such deposit) or insofar as Events of Default from bankruptcy or insolvency events are concerned, at any time in the period ending on the 91st day after the date of deposit; (v) such Legal Defeasance or Covenant Defeasance will not result in a breach or violation of, or constitute a default under any material agreement or instrument (other than the Indenture) to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries is bound; (vi) the Company shall 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 shall have delivered to the Trustee an Officers' Certificate stating that the deposit was not made by the Company with the intent of preferring the Holders of Notes over the other creditors of the Company with the intent of defeating, hindering, delaying or defrauding creditors of the Company or others; and (viii) the Company must deliver to the Trustee an Officers' Certificate and an opinion of counsel, each stating that all conditions precedent provided for relating to the Legal Defeasance or the Covenant Defeasance have been complied with. TRANSFER AND EXCHANGE A Holder may transfer or exchange Notes in accordance with the Indenture. The Registrar and the Trustee may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and the Company may require a Holder to pay any taxes and fees required by law or permitted by the Indenture. The Company is not required to transfer or exchange any Note selected for redemption. Also, the Company is not required to transfer or exchange any Note for a period of 15 days before a selection of Notes to be redeemed. The registered Holder of a Note will be treated as the owner of it for all purposes. AMENDMENT, SUPPLEMENT AND WAIVER Except as provided in the next two succeeding paragraphs, the Indenture, the Notes or the Subsidiary Guarantees may be amended or supplemented with the consent of the Holders of at least a majority in principal amount of the Notes then outstanding (including, without limitation, consents obtained in connection with a purchase of, or tender offer or exchange offer for, Notes), and any existing default or compliance with any provision of the Indenture, the Notes or the Subsidiary Guarantees may be waived with the consent of the Holders of a majority in principal amount of the then outstanding Notes (including, without limitation, consents obtained in connection with a purchase of, or tender offer or exchange offer for, Notes). Without the consent of each Holder affected, an amendment or waiver may not (with respect to any Notes held by a non-consenting Holder): (i) reduce the principal amount of Notes whose Holders must consent to an amendment, supplement or waiver, (ii) reduce the principal of or change the fixed maturity of any Note or alter the provisions with respect to the redemption of the Notes (other than provisions relating to the covenants described above under the caption "--Repurchase at the Option of Holders"), (iii) reduce the rate of or change the time for payment of interest on any Note, (iv) waive a Default or Event of Default in the payment of principal of or premium, interest or Liquidated Damages, if any, on the Notes (except a rescission 77 84 of acceleration of the Notes by the Holders of at least a majority in aggregate principal amount of the Notes and a waiver of the payment default that resulted from such acceleration), (v) make any Note payable in money other than that stated in the Notes, (vi) make any change in the provisions of the Indenture relating to waivers of past Defaults or the rights of Holders of Notes to receive payments of principal of or premium, interest or Liquidated Damages, if any, on the Notes, (vii) waive a redemption payment with respect to any Note (other than a payment required by one of the covenants described above under the caption "--Repurchase at the Option of Holders"), (viii) release any Guarantor from any of its obligations under its Subsidiary Guarantee or the Indenture, except in accordance with the terms of the Indenture or (ix) make any change in the foregoing amendment and waiver provisions. Notwithstanding the foregoing, without the consent of any Holder of Notes, the Company, the Guarantors (with respect to a Subsidiary Guarantee or the Indenture to which it is a party) and the Trustee may amend or supplement the Indenture, the Notes or any Subsidiary Guarantee to cure any ambiguity, defect or inconsistency, to provide for uncertificated Notes in addition to or in place of certificated Notes, to provide for the assumption of the Company's or any Guarantor's obligations to Holders of Notes in the case of a merger or consolidation or sale of all or substantially all of the Company's assets, to provide for the issuance of Additional Notes in accordance with the provisions set forth in the Indenture on the date thereof, to make any change that would provide any additional rights or benefits to the Holders of Notes or that does not adversely affect the legal rights under the Indenture of any such Holder, or to comply with requirements of the Commission in order to effect or maintain the qualification of the Indenture under the Trust Indenture Act. CONCERNING THE TRUSTEE The Indenture contains certain limitations on the rights of the Trustee, should it 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 it acquires any conflicting interest it must eliminate such conflict within 90 days, apply to the Commission for permission to continue or resign. The Holders of a majority in principal amount of the then outstanding Notes will have the right to direct the time, method and place of conducting any proceeding for exercising any remedy available to the Trustee, subject to certain exceptions. The Indenture provides that in case an Event of Default shall occur (which shall not be cured), the Trustee will be required, in the exercise of its power, to use the degree of care of a prudent man in the conduct of his own affairs. Subject to such provisions, the Trustee will be under no obligation to exercise any of its rights or powers under the Indenture at the request of any Holder of Notes, unless such Holder shall have offered to the Trustee security and indemnity satisfactory to it against any loss, liability or expense. BOOK-ENTRY, DELIVERY AND FORM The Old Notes have been issued to qualified institutional buyers in the form of a permanent global certificate in definitive, fully registered form (the "Global Note") and the New Notes will be issued in the form of a permanent global certificate in definitive, fully registered form (the "Global New Note" and, together with the Global Old Note, the "Global Notes"). The Global Old Note was deposited on the date of the closing of the sale of the Old Notes with, or on behalf of, DTC and registered in the name of the nominee of DTC. Except as set forth below, the Global Notes may be transferred, in whole and not in part, only to another nominee of DTC or to a successor of DTC or its nominee. DTC has advised the Company that DTC is a limited-purpose trust company created to hold securities for its participating organizations (collectively, the "Participants") and to facilitate the clearance and settlement of transactions in those securities between Participants through electronic book-entry changes in accounts of its Participants. The Participants include securities brokers and dealers (including the Initial Purchasers), banks, trust companies, clearing corporations and certain other organizations. Access to DTC's system is also available to other entities such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a Participant, either directly or indirectly (collectively, the "Indirect Participants"). Persons who are not Participants may beneficially own securities held by or on behalf of DTC 78 85 only through the Participants or the Indirect Participants. The ownership interests in, and transfers of ownership interests in, each security held by or on behalf of DTC are recorded on the records of the Participants and Indirect Participants. DTC has also advised the Company that, pursuant to procedures established by it, (i) upon deposit of the Global Notes, DTC will credit the accounts of Participants designated by the Initial Purchasers with portions of the principal amount of the Global Notes and (ii) ownership of such interests in the Global Notes will be shown on, and the transfer of ownership thereof will be effected only through, records maintained by DTC (with respect to the Participants) or by the Participants and the Indirect Participants (with respect to other owners of beneficial interest in the Global Notes). EXCEPT AS DESCRIBED BELOW, OWNERS OF INTEREST IN THE GLOBAL NOTES WILL NOT HAVE NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY OF NOTES IN CERTIFICATED 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, Liquidated Damages, if any, and interest on a Global New Note registered in the name of DTC or its nominee will be payable to DTC in its capacity as the registered Holder under the Indenture. Under the terms of the Indenture, the Company and the Trustee will treat the persons in whose names the Notes, including the Global Notes, 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 DTC's records or any Participant's or Indirect Participant's records relating to or payments made on account of beneficial ownership interest in the Global Notes, or for maintaining, supervising or reviewing any of DTC's records or any Participant's or Indirect Participant's records relating to the beneficial ownership interests in the Global Notes or (ii) any other matter relating to the actions and practices of DTC or any of its Participants or Indirect Participants. DTC has advised the Company that its current practice, upon receipt of any payment in respect of securities such as the Notes (including principal and interest), is to credit the accounts of the relevant Participants with the payment on the payment date, in amounts proportionate to their respective holdings in the principal amount of beneficial interest in the relevant security as shown on the records of DTC unless DTC 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 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 DTC, the Trustee or the Company. Neither the Company nor the Trustee will be liable for any delay by DTC or any of its Participants in identifying the beneficial owners of the Notes, and the Company and the Trustee may conclusively rely on and will be protected in relying on instructions from DTC or its nominee for all purposes. Interest in the Global Notes are expected to be eligible to trade in DTC's Same-Day Funds Settlement System and secondary market trading activity in such interests will, therefore, settle in immediately available funds, subject in all cases to the rules and procedures of DTC and its Participants. See "-- Same Day Settlement and Payment." DTC has advised the Company that it will take any action permitted to be taken by a Holder of Notes only at the direction of one or more Participants to whose account DTC has credited the interests in the Global Notes and only in respect of such portion of the aggregate principal amount of the Notes as to which such Participant or Participants has or have given such direction. However, if there is an Event of Default under the Notes, DTC reserves the right to exchange the Global Notes for legended Notes in certificated form, and to distribute such Notes to its Participants. EXCHANGE OF BOOK-ENTRY NOTES FOR CERTIFICATED NOTES A Global New Note is exchangeable for definitive New Notes in registered certificated form ("Certificated Notes") if (i) DTC (x) notifies the Company that it is unwilling or unable to continue as depositary for the Global New Notes and the Company thereupon fails to appoint a successor depositary or (y) has ceased to be a clearing agency registered under the Exchange Act, (ii) the Company, at its option, notifies the Trustee in writing that it elects to cause the issuance of the Certificated Notes or (iii) there shall have occurred and be 79 86 continuing a Default or Event of Default with respect to the Notes. In addition, beneficial interests in a Global New Note may be exchanged for Certificated Notes upon request but only upon prior written notice given to the Trustee by or on behalf of DTC in accordance with the Indenture. In all cases, Certificated Notes delivered in exchange for any Global New Note or beneficial interests therein will be registered in the names, and issued in any approved denominations, requested by or on behalf of the depositary (in accordance with its customary procedures). SAME DAY SETTLEMENT AND PAYMENT The Indenture requires that payments in respect of the Notes represented by the Global Notes (including principal, premium, if any, interest and Liquidated Damages, if any) be made by wire transfer of immediately available funds to the accounts specified by the Global Note Holder. With respect to Notes in certificated form, the Company will make all payments of principal, premium, if any, interest and Liquidated Damages, if any, by wire transfer of immediately available funds to the accounts specified by the Holders thereof or, if no such account is specified, by mailing a check to each such Holder's registered address. The Notes represented by the Global Notes are expected to be eligible to trade in the Depositary's Same-Day Funds Settlement System, and any permitted secondary market trading activity in such Notes will, therefore, be required by the Depositary to be settled in immediately available funds. The Company expects that secondary trading in any Certificated Notes will also be settled in immediately available funds. CERTAIN DEFINITIONS Set forth below are certain defined terms used in the Indenture. Reference is made to the Indenture for a full disclosure of all such terms, as well as any other capitalized terms used herein for which no definition is provided. "Acquired Debt" means, with respect to any specified Person, (i) Indebtedness of any other Person existing at the time such other Person is merged with or into or became a 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 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 Stock of a Person shall be deemed to be control. "Asset Sale" means (i) the sale, lease, conveyance or other disposition of any assets or rights (including, without limitation, by way of a sale and leaseback) other than sales of inventory in the ordinary course of business (provided that the sale, conveyance or other disposition of all or substantially all of the assets of the Company and its Subsidiaries taken as a whole will be governed by the provisions of the Indenture described above under the caption "--Repurchase at the Option of Holders -- Change of Control" and/or the provisions described above under the caption "--Certain Covenants -- Merger, Consolidation or Sale of Assets" and not by the provisions of the Asset Sale covenant), and (ii) the issue or sale by the Company or any of its Subsidiaries of Equity Interests of any of the Company's Subsidiaries, in the case of either clause (i) or (ii), whether in a single transaction or a series of related transactions (a) that have a fair market value in excess of $1.0 million or (b) for net proceeds in excess of $1.0 million. Notwithstanding the foregoing, the following items shall not be deemed to be Asset Sales: (i) a transfer of assets by the Company to a Wholly Owned Subsidiary or by a Wholly Owned Subsidiary to the Company or to another Wholly Owned Subsidiary, (ii) an issuance of Equity Interests by a Wholly Owned Subsidiary to the Company or to another Wholly Owned Subsidiary, and (iii) a Restricted Payment that is permitted by the covenant described above under the caption "--Certain Covenants -- Restricted Payments." 80 87 "Attributable Debt" in respect of a sale and leaseback transaction means, at the time of determination, the present value (discounted at the rate of interest implicit in such transaction, determined in accordance with GAAP) of the obligation of the lessee for net rental payments during the remaining term of the lease included in such sale and leaseback transaction (including any period for which such lease has been extended or may, at the option of the lessor, be extended). "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 or limited liability company, partnership or membership 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. "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 (provided that the full faith and credit of the United States is pledged in support thereof) having maturities of not more than six months from the date of acquisition, (iii) certificates of deposit and eurodollar time deposits with maturities of six months or less from the date of acquisition, bankers' acceptances with maturities not exceeding six months and overnight bank deposits, in each case with any lender party to the Senior Credit Facility or with any domestic commercial bank having capital and surplus in excess of $500.0 million and a Thompson Bank Watch Rating of "B" 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, (v) commercial paper having the highest rating obtainable from Moody's Investors Service, Inc. or Standard & Poor's Corporation and in each case maturing within six months after the date of acquisition and (vi) money market funds at least 95% of the assets of which constitute Cash Equivalents of the kinds described in clauses (i) -- (v) of this definition. "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 related transactions, of all or substantially all of the assets of the Company and its Subsidiaries taken as a whole to any "person" (as such term is used in Section 13(d)(3) of the Exchange Act) other than a Principal or a Related Party; (ii) the adoption of a plan relating to the liquidation or dissolution of the Company; (iii) the consummation of any transaction (including, without limitation, any merger or consolidation) the result of which is that any "person" (as defined above) other than the Principals, their Related Parties or a Permitted Group becomes the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except that a person shall be deemed to have "beneficial ownership" of all securities that such person has the right to acquire, whether such right is currently exercisable or is exercisable only upon the occurrence of a subsequent condition), directly or indirectly, of more than 35% of the Voting Stock of the Company (measured by voting power rather than number of shares); or (iv) the first day on which a majority of the members of the Board of Directors of the Company are not Continuing Directors. "Consolidated Assets" means, with respect to any Person as of any date, the total assets of such Person and its consolidated Subsidiaries as of such date, calculated on a consolidated basis in accordance with GAAP. "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 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 Subsidiaries for such period, whether paid or accrued and whether or not capitalized (including, without limitation, amortization of debt issuance costs and original issue discount, noncash interest payments, the interest component of any deferred payment obligations, the interest component of all payments associated with Capital Lease 81 88 Obligations, imputed interest with respect to Attributable Debt, 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 expenses that were paid in a prior period) and other noncash expenses (excluding any such noncash expense to the extent that it represents an accrual of or reserve for cash expenses in any future period or amortization of a prepaid cash expense that was paid in a prior period) of such Person and its Subsidiaries for such period to the extent that such depreciation, amortization and other noncash expenses were deducted in computing such Consolidated Net Income, plus (v) Restructuring Charges, minus (vi) noncash items increasing such Consolidated Net Income for such period (other than items that were accrued in the ordinary course of business), in each case, on a consolidated basis and determined in accordance with GAAP. Notwithstanding the foregoing, the provision for taxes on the income or profits of, and the depreciation and amortization and other noncash expenses of, a Subsidiary of the referent Person shall be added to Consolidated Net Income to compute Consolidated Cash Flow only to the extent that a corresponding amount would be permitted at the date of determination to be dividended to the Company by such Subsidiary without prior governmental approval (that has not been obtained), and without direct or indirect restriction pursuant to the terms of its charter and all agreements, instruments, judgments, decrees, orders, statutes, rules and governmental regulations applicable to that Subsidiary or its shareholders. "Consolidated Net Income" means, with respect to any Person for any period, the aggregate of the Net Income of such Person and its Subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP; provided that (i) the Net Income (but not loss) of any Person that is not a Subsidiary or that is accounted for by the equity method of accounting 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 Subsidiary thereof, (ii) the Net Income of any Subsidiary shall be excluded to the extent that the declaration or payment of dividends or similar distributions by that Subsidiary of that Net Income is not at the date of determination permitted without any prior governmental approval (that has not been obtained) or, directly or indirectly, by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Subsidiary or its shareholders, (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 and (iv) the cumulative effect of a change in accounting principles shall be excluded. "Consolidated Net Worth" means, with respect to any Person as of any date, the sum of (i) the consolidated equity of the common shareholders of such Person and its consolidated Subsidiaries as of such date plus (ii) the respective amounts reported on such Person's balance sheet as of such date with respect to any series of preferred stock (other than Disqualified Stock) that by its terms is not entitled to the payment of dividends unless such dividends may be declared and paid only out of net earnings in respect of the year of such declaration and payment, but only to the extent of any cash received by such Person upon issuance of such preferred stock, less (a) all write-ups (other than write-ups resulting from foreign currency translations and write-ups of tangible assets of a going concern business made within 12 months after the acquisition of such business) subsequent to the date of the Indenture in the book value of any asset owned by such Person or a consolidated Subsidiary of such Person, (b) all investments as of such date in unconsolidated Subsidiaries and in Persons that are not Subsidiaries (except, in each case, Permitted Investments) and (c) all unamortized debt discount and expense and unamortized deferred charges as of such date, all of the foregoing determined in accordance with GAAP. "Continuing Directors" means, as of any date of determination, any member of the Board of Directors of the Company 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 the approval of a majority of the Continuing Directors who were members of such Board at the time of such nomination or election. "Credit Facilities" means, with respect to the Company or a Foreign Subsidiary, one or more debt facilities (including, without limitation, the Senior Credit Facility) or commercial paper facilities, in each case with banks or other institutional lenders providing for revolving credit loans, term loans, receivables financing (including through the sale of receivables to such lenders or to special purpose entities formed to borrow from 82 89 such lenders against such receivables) or letters of credit, in each case, as amended, restated, modified, renewed, refunded, replaced or refinanced in whole or in part from time to time. Indebtedness under Credit Facilities outstanding on the date on which Notes are first issued and authenticated under the Indenture shall be deemed to have been incurred on such date in reliance on the exception provided by clause (i) of the definition of Permitted Debt under the caption "--Certain Covenants -- Limitation of Indebtedness and Issuance of Preferred Stock." "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, in each case at the option of the holder thereof), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable at the option of the Holder thereof, in whole or in part, on or prior to the date that is 91 days after the date on which the Notes mature; provided, however, that any Capital Stock that would constitute Disqualified Stock solely because the holders thereof have the right to require the Company to repurchase such Capital Stock upon the occurrence of a Change of Control or an Asset Sale shall not constitute Disqualified Stock if the terms of such Capital Stock provide that the Company may not repurchase or redeem any such Capital Stock pursuant to such provisions unless such repurchase or redemption complies with the covenant described above under the caption "--Certain Covenants -- Restricted Payments." "Domestic Subsidiary" means, with respect to the Company, any Subsidiary of the Company that was formed under the laws of the United States of America or that guarantees or otherwise provides credit support for any Indebtedness of the Company. "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). "Existing Indebtedness" means Indebtedness of the Company and its Subsidiaries (other than Indebtedness under the Senior Credit Facility) in existence on the date of the Indenture (calculated in the case of contingent Indebtedness on the basis of the maximum amount due under agreements existing as of the date of the Indenture), until such Indebtedness is repaid. "Existing Leases" means (i) that certain Lease effective January 1, 1998 by and between Sunrise Properties LLC and the Company, covering the premises at 4 Warren Avenue, North Providence, Rhode Island; (ii) that certain Lease effective January 1, 1998 by and between 299 Carpenter Street Associates, LLC and the Company, covering the premises located at 299 Carpenter Street, Providence, Rhode Island; and (iii) that certain Standard Net Commercial Lease dated December 11, 1996, by and between Foster Grant Group L.P. and OCR Management Corporation, covering the Texas Property. "Fantasma Agreement" means and includes that certain Member Agreement dated as of June 23, 1998 by and among the Company, Roger D. Dreyer and Houdini Capital LTD and that certain Member Agreement dated as of June 23, 1998 by and between the Company and Paul Michaels. "Fixed Charges" means, with respect to any Person for any period, the sum, without duplication, of (i) the consolidated interest expense of such Person and its Subsidiaries for such period, whether paid or accrued (including, without limitation, amortization of debt issuance costs and original issue discount, non-cash interest payments, the interest component of any deferred payment obligations, the interest component of all payments associated with Capital Lease Obligations, imputed interest with respect to Attributable Debt, 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 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 Subsidiaries or secured by a Lien on assets of such Person or one of its Subsidiaries (whether or not such Guarantee or Lien is called upon) and (iv) the product of (a) all dividend payments, whether or not in cash, on any series of preferred stock of such Person or any of its Subsidiaries, other than dividend payments on Equity Interests payable solely in Equity Interests of the Company (other than Disqualified Stock) or to the 83 90 Company or a Subsidiary of the Company, times (b) a fraction, the numerator of which is one and the denominator of which is one minus the then current combined federal, state and local statutory tax rate of such Person, expressed as a decimal, in each case, on a consolidated basis and in accordance with GAAP. "Fixed Charge Coverage Ratio" means with respect to any Person for any period, the ratio of the Consolidated Cash Flow of such Person for such period to the Fixed Charges of such Person for such period. In the event that the referent Person or any of its Subsidiaries incurs, assumes, Guarantees or redeems any Indebtedness (other than revolving credit borrowings) or issues or redeems preferred stock subsequent to the commencement of the period for which the Fixed Charge Coverage Ratio is being calculated but 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 addition, for purposes of making the computation referred to above, (i) acquisitions that have been made by the Company or any of its Subsidiaries, including through mergers or consolidations and including any related financing transactions, during the four-quarter reference period or subsequent to such reference period and on or prior to the Calculation Date shall be deemed to have occurred on the first day of the four-quarter reference period and Consolidated Cash Flow for such reference period shall be calculated without giving effect to clause (iii) of the proviso set forth in the definition of Consolidated Net Income, and (ii) the Consolidated Cash Flow attributable to discontinued operations, as determined in accordance with GAAP, and operations or businesses disposed of prior to the Calculation Date, shall be excluded, and (iii) the Fixed Charges attributable to discontinued operations, as determined in accordance with GAAP, and operations or businesses disposed of 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 referent Person or any of its Subsidiaries following the Calculation Date. "Foreign Subsidiary" means any Subsidiary of the Company that is not a Domestic Subsidiary. "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as have been approved by a significant segment of the accounting profession, which are in effect on the date of the Indenture. "Guarantee" means a guarantee (other than by endorsement of negotiable instruments for collection in the ordinary course of business), direct or indirect, in any manner (including, without limitation, by way of a pledge of assets or through letters of credit or reimbursement agreements in respect thereof), of all or any part of any Indebtedness. "Guarantors" means (i) each current and future Domestic Subsidiary of the Company and (ii) any other Subsidiary of the Company that executes a Subsidiary Guarantee in accordance with the provisions of the Indenture, and their respective successors and assigns. "Hedging Obligations" means, with respect to any Person, the obligations of such Person under (i) interest rate swap agreements, interest rate cap agreements and interest rate collar agreements and (ii) other agreements or arrangements designed to protect such Person against fluctuations in interest rates or currency exchange rates. "Indebtedness" means, with respect to any Person, (i) 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, (ii) all indebtedness of others secured by a Lien on any asset of such Person (whether or not such 84 91 indebtedness is assumed by such Person) and (iii) to the extent not otherwise included, the Guarantee by such Person of any indebtedness of any other Person. The amount of any Indebtedness outstanding as of any date shall be (i) the accreted value thereof, in the case of any Indebtedness issued with original issue discount, and (ii) the principal amount thereof, together with any interest thereon that is more than 30 days past due, in the case of any other Indebtedness. "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 or capital contributions (excluding commission, travel and similar advances to officers and employees made in the ordinary course of business and advances to customers in the ordinary course of business that are recorded as accounts receivable of the lender), purchases or other acquisitions for consideration of Indebtedness, Equity Interests or other securities, together with all items that are or would be classified as investments on a balance sheet prepared in accordance with GAAP. If the Company or any Subsidiary of the Company sells or otherwise disposes of any Equity Interests of any direct or indirect Subsidiary of the Company such that, after giving effect to any such sale or disposition, such Person is no longer a Subsidiary of the Company, the Company 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 in an amount determined as provided in the final paragraph of the covenant described above under the caption "--Certain Covenants -- Restricted Payments." "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset, whether or not filed, recorded or otherwise perfected under applicable law (including any conditional sale or other title retention agreement, any lease in the nature thereof, any option or other agreement to sell or give a security interest in and any filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction). "Net Income" means, with respect to any 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 Subsidiaries or the extinguishment of any Indebtedness of such Person or any of its Subsidiaries and (ii) any extraordinary gain (but not loss), together with any related provision for taxes on such extraordinary gain (but not loss). "Net Proceeds" means the aggregate cash proceeds received by the Company or any of its Subsidiaries in respect of any Asset Sale (including, without limitation, any cash received upon the sale or other disposition of any non-cash consideration received in any Asset Sale), net of the direct costs relating to such Asset Sale (including, without limitation, legal, accounting and investment banking fees, and sales commissions) and any relocation expenses incurred as a result 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 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. "Obligations" means any principal, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness. "Permitted Group" means, at any time prior to an initial public offering of common stock of the Company, any group of investors that is deemed to be a "person" (as such term is used in Section 13(d)(3) of the Exchange Act) by virtue of the Shareholders Agreement, as the same may be amended, modified or supplemented from time to time; provided that no single Person (together with its Affiliates), other than the Principals and their Related Parties, is the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except that a person shall be deemed to have "beneficial ownership" of all securities that such person has the right to acquire, whether such right is currently exercisable or is exercisable only upon the occurrence of a subsequent condition, and beneficial ownership shall be determined 85 92 without regard to the Shareholders Agreement, as the same may be amended, modified or supplemented from time to time), directly or indirectly, of more than 50% of the Voting Stock of the Company (measured by voting power rather than number of shares) that is "beneficially owned" (as defined above) by such Permitted Group. "Permitted Investments" means (a) any Investment in the Company, in a Wholly Owned Subsidiary or in a Guarantor; (b) any Investment in Cash Equivalents; (c) any Investment by the Company or any Subsidiary of the Company in a Person, if as a result of such Investment (i) such Person becomes a Guarantor or a Wholly Owned Subsidiary or (ii) such Person is merged, consolidated or amalgamated with or into, or transfers or conveys substantially all of its assets to, or is liquidated into, the Company or a Guarantor or a Wholly Owned Subsidiary; (d) any Investment made as a result of the receipt of noncash consideration from an Asset Sale that was made pursuant to and in compliance with the covenant described above under the caption "--Repurchase at the Option of Holders -- Asset Sales;" (e) any acquisition of assets solely in exchange for the issuance of Equity Interests (other than Disqualified Stock) of the Company; (f) other Investments in Subsidiaries of the Company that are not Guarantors having an aggregate fair market value (measured on the date each such Investment was made and without giving effect to subsequent changes in value), when taken together with all other Investments made pursuant to this clause (f) that are at the time outstanding, not to exceed 10% of the Company's Consolidated Assets on the date of such Investment; (g) Investments existing on the date of the Indenture; (h) receivables owing to the Company or any Subsidiary of the Company if created or acquired in the ordinary course of business and payable or dischargeable in accordance with customary trade terms; provided that such trade terms may include concessionary terms as the Company of such Subsidiary deems reasonable under the circumstances; (i) loans or advances to employees permitted by clause (v) under the caption "--Certain Covenants -- Transactions with Affiliates;" (j) stock obligations or securities received in settlement of debts created in the ordinary course of business and owing to the Company or any of its Subsidiaries or in satisfaction of judgments; and (k) other Investments in any Person having an aggregate fair market value (measured on the date each such Investment was made and without giving effect to subsequent changes in value), when taken together with all other Investments made pursuant to this clause (k) that are at the time outstanding, not to exceed $5.0 million. "Permitted Liens" means (i) Liens on assets of the Company or any of the Guarantors or Foreign Subsidiaries securing obligations of such persons under Credit Facilities that were permitted by the terms of the Indenture to be incurred; (ii) Liens in favor of the Company; (iii) Liens on property of a Person existing at the time such Person is merged with or into or consolidated with the Company or any Subsidiary of the Company; provided that such Liens were in existence prior to the contemplation of such merger or consolidation and do not extend to any assets other than those of the Person merged into or consolidated with the Company; (iv) Liens on property existing at the time of acquisition thereof by the Company or any Subsidiary of the Company, provided that such Liens were in existence prior to the contemplation of such acquisition; (v) Liens to secure the performance of statutory obligations, surety or appeal bonds, performance bonds or other obligations of a like nature incurred in the ordinary course of business; (vi) Liens to secure Indebtedness (including Capital Lease Obligations) permitted by clause (iv) of the second paragraph of the covenant entitled "Incurrence of Indebtedness and Issuance of Preferred Stock" covering only the assets acquired with such Indebtedness; (vii) Liens existing on the date of the Indenture; (viii) Liens on the Smithfield Property incurred in connection with a sale and leaseback transaction permitted under the terms of the Indenture; (ix) Liens for taxes, assessments or governmental charges or claims that are not yet delinquent or that are being contested in good faith by appropriate proceedings promptly instituted and diligently concluded, provided that any reserve or other appropriate provision as shall be required in conformity with GAAP shall have been made therefor; (x) Liens to secure Permitted Refinancing Indebtedness, provided that such Liens extend only to the assets that secured the Indebtedness refinanced with the proceeds of such Permitted Refinancing Indebtedness; (xi) statutory Liens of landlords and Liens of carriers, warehouseman, mechanics, suppliers, materialmen, repairmen and other Liens imposed by law incurred in the ordinary course of business for sums not delinquent or being contested in good faith, if such reserve or other appropriate provision, if any, as shall be required by GAAP shall have been made in respect thereof; (xii) Liens securing Hedging Obligations; and (xiii) easements, rights-of-way, municipal and zoning ordinances and similar 86 93 charges, encumbrances, title defects or other irregularities that do not materially interfere with the ordinary course of business of the Company and its Subsidiaries; (xiv) Liens on assets of Subsidiaries securing Indebtedness of such persons that was permitted by the terms of this Indenture to be incurred; and (xv) Liens incurred in the ordinary course of business of the Company or any Subsidiary of the Company with respect to obligations that do not exceed $5.0 million at any one time outstanding. "Permitted Refinancing Indebtedness" means any Indebtedness of the Company or any of its 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 Subsidiaries (other than intercompany Indebtedness); provided that: (i) the principal amount (or accreted value, if applicable) of such Permitted Refinancing Indebtedness does not exceed the principal amount of (or accreted value, if applicable), plus accrued interest on, the Indebtedness 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 later than the final maturity date of, and has a Weighted Average Life to Maturity equal to or greater than the Weighted Average Life to Maturity of, the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; (iii) if the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded is subordinated in right of payment to the Notes, such Permitted Refinancing Indebtedness has a final maturity date later than the final maturity date of, and is subordinated in right of payment to, the Notes on terms at least as favorable to the Holders of Notes as those contained in the documentation governing the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; and (iv) such Indebtedness is incurred either by the Company or by the Subsidiary that is the obligor on the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded. "Principals" means Gerald F. Cerce, John H. Flynn, Jr., Robert V. Lallo and Felix A. Porcaro, Jr. "Related Party" with respect to any Principal means (i) any controlling shareholder, 80% (or more) owned Subsidiary, or spouse or immediate family member (in the case of an individual) of such Principal or (ii) any trust, corporation, partnership or other entity, the beneficiaries, shareholders, partners, owners or Persons beneficially holding an 80% or more controlling interest of which consist of such Principal and/or such other Persons referred to in the immediately preceding clause (i). "Restricted Investment" means an Investment other than a Permitted Investment. "Restructuring Charges" means any charges or write-offs associated with the discontinuance of operations at the Company's Texas Property less any tax benefit received from any such charge being deducted from the taxable income of the Company or any of its Subsidiaries; provided, however, that such charges or write-offs are charged within 12 months of the date of the Indenture and the maximum amount of charges that may be treated as "Restructuring Charges" shall be $2.6 million. "Senior Credit Facility" means that certain Amended and Restated Financing and Security Agreement, dated as of May 9, 1997, by and among the Company, certain of its Subsidiaries, NationsBank, N.A., as agent, and the other lenders party thereto, as amended by the Second Amended and Restated Financing and Security Agreement, dated July 21, 1998, by and among the Company, its existing Domestic Subsidiaries, NationsBank, N.A., as agent, and the other lenders party thereto, providing for up to $60.0 million of revolving credit borrowings, including any related notes, guarantees, collateral documents, instruments and agreements executed in connection therewith, and in each case as amended, modified, renewed, refunded, replaced or refinanced from time to time. "Shareholders Agreement" means the Tag-Along, Transfer Restriction and Voting Agreement dated as of December 11, 1996, as amended, among the Company and the shareholders and option holders party thereto. "Significant Subsidiary" means any Subsidiary that would be a "significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated pursuant to the Act, as such Regulation is in effect on the date hereof. 87 94 "Smithfield Property" means the real property and fixtures located at 500 George Washington Highway, Smithfield, Rhode Island, which are used by the Company as an office and distribution facility. "Stated Maturity" means, with respect to any installment of interest or principal on any series of Indebtedness, the date on which such payment of interest or principal was scheduled to be paid in the original documentation governing such Indebtedness, and shall not include any contingent obligations to repay, redeem or repurchase any such interest or principal prior to the date originally scheduled for the payment thereof. "Subsidiary" means, with respect to any 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 of one or more Subsidiaries of such Person (or any combination thereof). "Texas Property" means the real property and fixtures located at Valley View Lane, Farmers Branch, Texas, which are leased by the Company. "Voting Stock" of any Person as of any date means the Capital Stock of such Person that is at the time entitled to vote in the election of the Board of Directors of such Person. "Weighted Average Life to Maturity" means, when applied to any Indebtedness at any date, the number of years obtained by dividing (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 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 and one or more Wholly Owned Subsidiaries of such Person. 88 95 DESCRIPTION OF CAPITAL STOCK GENERAL The authorized capital stock of the Company consists of: (i) 4,800,000 shares of Common Stock, $.01 par value per share, of which 608,000 shares are issued and outstanding; and (ii) 200,000 shares of Preferred Stock, $.01 par value, issuable in one or more series with such voting powers, designations, preferences and other special rights and such qualifications, limitations or restrictions as may be stated in the resolution or resolutions adopted by the Company's Board of Directors providing for the issue of such series and as permitted by the Rhode Island Business Corporation Act. The Company has created one series of Preferred Stock designated Series A Preferred Stock. 43,700 shares of Series A Preferred Stock are designated for issuance, all of which are issued and outstanding. The Series A Preferred Stock was issued pursuant to a Securities Purchase Agreement dated May 31, 1996 by and among the Company, Weston Presidio Capital II, L.P., and certain other investors and a Stock Purchase Agreement dated as of November 13, 1996 by and among the Company, BEC Group, Inc., Foster Grant Group, L.P. and FG Holdings. COMMON STOCK Each share of Common Stock has the same relative rights and is identical in all respects to each other share of Common Stock. The holders of Common Stock are entitled to one vote per share on all matters to be voted upon by them. Subject to preferences that may be applicable to the holders of Preferred Stock, if any, the holders of Common Stock are entitled to dividends only when and as declared by the Board of Directors out of funds legally available therefor. Holders of Common Stock may not cumulate their votes for election of directors. Holders of Common Stock do not have preemptive rights to acquire any additional shares of the Company. In the event of a dissolution or liquidation of the Company, after payment has been made to the holders of Preferred Stock for the full amounts to which such holders are entitled, the holders of Common Stock share ratably in the remaining assets available for distribution. SERIES A PREFERRED STOCK The rights, preferences and privileges of Series A Preferred Stock are described below. Conversion. Each share of Series A Preferred Stock is convertible into ten shares of Common Stock, adjustable for certain dilutive events. Conversion is at the option of the shareholder, but is automatic upon the consummation of an initial public offering resulting in gross proceeds to the Company of at least $20.0 million and at an offering price of at least 137.8% of the Initial Conversion Price, if such public offering shall be consummated on or before May 31, 1999 and thereafter 175.0% of the Initial Conversion Price, in each case adjusted for stock splits and dividends (a "Qualified Public Offering"). Redemption. Except as limited by the provisions of Restrictive Indebtedness (as defined), the holders of Series A Preferred Stock have the right to require redemption for cash of any unconverted shares, beginning June 30, 2002. The Company will redeem the Series A Preferred Stock equal to 5.0% of the total number of shares issued and outstanding as of March 31, 2002 on the last day of each March, June, September and December as follows:
YEAR ENDED DECEMBER 31, PERCENTAGE - ----------------------- ---------- 2002................................................. 15% 2003................................................. 35 2004................................................. 55 2005................................................. 75 2006................................................. 95 2007................................................. 100
The Series A Preferred Stock will be redeemed at an amount equal to the original stock price, $526.32 per share, plus any accrued and unpaid dividends, yielding a 10.0% compounded annually rate of return (the "Redemption Amount"). As of April 4, 1998, cumulative dividends were approximately $4.3 million. 89 96 Except as limited by the provisions of Restrictive Indebtedness, the holders of the Series A Preferred Stock may require the Company to redeem all or any portion of the Series A Preferred Stock upon the happening of certain events including the following: (a) the sale by the Company of all or substantially all its assets; (b) the merger of the Company with, or the consolidation of the Company into, any other corporation as a result of which the shareholders of the Company immediately prior to such merger or consolidation do not own stock having more than 50% of the outstanding voting power (assuming conversion of all convertible securities and exercise of all outstanding options and warrants) of the surviving corporation; (c) the dissolution or liquidation of the Company; (d) Mr. Cerce ceasing for any reason to be Chairman of, and actively involved in the executive management of, the Company unless a replacement satisfactory to the holders of two-thirds of the outstanding Series A Preferred Stock is in place within 180 days; (e) except in the case of a Qualified Public Offering or stock passing by death, more than 50% of the outstanding voting stock of the Company becomes owned by persons or entities other than (i) holders of Series A Preferred Stock and their transferees and (ii) the shareholders of record on the date on which the Series A Preferred Stock was first issued by the Company; and (f) the happening of any of certain events (a "Remedy Event") generally relating to the financial condition of the Company or its failure to meet material obligations which Remedy Event continues for thirty days following written notice of the occurrence. The Company may voluntarily redeem the Series A Preferred Stock at any time at the Redemption Amount. If the Company voluntarily redeems the Series A Preferred Stock, it must issue the holders of Series A Preferred Stock a warrant to purchase Common Stock equal to the number of shares of Common Stock the shareholder would have received upon conversion, at a strike price equal to the redemption price at the time of redemption. Notwithstanding the foregoing, at any time the Company has outstanding any Indebtedness the terms of which restrict the Company's ability to redeem, in whole or in part, the Series A Preferred Stock ("Restrictive Indebtedness"), the Company's obligations to redeem any shares of Series A Preferred Stock are suspended until 91 days after the date that such Restrictive Indebtedness is no longer outstanding. Within ten (10) days after the expiration of 91 days after the date of the payment of such Restrictive Indebtedness in full, the Company must redeem such number of shares of Series A Preferred Stock as the Company would have been obligated to redeem, on or prior to such date, but for the provisions suspending the Company's redemption obligation. In no event may the aggregate principal amount of Restrictive Indebtedness at any time exceed $150 million unless approved by the directors designated by the Preferred Holders. Dividends. Dividends will not be paid on the Common Stock unless the Series A Preferred Stock receives the same dividends that such shares of Series A Preferred Stock would have received had they been converted into Common Stock immediately prior to the record date for such dividend. Liquidation Preferences. The holders of Series A Preferred Stock have preference equal to the Redemption Amount in the event of a liquidation, dissolution or winding up of the Company, either voluntary or involuntary, or a merger or consolidation of the Company that has not been agreed to in writing by the holders of two-thirds of the outstanding Series A Preferred Stock. If the assets of the Company are insufficient to pay the full preferential amounts to the holders of Series A Preferred Stock, the entire assets of the Company legally available for distribution will be distributed ratably among the holders of Series A Preferred Stock in accordance with the aggregate liquidation preference of the shares of Series A Preferred Stock held by each of them. After payment has been made to the holders of Series A Preferred Stock for the full amounts to which they are entitled, the holders of Common Stock are entitled to share ratably in the remaining assets without participation by the holders of Series A Preferred Stock. Voting Rights and Election of Directors. The holders of Series A Preferred Stock are entitled to vote on all matters based on the number of votes equal to the number of shares of Common Stock into which the Series A Preferred Stock are convertible and are entitled to notice of any shareholders' meeting or solicitation of shareholders' consents in the manner provided in the Bylaws of the Company. In addition, the holders of a majority of shares of Series A Preferred Stock, voting separately as a single class, are entitled to elect two directors. Upon notice of a Remedy Event as described above, the number of directors of the Company automatically increases to the minimum number sufficient to permit the election of additional directors so that 90 97 after such election a majority of the directors will have been elected by the holders of the Series A Preferred Stock. Upon such increase, the directors will be divided into two classes. One class will consist of a majority of all of the directors and will be elected solely by the holders of Series A Preferred Stock, voting separately as a single class, and the other class will consist of the remaining directors. The holders of Series A Preferred Stock will be entitled to elect a majority of the directors of the Company until the Remedy Event has been cured or rectified to the written satisfaction of the holders of Series A Preferred Stock. At such time, the right of the holders of Series A Preferred Stock to elect a majority of the Board of Directors will cease, and the maximum number of directors will be reduced to seven. Other Rights. At any time when shares of Series A Preferred Stock are outstanding, in addition to any other vote required by law or by the Articles of Incorporation without the consent of the holders of two-thirds of the outstanding Series A Preferred Stock, given in writing or by vote at a meeting, consenting or voting separately as a class, the Company may not do any of the following: (i) create or authorize the creation of any additional class or series of shares of stock, or issue any shares thereof; (ii) increase the authorized amount of Series A Preferred Stock; (iii) increase the authorized amount of any additional class or series of stock; or (iv) create or authorize any instrument or security convertible into shares of Series A Preferred Stock or into shares of any other class or series of stock, unless, in each case, the same ranks junior to the Series A Preferred Stock as to the distribution of assets on the liquidation, dissolution or winding up of the Company. In addition, without the written consent or affirmative vote of the holders of two-thirds of the outstanding Series A Preferred Stock, the Company may not amend, alter or repeal its Articles of Incorporation or Bylaws in a manner that is adverse to the holders of Series A Preferred Stock or for which the holders of Series A Preferred Stock did not receive prior written notice; purchase or set aside sums for the purchase of shares of stock other than Series A Preferred Stock (with certain exceptions for the purchase of shares of Common Stock from former employees); redeem or otherwise acquire any shares of Series A Preferred Stock except as expressly authorized in the Articles of Incorporation, unless pursuant to a purchase offer made pro rata to all holders of Series A Preferred Stock; consent to any liquidation, dissolution or winding up of the Company; or consolidate or merge with any other entity or entities or sell or transfer all or a substantial portion of its assets. The Company may, however, effect a merger in which the Company is the surviving corporation and the shareholders of the Company immediately prior to the merger hold more than 50% of the outstanding voting power of the surviving corporation (assuming conversion of all convertible securities and exercise of all outstanding options and warrants). Further, the provisions of the Articles of Incorporation relating to the Series A Preferred Stock may not be amended, modified or waived without the written consent or affirmative vote the holders of two-thirds of the outstanding Series A Preferred Stock; except that any amendment reducing or postponing the payment of dividends or redemptions or postponing or increasing the amount of the conversion price requires the written consent or the affirmative vote of 90% of the then outstanding shares of Series A Preferred Stock. 91 98 CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS EXCHANGE OF OLD NOTES FOR NEW NOTES The exchange of the Old Notes for the New Notes pursuant to the Exchange Offer will not be treated as a taxable transaction for federal income tax purposes because the New Notes do not differ materially in kind or extent from the Old Notes. Accordingly, no gain or loss should be recognized by a Holder who exchanges an Old Note for a New Note pursuant to the Exchange Offer, and each New Note should be viewed as a continuation of the corresponding Old Note. For purposes of determining gain or loss upon a subsequent sale or exchange of the New Notes, a Holder's initial basis in the New Notes will be the same as such Holder's adjusted basis in the Old Notes exchanged therefor, and the holding period of a Holder for the New Note should include the period during which such Holder held such corresponding Old Note. Persons considering the exchange of the Old Notes for the New Notes are urged to consult their tax advisors regarding the United States federal tax consequences in light of their particular situations, as well as any tax consequences that may arise under the laws of any foreign, state, local, or other taxing jurisdiction. PLAN OF DISTRIBUTION Each broker-dealer who holds Old Notes that are Transfer Restricted Securities that were acquired for its own account as a result of market-making activities or other trading activities (other than Transfer Restricted Securities acquired directly from the Company) may exchange such Old Notes pursuant to the Exchange Offer; however, such broker-dealer may be deemed an "underwriter" within the meaning of the Securities Act and must, therefore, acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer for such purpose. The Company has agreed that for a period of 180 days after the Exchange Offer is consummated, it will, upon reasonable request, make this Prospectus, as amended or supplemented, available promptly to any broker-dealer for use in connection with any such resale. The Company has agreed to pay the expenses incident to the Exchange Offer and will indemnify the Holders of the Old Notes against certain liabilities, including certain liabilities under the Securities Act, in connection with the Exchange Offer. The Company will not receive any proceeds from any sale of the New Notes by broker-dealers. The New 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 New Notes or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such broker-dealer and/or the purchasers of any such New Notes. Any broker-dealer that resells New 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 New Notes may be deemed to be an "underwriter" within the meaning of the Securities Act, and any profit on any such resale of the New Notes and any commissions and 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. LEGAL MATTERS The legality of the New Notes will be passed upon for the Company by Hinckley, Allen & Snyder, Providence, Rhode Island. Stephen J. Carlotti, a partner of Hinckley, Allen & Snyder, is a director and Secretary of the Company and, as trustee, is the holder of 5.9% of the Common Stock. See "Security Ownership of Management and Certain Beneficial Owners." 92 99 EXPERTS The Consolidated Financial Statements of AAi as of December 31, 1996 and 1997 and for each of the three years in the period ended December 31, 1997 and the Consolidated Statements of Operations and Shareholders' Equity and Cash Flows of Foster Grant Group L.P. for the eleven months ended November 30, 1996 included in this Prospectus have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports with respect thereto and are included herein in reliance upon the authority of said firm as experts in giving said reports. The Consolidated Financial Statements of Foster Grant Group L.P. as of, and for the year ended December 31, 1995 included in this Prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. AVAILABLE INFORMATION The Company and the Guarantors have filed with the Commission a Registration Statement on Form S-4 (the "Exchange Offer Registration Statement," which term shall encompass all amendments, exhibits, annexes and schedules thereto) pursuant to the Securities Act, and the rules and regulations promulgated thereunder, covering the New Notes being offered hereby. This Prospectus does not contain all the information set forth in the Exchange Offer Registration Statement. For further information with respect to AAi, the Guarantors and the Exchange Offer, reference is made to the Exchange Offer Registration Statement. Statements made in this Prospectus as to the contents of any contract, agreement or other document referred to are not necessarily complete. With respect to each such contract, agreement or other document filed as an exhibit to the Exchange Offer Registration Statement, reference is made to the exhibit for a more complete description of the document or matter involved, and each such statement shall be deemed qualified in its entirety by such reference. The Exchange Offer Registration Statement, including the exhibits thereto, can be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Regional Offices of the Commission at Seven World Trade Center, Suite 1300, New York, New York 10048 and at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials can be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition, the Commission maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The address of such Web site is: http://www.sec.gov. As a result of the Exchange Offer, the Company will become subject to the informational requirements of the Exchange Act, and in accordance therewith will be required to file periodic reports and other information with the Commission. AAi has agreed that, whether or not it is required to do so by the rules and regulations of the Commission, for so long as any of the Notes remain outstanding, AAi will furnish (excluding exhibits and schedules) to the Trustee and the holders of the Notes and will file with the Commission (unless the Commission will not accept such a filing) as specified in the Commission's rules and regulations: (i) all quarterly and annual financial information that would be required to be contained in a filing with the Commission if AAi were required to file such information, including a "Management's Discussion and Analysis of Financial Condition and Results of Operations" and, with respect to the annual financial information only, a report thereon by AAi's independent public accountants and (ii) any other information, documents and other reports which are otherwise required pursuant to Section 13 and 15(d) of the Exchange Act. In addition, for so long as any of the Notes remain outstanding, AAi has agreed to make available upon request to any prospective purchaser of the Notes or beneficial owner of the Notes in connection with any sale thereof the information required by Rule 144A(d)(4) under the Securities Act other than during any period in which AAi is subject to Section 13 to 15(d) of the Exchange Act and in compliance with the requirements thereof. Any such request should be directed to the Assistant Secretary of AAi at 500 George Washington Highway, Smithfield, Rhode Island 02917. 93 100 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- AAi.FOSTERGRANT, INC.: Report of Independent Public Accountants.................... F-1 Consolidated Balance Sheets as of December 31, 1996 and 1997 and April 4, 1998 (unaudited)............................. F-2 Consolidated Statements of Operations for the Three Years Ended December 31, 1995, 1996 and 1997 and the Three Months Ended March 31, 1997 (unaudited) and April 4, 1998 (unaudited)............................................... F-4 Consolidated Statements of Redeemable Preferred Stock and Shareholders' Equity (Deficit) for the Years Ended December 31, 1995, 1996 and 1997 and for the Three Months Ended April 4, 1998 (unaudited)........................... F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1996 and 1997 and the Three Months Ended March 31, 1997 (unaudited) and April 4, 1998 (unaudited)............................................... F-6 Notes to Consolidated Financial Statements.................. F-8 FOSTER GRANT GROUP L.P.: Report of Independent Public Accountants.................... F-29 Consolidated Statement of Operations and Shareholder's Equity Eleven Month Period Ended November 30, 1996........ F-30 Consolidated Statement of Cash Flows for the Eleven Month Period Ended November 30, 1996............................ F-31 Notes to Consolidated Financial Statements.................. F-32 Report of Independent Accountants........................... F-35 Consolidated Balance Sheet as of December 31, 1995.......... F-36 Consolidated Statement of Operations for the year ended December 31, 1995......................................... F-37 Consolidated Statement of Shareholder's Equity for the year ended December 31, 1995................................... F-38 Consolidated Statement of Cash Flows for the year ended December 31, 1995......................................... F-39 Notes to Consolidated Financial Statements.................. F-40
94 101 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of AAi.FosterGrant, Inc. and Subsidiaries: We have audited the accompanying consolidated balance sheets of AAi.FosterGrant, Inc. (a Rhode Island corporation) and subsidiaries as of December 31, 1996 and 1997, and the related consolidated statements of operations, redeemable preferred stock and shareholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements 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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated 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 consolidated financial position of AAi.FosterGrant, Inc. and Subsidiaries as of December 31, 1996 and 1997, and the consolidated results of their operations and their cash flows for each of the three years ended December 31, 1997, in conformity with generally accepted accounting principles. Arthur Andersen LLP Boston, Massachusetts February 2, 1998, except with respect to matters discussed in Notes 6, 7 and 18 as to which the date is July 21, 1998 F-1 102 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, ------------------ APRIL 4, 1996 1997 1998 ------- ------- ----------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................. $ 1,477 $ 2,779 $ 439 Accounts receivable, less reserves of approximately $13,082, $10,338 and $11,080 in 1996, 1997 and 1998, respectively........................................... 14,245 18,323 34,928 Inventories............................................... 36,460 32,795 34,873 Prepaid expenses and other current assets................. 1,575 734 609 Deferred tax assets....................................... 1,505 8,993 8,755 ------- ------- -------- Total current assets.............................. 55,262 63,624 79,604 ------- ------- -------- Property and equipment, at cost: Land...................................................... -- -- 1,233 Building and improvements................................. -- -- 3,371 Display fixtures.......................................... 5,695 11,009 15,624 Furniture, fixtures and equipment......................... 6,519 7,427 8,845 Leasehold improvements.................................... 2,759 2,819 1,431 Equipment under capital leases............................ 196 361 361 ------- ------- -------- 15,169 21,616 30,865 Less -- Accumulated depreciation and amortization......... 5,533 11,431 12,688 ------- ------- -------- 9,636 10,185 18,177 ------- ------- -------- Other assets: Advances to officers/shareholders......................... 52 53 2,215 Deferred costs, net of accumulated amortization of approximately $650, $2,292 and $2,755 in 1996, 1997 and 1998, respectively..................................... 1,846 1,883 1,703 Investments in affiliates................................. 1,949 1,426 1,486 Intangible assets, net of accumulated amortization of $237, $1,306 and $1,587 in 1996, 1997 and 1998, respectively........................................... 14,251 16,600 17,340 Other assets.............................................. 670 1,144 1,234 ------- ------- -------- 18,768 21,106 23,978 ------- ------- -------- Total assets...................................... $83,666 $94,915 $121,759 ======= ======= ========
The accompanying notes are an integral part of these consolidated financial statements. F-2 103 AAi.FOSTERGRANT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, ------------------ APRIL 4, 1996 1997 1998 ------- ------- ----------- (UNAUDITED) LIABILITIES AND SHAREHOLDERS' DEFICIT Current liabilities: Borrowings under revolving note payable................... $25,873 $27,598 $ 45,041 Current maturities of long-term obligations............... 2,155 3,361 5,442 Accounts payable.......................................... 16,903 14,117 22,184 Accrued expenses.......................................... 8,985 11,221 9,788 Accrued income taxes...................................... 624 2,105 2,100 ------- ------- -------- Total current liabilities......................... 54,540 58,402 84,555 ------- ------- -------- Long-term obligations, less current maturities.............. 3,208 9,653 9,917 Deferred tax liabilities.................................... 554 689 689 Subordinated promissory notes payable to shareholders....... 5,205 5,487 5,575 Commitments and Contingencies (Notes 7 and 15) Redeemable preferred stock of a subsidiary.................. 751 835 847 Preferred stock, $.01 par value -- Authorized -- 200,000 shares Designated, issued and outstanding -- 43,700 shares of Series A Redeemable Convertible Preferred Stock, stated at redemption value.................................... 23,587 26,083 26,766 ------- ------- -------- Shareholders' deficit: Common stock, $.01 par value -- Authorized -- 4,800,000 shares Issued and outstanding -- 608,000 shares............... 6 6 6 Additional paid-in capital................................ 270 270 270 Cumulative foreign currency translation adjustment........ 8 (78) (55) Accumulated deficit....................................... (4,463) (6,432) (6,811) ------- ------- -------- Total shareholders' deficit....................... (4,179) (6,234) (6,590) ------- ------- -------- Total liabilities and shareholders' deficit............... $83,666 $94,915 $121,759 ======= ======= ========
The accompanying notes are an integral part of these consolidated financial statements. F-3 104 AAi.FOSTERGRANT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED -------------------------------- ---------------------- MARCH 31, APRIL 4, 1995 1996 1997 1997 1998 -------- -------- -------- --------- --------- (UNAUDITED) Net sales........................... $ 88,050 $ 86,336 $149,411 $ 34,851 $ 42,703 Cost of goods sold.................. 43,690 47,871 77,928 19,023 23,431 -------- -------- -------- -------- -------- Gross profit.............. 44,360 38,465 71,483 15,828 19,272 Selling expenses.................... 22,264 24,767 43,551 9,496 11,671 General and administrative expenses.......................... 12,518 10,911 21,734 5,191 5,956 -------- -------- -------- -------- -------- Income from operations............ 9,578 2,787 6,198 1,141 1,645 Equity in earnings (losses) of investments in affiliates......... 275 (345) (63) (80) 60 Minority interest in income of consolidated subsidiary........... -- -- (83) (16) (13) Interest expense.................... (1,031) (1,469) (4,214) (928) (1,178) Other (expense) income, net......... (355) 14 177 48 29 -------- -------- -------- -------- -------- Income before income tax (expense) benefit and dividends and accretion on preferred stock... 8,467 987 2,015 165 543 Income tax (expense) benefit........ (42) 204 (1,177) (96) (239) -------- -------- -------- -------- -------- Net income before dividends and accretion on preferred stock... 8,425 1,191 838 69 304 Dividends and accretion on preferred stock............................. -- 1,123 2,496 597 683 -------- -------- -------- -------- -------- Net income (loss) applicable to common shareholders............ $ 8,425 $ 68 $ (1,658) $ (528) $ (379) ======== ======== ======== ======== ======== Pro forma income tax adjustment..... (3,370) (598) -- -- -- -------- -------- -------- -------- -------- Pro forma net income (loss) applicable to common shareholders...................... $ 5,055 $ (530) $ (1,658) $ (528) $ (379) ======== ======== ======== ======== ======== Basic and diluted net income (loss) per share applicable to common shareholders...................... $ 14.78 $ .11 $ (2.73) $ (.87) $ (.62) ======== ======== ======== ======== ======== Basic and diluted pro forma net income (loss) per share applicable to common shareholders............ $ 8.87 $ (.90) ======== ======== Basic and diluted weighted average shares outstanding................ 570,000 591,000 608,000 608,000 608,000 ======== ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-4 105 AAi.FOSTERGRANT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS, EXCEPT SHARE DATA)
REDEEMABLE PREFERRED STOCK SHAREHOLDERS' EQUITY (DEFICIT) ------------------- --------------------------------------------------------- SERIES A REDEEMABLE CONVERTIBLE CUMULATIVE PREFERRED STOCK COMMON STOCK FOREIGN RETAINED ------------------- --------------- ADDITIONAL CURRENCY EARNINGS REDEMPTION PAR PAID-IN TRANSLATION (ACCUMULATED SHARES VALUE SHARES VALUE CAPITAL ADJUSTMENT DEFICIT) ------ ---------- ------- ----- ---------- ----------- ------------ Balance, December 31, 1994......... -- $ -- 570,000 $6 $112 $ -- $ 4,897 Payment for previously issued common stock.................... -- -- -- -- 3 -- -- Foreign currency translation adjustment...................... -- -- -- -- -- 7 -- Distributions to shareholders..... -- -- -- -- -- -- (1,802) Net income........................ -- -- -- -- -- -- 8,425 Comprehensive net income for the year ended December 31, 1995.... ------ ------- ------- -- ---- ---- ------- Balance, December 31, 1995......... -- -- 570,000 6 115 7 11,520 Issuance of Series A Preferred Stock, net of issuance costs of $536,000........................ 43,700 22,464 -- -- -- -- -- Dividends and accretion on Series A Preferred Stock............... -- 1,123 -- -- -- -- (1,123) Issuance of common stock.......... -- -- 38,000 -- 100 -- -- Retirement of treasury stock...... -- -- -- -- (2) -- (123) Proceeds from previously issued common stock.................... -- -- -- -- 57 -- -- Foreign currency translation adjustment...................... -- -- -- -- -- 1 -- Distributions to shareholders..... -- -- -- -- -- -- (15,926) Net income........................ -- -- -- -- -- -- 1,191 Comprehensive net income for the year ended December 31, 1996.... ------ ------- ------- -- ---- ---- ------- Balance, December 31, 1996......... 43,700 23,587 608,000 6 270 8 (4,463) Dividends and accretion on Series A Preferred Stock............... -- 2,496 -- -- -- -- (2,496) Foreign currency translation adjustment...................... -- -- -- -- -- (86) -- Distributions to shareholders..... -- -- -- -- -- -- (311) Net income........................ -- -- -- -- -- -- 838 Comprehensive net income for the year ended December 31, 1997.... ------ ------- ------- -- ---- ---- ------- Balance, December 31, 1997......... 43,700 26,083 608,000 6 270 (78) (6,432) Dividends and accretion on Series A Preferred Stock............... -- 683 -- -- -- -- (683) Foreign currency translation adjustment...................... -- -- -- -- -- 23 -- Net income........................ -- -- -- -- -- -- 304 Comprehensive net income for the three months ended April 4, 1998............................ ------ ------- ------- -- ---- ---- ------- Balance, April 4, 1998 (unaudited)....................... 43,700 $26,766 608,000 $6 $270 $(55) $(6,811) ====== ======= ======= == ==== ==== ======= SHAREHOLDERS' EQUITY (DEFICIT) ---------------------------------- TREASURY STOCK --------------- TOTAL SHAREHOLDERS' COMPREHENSIVE SHARES COST EQUITY (DEFICIT) NET INCOME ------- ----- ---------------- ------------- Balance, December 31, 1994......... 47,538 $(125) $ 4,890 $ -- Payment for previously issued common stock.................... -- -- 3 Foreign currency translation adjustment...................... -- -- 7 7 Distributions to shareholders..... -- -- (1,802) Net income........................ -- -- 8,425 8,425 ------ Comprehensive net income for the year ended December 31, 1995.... $8,432 ------- ----- -------- ====== Balance, December 31, 1995......... 47,538 (125) 11,523 Issuance of Series A Preferred Stock, net of issuance costs of $536,000........................ -- -- -- Dividends and accretion on Series A Preferred Stock............... -- (1,123) Issuance of common stock.......... -- -- 100 Retirement of treasury stock...... (47,538) 125 -- Proceeds from previously issued common stock.................... -- -- 57 Foreign currency translation adjustment...................... -- -- 1 1 Distributions to shareholders..... -- -- (15,926) Net income........................ -- -- 1,191 1,191 ------ Comprehensive net income for the year ended December 31, 1996.... $1,192 ------- ----- -------- ====== Balance, December 31, 1996......... -- -- (4,179) Dividends and accretion on Series A Preferred Stock............... -- -- (2,496) -- Foreign currency translation adjustment...................... -- -- (86) (86) Distributions to shareholders..... -- -- (311) Net income........................ -- -- 838 838 ------ Comprehensive net income for the year ended December 31, 1997.... $ 752 ------- ----- -------- ====== Balance, December 31, 1997......... -- -- (6,234) Dividends and accretion on Series A Preferred Stock............... -- -- (683) Foreign currency translation adjustment...................... -- -- 23 23 Net income........................ -- -- 304 304 ------ Comprehensive net income for the three months ended April 4, 1998............................ $ 327 ------- ----- -------- ====== Balance, April 4, 1998 (unaudited)....................... -- $ -- $ (6,590) ======= ===== ========
The accompanying notes are an integral part of these consolidated financial statements. F-5 106 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED, ----------------------------- -------------------- MARCH 31, APRIL 4, 1995 1996 1997 1997 1998 ------- -------- -------- --------- -------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................ $ 8,425 $ 1,191 $ 838 $ 69 $ 304 Adjustments to reconcile net income to net cash provided by (used in) operating activities -- Depreciation and amortization........................... 783 2,400 9,894 1,987 2,972 Equity in (losses) earnings of investments in affiliates............................................ (275) 345 63 80 (60) Minority interest in income of consolidated subsidiary............................................ -- -- 83 16 13 Cumulative foreign currency translation adjustment...... 8 1 (86) (21) 23 Deferred compensation................................... 279 327 286 -- 88 Deferred interest on subordinated promissory notes payable............................................... -- 205 282 88 88 Deferred taxes.......................................... -- (951) (353) -- 239 Changes in assets and liabilities, net of effect of acquisitions -- Accounts receivable................................... (858) (5,087) (7,410) (12,515) (14,920) Inventories........................................... (5,580) (463) 3,797 1,979 1,221 Prepaid expenses and other current assets............. 215 (477) 912 748 272 Accounts payable...................................... 1,187 3,502 (5,323) (3,958) 6,942 Accrued expenses...................................... (2,366) (1,097) (923) 978 (2,020) Accrued income taxes.................................. -- 590 1,481 210 (6) ------- -------- -------- -------- -------- Net cash provided by (used in) operating activities....................................... 1,818 486 3,541 (10,339) (4,844) ------- -------- -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions, net of cash received........................ -- (9,844) (1,835) -- (5,487) Purchase of property and equipment........................ (1,555) (1,572) (7,583) (1,492) (9,073) Advances to officers/shareholders......................... 23 (32) (1) (40) (2,162) Increase in deferred costs................................ -- (2,378) (1,655) -- (324) Increase (decrease) in investments in affiliates.......... 109 (761) 460 587 (60) Increase in other assets.................................. (681) (616) (404) (1,033) (90) ------- -------- -------- -------- -------- Net cash used in investing activities.............. (2,104) (15,203) (11,018) (1,978) (17,196) ------- -------- -------- -------- --------
The accompanying notes are an integral part of these consolidated financial statements. F-6 107 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (IN THOUSANDS)
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED, ---------------------------- -------------------- MARCH 31, APRIL 4, 1995 1996 1997 1997 1998 ------- -------- ------- --------- -------- (UNAUDITED) CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings under revolving note payable............... 3,275 3,311 7,697 12,237 17,443 Proceeds from term note payable........................... -- -- -- -- 2,737 Proceeds from issuance of subordinated promissory notes payable to shareholders................................. -- 2,000 -- -- -- Proceeds from issuance of long-term obligations........... 319 3,445 8,943 -- -- Payments on long-term obligations......................... (1,535) (2,292) (7,551) -- (480) Distributions to shareholders............................. (1,803) (12,927) (310) -- -- Proceeds from issuance of common stock.................... -- 100 -- -- -- Proceeds from issuance of preferred stock, net of issuance costs................................................... -- 22,464 -- -- -- Proceeds from previously issued common stock.............. 3 58 -- -- -- ------- -------- ------- ------- ------- Net cash provided by financing activities.......... 259 16,159 8,779 12,237 19,700 ------- -------- ------- ------- ------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........ (27) 1,442 1,302 (80) (2,340) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 62 35 1,477 1,477 2,779 ------- -------- ------- ------- ------- CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 35 $ 1,477 $ 2,779 $ 1,397 $ 439 ======= ======== ======= ======= ======= SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES: Conversion of leasehold improvements to building improvements............................................ $ -- $ -- $ -- $ -- $ 1,393 ======= ======== ======= ======= ======= Acquisition of equipment under capital lease obligations............................................. $ -- $ -- $ 362 $ -- $ -- ======= ======== ======= ======= ======= Acquisition of inventory in exchange for issuance of note payable................................................. $ 622 $ -- $ -- $ -- $ -- ======= ======== ======= ======= ======= Distribution of notes payable to shareholders............. $ -- $ 3,000 $ -- $ -- $ -- ======= ======== ======= ======= ======= Repayment of revolving note payable with term loan........ $ -- $ -- $ 5,972 $ -- $ -- ======= ======== ======= ======= ======= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for -- Interest................................................ $ 1,015 $ 1,042 $ 4,074 $ 914 $ 1,040 ======= ======== ======= ======= ======= Income taxes............................................ $ 12 $ 57 $ 50 $ 38 $ 98 ======= ======== ======= ======= ======= SUPPLEMENTAL DISCLOSURE OF CASH FLOWS RELATED TO ACQUISITIONS: During 1996, 1997 and 1998, the Company acquired Tempo, Foster Grant US, Superior and Foster Grant UK as described in Note 2. These acquisitions are summarized as follows -- Fair value of assets acquired, excluding cash............. $ -- $ 48,635 $ 5,950 $ -- $ 7,260 Payments in connection with the acquisitions, net of cash acquired................................................ -- (9,844) (1,835) -- (5,487) ------- -------- ------- ------- ------- Liabilities assumed and notes issued............... $ -- $ 38,791 $ 4,115 $ -- $ 1,773 ======= ======== ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-7 108 AAi.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Including Data Applicable to Unaudited Periods) (1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES AAi.FosterGrant, Inc. and Subsidiaries (the Company) is a distributor of optical products, costume jewelry and other accessories to mass merchandisers, variety stores, chain drug stores and supermarkets in North America and the United Kingdom. In April 1998, the Company adopted a formal plan to close its Texas distribution center in the fourth quarter of 1998. The Company expects to incur approximately $2.6 million in costs in connection with this plant closing, which is comprised of approximately $1.1 million in employee related costs and approximately $1.5 million related to the write off of fixed assets which will be abandoned. This charge will be recorded in the quarter ending July 4, 1998. On July 21, 1998, the Company sold $75.0 million of 10 3/4% Senior Series A Notes (the Notes) through a Rule 144A offering (see Note 18). The Company used the proceeds from the offering of the Notes to repay its indebtedness under its credit facilities with a bank and other obligations. The Company has agreed to file and use its best efforts to have declared effective under the Securities Act of 1933, as amended, a registration statement relating to an exchange offer for the Notes, or in lieu thereof, or in certain circumstances, in addition thereto, to file and use its best efforts to cause to be declared effective a shelf registration statement for the Notes. The accompanying consolidated financial statements reflect the application of certain significant accounting policies, as discussed below and elsewhere in the notes to consolidated financial statements. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (a) Principles of Consolidation The accompanying consolidated financial statements include the results of operations of the Company and its majority-owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation. (b) Interim Financial Statements The accompanying consolidated financial statements as of April 4, 1998 and for the three-month periods ended March 31, 1997 and April 4, 1998 are unaudited, but in the opinion of management, include all adjustments consisting of normal recurring adjustments necessary for a fair presentation of results for the interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted, although the Company believes that the disclosures included are adequate to make the information presented not misleading. Results for the three months ended April 4, 1998 are not necessarily indicative of the results that may be expected for the year ending January 2, 1999. (c) Change in Fiscal Year-End During the first quarter of 1998, the Company elected to change its fiscal year-end from December 31, to the Saturday closest to December 31. The Company has also applied this change to its quarterly periods during 1998 whereby each interim period will end on the last Saturday of the 13 week period. F-8 109 AAi.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (d) Cash and Cash Equivalents The Company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. (e) Inventories Inventories are stated at the lower of cost (first-in, first-out) or market and consist of the following in 1996, 1997 and 1998 (in thousands):
DECEMBER 31 ------------------ APRIL 4, 1996 1997 1998 ------- ------- -------- Finished goods........................................ $30,564 $28,229 $32,852 Work-in-process and raw materials..................... 5,896 4,566 2,021 ------- ------- ------- $36,460 $32,795 $34,873 ======= ======= =======
Finished goods inventory consists of material, labor and manufacturing overhead. (f) Depreciation and Amortization The Company provides for depreciation and amortization by charges to operations in amounts that allocate the cost of these assets on a straight-line basis over their estimated useful lives as follows:
ASSET CLASSIFICATION ESTIMATED USEFUL LIFE - -------------------- --------------------- Building and improvements................................... 20 years Display fixtures............................................ 1-3 years Furniture, fixtures and equipment........................... 3-10 years Leasehold improvements...................................... Term of lease Equipment under capital leases.............................. Term of lease
The Company has adopted the provisions of Statement of Position No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. The adoption of this pronouncement did not have a material effect on the Company's financial position or financial results. (g) Revenue Recognition The Company recognizes revenue from product sales, net of estimated agreed-upon future allowances and anticipated returns and discounts, taking into account historical experience, upon shipment to the customer. (h) Concentration of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk are principally accounts receivable. A significant portion of its business activity is with domestic mass merchandisers whose ability to meet their financial obligations is dependent on economic conditions germane to the retail industry. During recent years, many major retailers have experienced significant financial difficulties and some have filed for bankruptcy protection; other retailers have begun to consolidate within the industry. The Company sells to certain customers in bankruptcy as well as those consolidating within the industry. To reduce credit risk, the Company routinely assesses the financial strength of its customers and purchases credit insurance as it deems appropriate. F-9 110 AAi.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (i) Intangible Assets Intangible assets consist of goodwill and trademarks, which are being amortized on a straight-line basis over estimated useful lives of 10 to 40 years. At each balance sheet date, the Company evaluates the realizability of intangible assets based on profitability and cash flow expectations for the related asset or subsidiary. Based on its most recent analysis, the Company does not believe an impairment of intangible assets exists at April 4, 1998. Amortization expense was approximately $0.2 million, $1.1 million, $0.2 million and $0.3 million for the years ended December 31, 1996 and 1997 and the three months ended March 31, 1997 and April 4, 1998, respectively. There was no amortization expense related to intangible assets in 1995. (j) Disclosure of Fair Value of Financial Instruments The Company's financial instruments consist mainly of cash and cash equivalents, accounts receivable, accounts payable and debt. The carrying amounts of the Company's financial instruments approximate fair value. (k) Net Income (Loss) Per Share In March 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 128, Earnings per Share. This statement established standards for computing and presenting net income (loss) per share. This statement is effective for fiscal years ending after December 15, 1997. Basic net income (loss) per share applicable to common shareholders was determined by dividing net income (loss) attributable to common shareholders by the weighted average common shares outstanding during the period. Diluted net income (loss) per share applicable to common shareholders was determined by dividing net income (loss) applicable to common shareholders by diluted weighted average shares outstanding. Diluted weighted average shares reflects the dilutive effect, if any, of common equivalent shares, which includes common stock options and convertible preferred stock. Based on the treasury stock method, the common stock options have no dilutive effect on earnings per share as the exercise price for all options equals the fair market value of the Company's common stock at the end of each applicable period. Accordingly, options to purchase a total of 8,000, 14,000 and 12,000 common shares have been excluded from the computation of diluted weighted average shares outstanding. The 437,000 shares of common stock issuable upon the conversion of the 43,700 share of Series A Redeemable Convertible Preferred Stock (Series A Preferred Stock) has also been excluded for all periods presented as they are antidilutive. Accordingly, there is no difference between basic and diluted weighted average shares outstanding for all periods presented. Pro forma net income (loss) per share applicable to common shareholders which reflects the effects of the pro forma tax provision (see Note 4), was determined by dividing pro forma net income (loss) applicable to common shareholders by the basic and diluted weighted average shares outstanding. (l) New Accounting Standards In July 1997, the FASB issued SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information. SFAS No. 131 requires certain financial and supplementary information to be disclosed on an annual and interim basis for each reportable segment of an enterprise. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997. Unless impracticable, companies would be required to restate prior period information upon adoption. The Company will adopt this statement in their fiscal year end 1998 financial statements. In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement establishes accounting and reporting standards for derivative instruments, F-10 111 AAi.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5, Reporting on the Costs of Start-up Activities, (SOP-98-5). SOP 98-5 provides guidance on the financial reporting of start-up activities and organization costs to be expensed as incurred. The Company does not believe that the adoption of SOP 98-5 will have a material impact on its financial statements. (2) ACQUISITIONS On March 5, 1998, the Company acquired certain assets and liabilities of Eyecare Products UK Ltd. (Foster Grant UK), including the Foster Grant trademark in territories not previously owned, for approximately $5.5 million in cash. Foster Grant UK is a marketer and distributor of sunglasses and reading glasses in Europe. The purchase price may be increased by approximately $0.7 million in 1998 and 1999 based on Foster Grant UK performance. The acquisition has been accounted for using the purchase method of accounting; accordingly, the results of operations of Foster Grant UK from the date of the acquisition are included in the accompanying consolidated statements of operations. The purchase price was allocated based on estimated fair values of assets and liabilities at the date of acquisition. In connection with the purchase price allocation, the Company recorded goodwill of approximately $1.1 million, which is being amortized on a straight-line basis over 20 years. In July 1997, the Company acquired the assets of Superior Jewelry Company (Superior), a distributor of costume jewelry to retail drug stores and discount mass merchandisers in the United States. The Company paid approximately $1.8 million in cash and assumed certain liabilities in the amount of approximately $4.1 million. The purchase price may be increased by up to an additional $3.0 million based on Superior's annual earnings during 1997 and 1998. Any increase in purchase price will be recorded as goodwill when paid. Based on 1997 activity, the purchase price increased $0.9 million and is subject to an additional $2.0 million upward adjustment based on 1998 annual earnings. This amount has been accrued as of December 31, 1997. The acquisition was accounted for using the purchase method of accounting; accordingly, the results of operations of Superior from the date of the acquisition are included in the accompanying consolidated statements of operations. The purchase price was allocated based on estimated fair values of assets and liabilities at the date of acquisition. In connection with the purchase price allocation, the Company recorded goodwill of approximately $3.5 million, adjusted to include the additional purchase price for 1997 activity, which is being amortized on a straight-line basis over 10 years. In December 1996, the Company's subsidiary, Foster Grant Holdings, Inc. (FG Holdings), acquired Foster Grant Group, L.P. (Foster Grant US), a subsidiary of BEC Group, Inc. (BEC), and related entities. Foster Grant US is a marketer and distributor of sunglasses, reading glasses and eyewear accessories located in Dallas, Texas. The Company paid $10.0 million in cash and assumed certain liabilities in the amount of approximately $34.0 million. In addition, FG Holdings issued 100 shares of Series A redeemable nonvoting preferred stock (FG Preferred Stock) initially valued at approximately $0.8 million. As discussed in Note 9, the redemption value of this preferred stock is subject to upward adjustment based on annual sales of the FG Holdings operations, as defined, through the years ending January 1, 2000 or upon the occurrence of certain specified capital transactions based upon the transaction value. The maximum redemption amount, as amended, is $4.0 million. Any increase in the redemption amount may be recorded as goodwill when paid. The $10.0 million cash investment was financed by $5.0 million of borrowings through the Company's credit F-11 112 AAi.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) facility and a $5.0 million equity investment in the Company by an investment group led by Marlin Capital, L.P., a related party to BEC (see Note 9). The acquisition was accounted for using the purchase method of accounting; accordingly, the results of operations of Foster Grant US from the date of the acquisition are included in the accompanying consolidated statements of operations. The original purchase price was allocated based on the preliminary estimated fair values of assets and liabilities at the date of acquisition. In connection with the purchase price allocation, the Company recorded intangible assets of approximately $11.0 million, which are being amortized on a straight- line basis over 40 years. During 1997, the preliminary purchase price allocation was finalized. This resulted in (i) a reduction of certain asset carrying amounts of approximately $4.9 million, (ii) an increase in certain liabilities of approximately $2.2 million and (iii) a decrease in the valuation reserve related to the deferred tax assets of approximately $7.0 million (see Note 4) resulting in an immaterial increase in goodwill. In June 1996, the Company acquired certain assets of the Tempo Division (Tempo) of Allison Reed Group, Inc. The Company paid $1.0 million in cash, assumed certain liabilities in the amount of $0.6 million and issued a $2.0 million non-interest-bearing term note payable to Allison Reed Group, Inc (see Note 7). The payments on this note are subject to potential future downward adjustments based on sales of Tempo; no such adjustment was made in 1996 or 1997. The acquisition was accounted for using the purchase method of accounting; accordingly, the results of operation of Tempo from the date of the acquisition are included in the accompanying consolidated statements of operations. The purchase price was allocated entirely to intangible assets and is being amortized on a straight-line basis over 10 years. In June 1998, the Company acquired an 80% interest in Fantasma, LLC (Fantasma) for approximately $3.5 million in cash. The remaining 20% interest in Fantasma is held by a previous member of Fantasma. This member and an employee of Fantasma have options to acquire up to an additional 13% interest if certain earnings targets for Fantasma are met in 1998, 1999 and 2000. The acquisition will be accounted for using the purchase method; accordingly, the results of operations of Fantasma from the date of acquisition will be included in the Company's consolidated statements of operations. The purchase price will be allocated based on estimated fair market value of assets and liabilities at the date of acquisition. In connection with the purchase price allocation, the Company anticipates recording approximately $3.4 million of goodwill, which will be amortized ratably over 10 years. The following unaudited pro forma summary information presents the combined results of operations of the Company, Foster Grant US, Tempo, Superior, Foster Grant UK and Fantasma as if the acquisitions had occurred at the beginning of 1996, 1997 and 1998. This unaudited pro forma financial information is presented for informational purposes only and may not be indicative of the results of operations as they would have been if the Company, Foster Grant US, Tempo, Superior and Foster Grant UK had been a single entity, nor is it necessarily indicative of the results of operations that may occur in the future. Anticipated efficiencies from the consolidation of the Company, Foster Grant US, Tempo, Superior, Foster Grant UK and Fantasma have been excluded from the amounts included in the unaudited pro forma summary presented below.
YEAR ENDED THREE MONTHS ENDED DECEMBER 31, --------------------- -------------------- MARCH 31, APRIL 4, 1996 1997 1997 1998 -------- -------- --------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net sales........................................ $195,231 $181,992 $42,346 $47,527 Net loss applicable to common shareholders....... (13,497) (1,714) (886) (539) Basic and diluted net loss per share applicable to common shareholders......................... (22.84) (2.82) (1.46) (.89)
F-12 113 AAi.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (3) DEFERRED COSTS In connection with initial merchandise shipments to new store locations, the Company may issue credits to the customer for the cost to purchase the previous vendors' unsold merchandise (buyback credits). Buyback credits are expensed when incurred unless there is an agreement regarding the term of the relationship over which the estimated gross profits from product sales are sufficient to recover the amount of the previous vendors' unsold merchandise purchased. In the latter case, the costs are amortized over a period that matches these costs with the related revenue. During 1996, the Company began entering into agreements with its customers regarding the term of their relationships. The Company capitalized approximately $1.6 million and $2.5 million and $0.7 million of buyback credits during the years ended December 31, 1996 and 1997 and the three months ended April 4, 1998, respectively. Amortization expense related to these credits was approximately $0.7 million, $1.6 million and $0.5 million for the years ended December 31, 1996 and 1997 and the three month period ended April 4, 1998, respectively. The Company directly expensed buyback credits of approximately $1.2 million and $0.2 million in 1995 and 1996, respectively. (4) INCOME TAXES Income taxes, including pro forma computations, are provided using the liability method of accounting in accordance with SFAS No. 109. A deferred tax asset or liability is recorded for all temporary differences between financial and tax reporting. Deferred tax expense (benefit) results from the net change during the year of the deferred tax asset and liability. The Company was an S corporation under Section 1362 of the Internal Revenue Code until May 31, 1996 when it issued Series A Preferred Stock. As an S corporation, the taxable income or loss of the Company was passed through to the shareholders and reported on their individual federal and certain state tax returns. Dividend distributions of approximately $1.8 million and $2.9 million in 1995 and 1996, respectively, were made to the shareholders primarily to fund payment of the taxes related to the Company's income. In addition, $10.3 million of cash and $3.0 million of subordinated notes payable (See Note 8) were distributed to the shareholders in 1996 to distribute the previously undistributed after-tax earnings. During 1997, a cash distribution of $0.3 million was made to the S corporation shareholders to distribute a portion of the remaining undistributed after-tax earnings. During 1998, the Company made advances to the S Corporation shareholders to pay a portion of the income tax owed by them with respect to the Company's S Corporation earnings resulting from an income tax audit. The Company agreed to make advances to these shareholders to pay their tax liabilities, the aggregate amount of which will not exceed $3.4 million. At April 4, 1998, the Company advanced approximately $2.2 million against these notes. These advances are evidenced by promissory notes and bear interest at an annual rate equal to the Applicable Federal Rate (5.26% at April 4, 1998). Principal and accrued interest are payable on demand. These amounts have been included in long-term other assets in the accompanying consolidated balance sheet as the Company expects these advances to be repaid upon payment of its subordinated notes payable to shareholders (see Note 8). Pro forma income taxes, assuming the Company was subject to C corporation income taxes, have been provided in the accompanying statements of operations for 1995 and 1996 at an estimated statutory rate of 40%. Upon termination of the S corporation election, deferred income taxes were recorded for the tax effect of cumulative temporary differences between the financial reporting and tax bases of certain assets and liabilities, primarily deferred costs, accrued expenses and depreciation. These temporary differences resulted in a net deferred income tax asset of approximately $1.9 million. The Company recorded this tax asset as a deferred tax benefit in the tax provision. F-13 114 AAi.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The components of the income tax (expense) benefit are as follows (in thousands):
1995 1996 1997 ---- ------- ------- Current -- Federal................................................ $ -- $ -- $ (700) State.................................................. (42) (51) (124) ---- ------- ------- (42) (51) (824) Deferred -- Federal................................................ -- (1,394) (301) State.................................................. -- (246) (52) ---- ------- ------- -- (1,640) (353) ---- ------- ------- Effect of change in tax status........................... -- 1,895 -- ---- ------- ------- $(42) $ 204 $(1,177) ==== ======= =======
A reconciliation of the federal statutory rate to the Company's effective tax rate is as follows:
1995 1996 1997 ---- ----- ---- Income tax provision at federal statutory rate.............. --% 34.0% 34.0% Increase (decrease) in tax resulting from -- State tax provision, net of federal benefit............... 0.5 6.0 6.0 Nondeductible expenses.................................... -- -- 18.4 Effect of change in tax status............................ -- (61.0) -- ---- ----- ---- Actual effective tax rate expense (benefit)....... 0.5% (21.0)% 58.4% ==== ===== ==== Pro forma adjustment........................................ 39.5 61.0 ---- ----- Pro forma effective tax rate................................ 40.0% 40.0% ==== =====
Deferred income taxes as of December 31, 1996 and 1997 related to the following temporary differences (in thousands):
1996 1997 ------- ------ Nondeductible reserves...................................... $ 6,960 $6,633 Nondeductible accruals...................................... 1,424 2,207 Net operating loss carryforwards............................ -- 703 Other....................................................... 197 402 ------- ------ Gross deferred tax assets......................... 8,581 9,945 Less -- Valuation allowance................................. (7,076) (952) ------- ------ Net deferred tax assets........................... $ 1,505 $8,993 ======= ====== Deferred customer acquisition costs......................... $ (779) $ (44) Tax basis of property and equipment......................... 396 (740) Other....................................................... (171) 95 ------- ------ Deferred tax liabilities.......................... $ (554) $ (689) ======= ======
A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be recognized. In connection with the acquisition of Foster Grant US, the Company F-14 115 AAi.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) acquired various tax attributes that resulted in deferred tax assets. In the initial purchase price allocation, the Company provided a valuation allowance for a significant portion of these assets due to the uncertainty of their realization. During 1997, based on the actual and anticipated results, the Company determined that a significant portion of the valuation reserve was not required. Accordingly, the Company reduced the valuation allowance by approximately $7.0 million, resulting in an equal decrease in goodwill. The Company has provided a valuation allowance for certain tax assets which may be limited in their use. The Company has $1.8 million of net operating loss carryforwards which expire through 2012. The Company has entered into an indemnification agreement with the shareholders of the Company prior to its conversion to a C corporation relating to potential income tax liabilities resulting from adjustments to reported S corporation taxable income. The shareholders will continue to be liable for personal income taxes on the Company's income for all periods prior to the time the Company ceased to be an S corporation, while the Company will be liable for all income taxes subsequent to the time it ceased to be an S corporation. The indemnification agreement provides that the Company shall distribute to the individual shareholders 40% of the amount of additional deductions permitted to be taken by the Company after its conversion to a C corporation for expenditures made prior to becoming a C corporation, which result from adjustments in the form of a final determination by tax authorities. (5) REDEEMABLE NONVOTING PREFERRED STOCK OF A SUBSIDIARY In connection with the purchase of Foster Grant US, the Company's wholly owned subsidiary, FG Holdings, issued 100 shares of FG Preferred Stock, which represents all of the issued and outstanding shares of FG Preferred Stock. The FG Preferred Stock, as amended in June 1998 (Note 2), must be redeemed on February 28, 2000 (the FG Redemption Date) by payment of an amount ranging from $1.0 million to $4.0 million (the FG Redemption Amount), determined based on the combined net sales of sunglasses, reading glasses and accessories by Foster Grant US and the Company for the year ending January 1, 2000, excluding an amount equal to the net sales by the Company for such items for the year ended December 31, 1996. These increases in the redemption amount will be recorded as goodwill when the final redemption amount is settled. The FG Preferred Stock also provides for early redemption of the FG Preferred Stock if the Company completes (i) an initial public offering where the pre-money valuation of the Company equals or exceeds $75.0 million, (ii) a merger or similar transaction where the transaction value equals or exceeds $75.0 million, or (iii) a private placement of equity securities representing more than 50% of the outstanding capital stock for consideration of not less than $37.5 million (each a "Redemption Event") prior to the FG Redemption Date. Upon completion of a Redemption Event, in lieu of the FG Redemption Amount, holders of FG Preferred Stock will receive a payment ranging from $3.5 million to $4.0 million (the Redemption Event Amount), to be determined with reference to, as the case may be, either the pre-money valuation of the Company immediately prior to the initial public offering or the proceeds of the merger or similar transaction or private equity placement. If a Redemption Event occurs after the FG Redemption Date, in addition to the FG Redemption Amount, holders of FG Preferred Stock will receive a supplemental payment equal to the difference, if any, between the FG Redemption Amount paid to such holders on the FG Redemption Date and Redemption Event Amount that would have been received had the Redemption Event occurred on or prior to the FG Redemption Date. The value of FG Preferred Stock has been recorded as part of the initial purchase of Foster Grant US and was based on the present value of management's best estimate of the expected payment of $1.0 million upon redemption. The accretion of the original value to the $1.0 million estimated redemption value is being recorded as a charge to minority interest in income of subsidiaries in the accompanying consolidated statements of operations. Accretion of this discount for the year ended December 31, 1997 and the three F-15 116 AAi.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) months ended March 31, 1997 and April 4, 1998 was approximately $75,000, $19,000 and $21,000, respectively. (6) CREDIT FACILITIES WITH A BANK In March 1998, the Company amended its credit facility with a bank (the Bank Agreement). The amended facility provides for (i) a $60.0 million revolving credit facility, including a $3.0 million letter of credit facility and a $5.0 million multi-currency facility, and (ii) a term loan of $10.0 million. Use of the proceeds from the facility are limited to refinancing existing term debt, support letters of credit, fund working capital and finance permitted acquisitions and tax distributions, as defined. In connection with this amendment, the Company refinanced $5,972,000 of its borrowing outstanding under the revolving letter of credit facility with the term loan. Borrowings under the revolving credit arrangement are limited to the lesser of $60.0 million or the borrowing base, which is defined as a percentage of eligible accounts receivable and inventories, reduced by outstanding letters of credit and amounts outstanding under the multi-currency facility. Revolving credit borrowings bear interest at the bank's prime rate (8.5% at April 4, 1998) plus .5% or LIBOR (5.85% at April 4, 1998) plus 2.25%. The Company has the option of electing the rate; however, the use of the LIBOR is limited. The revolving credit facility expires in January 2003. As of April 4, 1998, the Company had approximately $7.7 million available under this revolving credit facility. If the Bank Agreement is terminated by the Company earlier than the expiration date, the Company will be required to pay a termination fee of $0.5 million in the first year, $0.3 million in the second year and $0.1 million thereafter. The termination fee will be waived if the debt is refinanced with the bank or after the first year if it relates to an initial public offering of the Company's stock. The Bank Agreement also requires an annual reduction in outstanding principal equal to 50% of excess cash flow up to $2.0 million. The three year term loan bears interest at the bank's prime rate (8.5% at April 4, 1998) plus .5% or LIBOR (5.85% at April 4, 1998) plus 2.5%. The Company has the option of electing the rate. The term loan agreement requires quarterly principal payments of approximately $0.6 million in the first year, $0.9 million in the second year and $1.0 million in the final year. The credit facility is subject to certain restrictive covenants, including minimum tangible net worth and limitations of capital expenditures. Amounts due under this credit facility are secured by substantially all assets of the Company. On February 10, 1998, the Company entered into a new term loan facility with the same bank for the purchase of the Company's building and related improvements. Borrowings under this facility are limited to $3.3 million, bear interest at the bank's prime rate (8.5% at April 4, 1998) plus .75% or LIBOR (5.85% at April 4, 1998) plus 2.75% and are secured by substantially all assets of the Company. At April 4, 1998, $2,718,000 was outstanding under this facility. This facility expires on the earlier of August 3, 1998 or the expiration date of the revolving credit facility. In June 1998, the Company amended this facility to include an increase in the borrowing limit to $7,250,000 and extend the expiration date to October 15, 1998. F-16 117 AAi.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (7) LONG-TERM OBLIGATIONS Long-term obligations consist of the following at December 31, 1996 and 1997 and April 4, 1998 (in thousands):
1996 1997 APRIL 4, 1998 ------ ------- ------------- (UNAUDITED) Term loans with a bank (Note 6)............................. $2,333 $10,000 $12,718 Financing lease obligation, payable in monthly installments of principal and interest of $6,500 through September 2000, interest at 8.75% per annum, secured by certain office equipment.......................................... 244 190 169 Capital lease obligation, payable in monthly installments of principal and interest of $10,903 through November 2000, interest at 9.0% per annum................................ -- 335 309 Promissory notes, payable in monthly installments of principal and interest through February 2000, interest at 7.07% to 9.9% per annum, secured by certain factory equipment................................................. 247 159 126 Financing lease obligations, payable in monthly installments of principal and interest through December 2001, interest at 8.98% to 10.12% per annum, secured by certain factory and office equipment...................................... 445 -- -- Financing lease obligations, payable in monthly installments of principal and interest through January 2001, interest at 8.76% to 8.82% per annum, secured by certain factory and office equipment...................................... -- 604 587 Term loan payable in connection with Tempo acquisition...... 887 331 184 Deferred compensation....................................... 853 1,139 1,219 Other....................................................... 354 256 47 ------ ------- ------- 5,363 13,014 15,359 Less -- Current maturities.................................. 2,155 3,361 5,442 ------ ------- ------- $3,208 $ 9,653 $ 9,917 ====== ======= =======
In connection with the acquisition of Tempo (see Note 2), the Company entered into a note payable agreement with Allison Reed Group, Inc. whereby the Company is obligated to pay $55,555 a month for 36 months. The present value of this note, $1.8 million, was recorded as part of the initial purchase price allocation. Payments under this note were subject to potential downward adjustments based on sales of the Tempo division, as defined. The Company has deferred compensation agreements with several key employees. The agreements provide for deferred compensation based on increases in net book value, as defined, and for one executive, the cash surrender value of a life insurance policy owned by the Company. The amounts due under these agreements are payable in a lump sum or in annual installments upon certain defined events. During 1995, the Company charged to general and administrative expenses approximately $0.2 million of expenses, relating to these agreements. No amount was charged to expense during 1996, 1997 or the three months ended April 4, 1998. All amounts are payable subsequent to January 2, 1999 and thus have been classified as long-term obligations. At April 4, 1998, the cash surrender value of the life insurance policy was approximately $0.9 million and is included in other assets. The Company has an obligation to four former employees under a nonqualified deferred compensation plan. Payments of principal and interest are to be made monthly through August 2007. The obligation at December 31, 1997 was $123,783, of which $29,661 is due prior to January 2, 1999. These amounts are included as deferred compensation in the table above. F-17 118 AAi.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (8) SUBORDINATED PROMISSORY NOTES PAYABLE TO SHAREHOLDERS Coincident with the sale of Series A Preferred Stock (Note 9) and the concurrent change in the Company's tax status (Note 4), the Company issued $2.0 million of subordinated notes payable to the preferred shareholders and made a distribution of $3.0 million in subordinated notes payable to the original common shareholders. These notes bear interest at an annual rate of 7.04%. Approximately 50% of this interest is payable annually and the remaining balance is deferred and is due with the principal on June 1, 2002 for the preferred shareholders and June 1, 2006 for the original common shareholders, subject to acceleration on the closing of an initial public offering. These amounts were paid upon the closing of the offering of the Notes. (9) PREFERRED STOCK The Company has 200,000 shares of preferred stock, $.01 par value, authorized and issuable in one or more series with such voting powers, designations, preferences and other special rights and such qualifications, limitations or restrictions, as may be stated in the resolution or resolutions adopted by the Company's Board of Directors providing for the issue of such series and as permitted by the Rhode Island Business Corporation Act. The Company has created one series of preferred stock designated Series A Redeemable Convertible Preferred Stock (Series A Preferred Stock). A total of 43,700 shares of Series A Preferred Stock are designated for issuance, all of which are issued and outstanding. In May 1996, the Company sold 34,200 shares of Series A Preferred Stock for gross proceeds of $18.0 million. In connection with the acquisition of Foster Grant US (see Note 2) in December 1996, the Company issued an additional 9,500 shares of the Series A Preferred Stock for gross proceeds of $5.0 million. The rights, preferences and privileges of Series A Preferred Stock, as amended in June 1998, are as follows: Conversion Shares of the Series A Preferred Stock are convertible into common stock at a rate of 10 shares of common stock for each share of Series A Preferred Stock, adjustable for certain dilutive events. As amended by the Company's shareholders in June 1998, conversion is at the option of the shareholder, but is automatic upon the consummation of an initial public offering resulting in gross proceeds to the Company of at least $20.0 million and at an offering price of at least 137.8% of the original conversion price if the offering is consummated on or before May 31, 1999 and at least 175% of the original conversion price of the offering is consummated after May 31, 1999. F-18 119 AAi.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Redemption The holders of the Series A Preferred Stock have the right to require redemption for cash of any unconverted shares, beginning June 30, 2002. The Company will redeem the Series A Preferred Stock equal to 5% of the total number of shares issued and outstanding as of March 31, 2002 on the last day of each March, June, September and December as follows:
YEAR ENDED DECEMBER 31, PERCENTAGE ------------ ---------- 2002........................................................ 15% 2003........................................................ 35 2004........................................................ 55 2005........................................................ 75 2006........................................................ 95 2007........................................................ 100
The Series A Preferred Stock will be redeemed at an amount equal to the original stock price, $526.32 per share, plus accrued and unpaid dividends yielding a 10% compounded annual rate of return (the Redemption Amount). Accordingly, the Series A Preferred Stock has been recorded at its redemption value in the accompanying consolidated balance sheets. The holders of the Series A Preferred Stock may require the Company to redeem all or any portion of the Series A Preferred Stock upon certain events such as the sale, merger or dissolution of the Company. In addition, the Company may voluntarily redeem the Series A Preferred Stock at the Redemption Amount as defined above. If the Company voluntarily redeems the Series A Preferred Stock, it must issue the holders of Series A Preferred Stock a warrant to purchase common stock equal to the number of shares the shareholder would have received upon conversion, at a strike price equal to the redemption price at the time of redemption. In connection with the proposed issuance of the Notes the preferred shareholders agreed, in June 1998, to suspend their redemption rights until 91 days after the date that any Restrictive Indebtedness, as defined, is no longer outstanding. Restrictive Indebtedness is defined as indebtedness the terms of which restrict the Company's ability to redeem, in whole or part, the Series A Preferred Stock. Restrictive Indebtedness can not exceed $150.0 million or such greater amount as may be approved by the directors designated by the preferred shareholders. Liquidation Preferences The holders of Series A Preferred Stock have preference in the event of a liquidation, dissolution or winding up of the corporation equal to the Redemption Amount. If the assets of the Company are insufficient to pay the full preferential amounts to the holders of Series A Preferred Stock, the assets shall be distributed ratably among such shareholders in proportion to their aggregate liquidation preference amounts. Voting Rights and Dividends The holders of the Series A Preferred Stock shall be entitled to vote on all matters based on the number of votes equal to the number of shares into which the shares of Series A Preferred Stock are convertible after December 1, 1996. The holders of a majority of the Series A Preferred Stock shares are entitled to elect two directors. In certain events, defined as Remedy Events, the number of directors of the Company automatically increases to the minimum number sufficient to allow the holders of Series A Preferred Stock to elect a majority of the directors. In June 1998, the preferred shareholders agreed to change the definition of Remedy F-19 120 AAi.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Events to reduce the minimum amount of consolidated shareholders' equity which the Company is required to maintain dollar for dollar by any payments of certain subordinated notes payable to shareholders (see Note 8). Dividends will not be paid on the common stock unless the Series A Preferred Stock receives the same dividends that such shares would have received had they been converted into common stock immediately prior to the record date for such dividend. (10) COMMON STOCK In connection with the issuance of Series A Preferred Stock in May 1996 (see Note 9), the Board of Directors and shareholders voted to amend the Company's Articles of Incorporation and Bylaws to increase the number of authorized shares of common stock to 4,800,000 and change the no par value common stock to $.01 par value common stock. In addition, the Company effected a 57-for-1 stock split for the shares then outstanding. The accompanying consolidated financial statements have been retroactively adjusted to reflect this stock split and the establishment of a par value. (11) 1996 INCENTIVE STOCK PLAN In May 1996, the Company adopted the 1996 Incentive Stock Plan (the Plan) under which it may grant incentive stock options (ISOs), nonqualified stock options (NSOs), restricted stock and other stock rights to purchase up to 50,000 shares of common stock. Under the Plan, ISOs may not be granted at less than fair market value on the date of grant and generally vest in a method determined by the Board of Directors, over a term not to exceed 10 years. All options have been granted with exercise prices equal to the fair market value of the Company's common shares as determined by the Board of Directors. Stock option activity for each of the three years in the period ended December 31, 1997 and the three-month period ended April 4, 1998, is as follows:
WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE REMAINING SHARE EXERCISE PRICE CONTRACTUAL LIFE --------- ---------------- ---------------- Outstanding, December 31, 1995............ -- $-- -- Granted................................. 8,000 50 10 ------ --- ---- Outstanding, December 31, 1996............ 8,000 50 10 Granted................................. 6,000 50 10 ------ --- ---- Outstanding, December 31, 1997............ 14,000 50 9.5 Canceled................................ (2,000) 50 -- ------ --- ---- Outstanding, April 4, 1998................ 12,000 $50 9.25 ====== === ==== Exercisable, April 4, 1998................ 12,000 $50 9.25 ====== === ====
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 requires the measurement of the fair value of stock options to be included in the statement of operations or disclosed in the notes to financial statements. The Company has determined that it will continue to account for stock-based compensation for employees under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and elect the disclosure-only alternative under SFAS No. 123. F-20 121 AAi.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Had compensation cost for the Company's stock plans been determined based on the fair value at the grant dates, as prescribed in SFAS No. 123, the Company's net income and net income per share applicable to common shareholders would have been as follows:
1996 1997 ----- ------- Net income (loss) applicable to common shareholders (in thousands) As reported............................................... $ 68 $(1,659) Pro forma................................................. $ (99) $(1,783) Net income (loss) per share applicable to common shareholders As reported............................................... $ .11 $ (2.73) Pro forma................................................. $(.17) $ (2.93)
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for grants during the applicable period: dividend yield of 0.0% for all periods; volatility of 35.53% for all periods; risk-free interest rates of 6.07% for options granted during 1996 and 5.77% for options granted during 1997 and a weighted average expected option term of 5 years for all periods. The weighted average fair value per share of options granted during 1996 and 1997 was $20.87 and $20.60, respectively. (12) INVESTMENTS (a) Hong Kong The Company has an ownership interest in four entities in Hong Kong. These entities provide various services to the Company and each other in connection with purchasing and distributing products. The Company accounts for these investments using the equity method. The net investment in these entities is recorded as investment in affiliates in the accompanying consolidated balance sheets. The following table summarizes certain financial information for these entities (in thousands):
EQUITY IN OWNERSHIP EARNINGS INVESTMENT INTEREST SALES TO AAI (LOSSES) BALANCE --------- ------------ --------- ---------- 1995 ---------------------------------------------------- AAi Hong Kong Limited........................... 49% $12,372 $275 $741 Honest Lion Limited............................. 50 -- -- 551
1996 ---------------------------------------------------- AAi Hong Kong Limited........................... 49% $11,407 $ -- $741 Milagros (Far East) Limited..................... 49 254 (94) (29) Honest Lion Limited............................. 50 -- (69) 743
1997 ---------------------------------------------------- AAi Hong Kong Limited........................... 49% $ 2,969 $(70) $671 Milagros (Far East) Limited..................... 49 324 (10) (40) Honest Lion Limited............................. 50 -- (50) 692 Milagros AAi Asia Limited....................... 49 11,878 67 100
F-21 122 AAi.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table summarizes certain unaudited consolidated financial information of the four Hong Kong entities (in thousands):
1996 1997 MARCH 31, 1998 ------- ------- -------------- Current assets.................................... $ 4,407 $ 5,687 $5,754 Noncurrent assets................................. 6,608 2,187 6,580 Current liabilities............................... 8,421 9,978 9,702 Noncurrent liabilities............................ 1,557 1,563 1,809 Net sales......................................... 24,454 37,037 6,114 Gross profit...................................... 4,847 1,876 1,441 Income (loss) from operations..................... (406) (64) 124 Net income........................................ (406) (64) 122
(b) Mexico In 1996, the Company acquired a 50% ownership in AAi Joske's S.A. de R.L. De CV (Joske's), an entity engaged in the purchasing and distribution of accessories in Mexico for $0.5 million of inventory. This investment was accounted for under the equity method. In January 1997, the Company acquired an additional 5% ownership interest in Joske's and accordingly has consolidated its financial results in the Company's financial statements subsequent to December 31, 1996. (13) EMPLOYEE BENEFIT PLANS (a) Qualified 401(k) Plan The Company has a defined contribution profit sharing plan covering substantially all employees. Under the terms of the profit sharing plan, contributions are made at the discretion of the Company. The Company made contributions of $100,000 for the year ended December 31, 1995. No contributions were made for the years ended December 31, 1996 and 1997. The profit sharing plan also allows eligible participants to make contributions in accordance with Internal Revenue Code Section 401(k). The Company matches employee contributions equal to 25% of the first 6% of compensation that an employee defers. These matching contributions totaled approximately $79,000, $87,000 and $95,000 for the years ended December 31, 1995, 1996 and 1997, respectively. (b) Non-Qualified Excess 401(k) Plan In May 1997, the Company established the Non-Qualified Excess 401(k) Plan (the "Non-Qualified Plan") effective as of June 1, 1997. The purpose of the Non-Qualified Plan is to provide deferred compensation to a select group of management or highly compensated employees of the Company as designated by the Board of Directors. Under the Non-Qualified Plan, a participant may elect to defer up to 15% of his or her compensation on an annual basis. This amount is credited to the employee's deferred compensation account (the Deferred Amount). Under the Non-Qualified Plan, the Company also credits the participant's deferred compensation account for the amount of the matching contribution the Company would have made under the qualified 401(k) Plan with respect to the Deferred Amount. The matching contributions totaled approximately $10,000 for the year ended December 31, 1997. All amounts contributed by the employee and by the Company under the Non-Qualified Plan are immediately vested. A participant under the Non-Qualified Plan is entitled to receive a distribution of his or her account upon retirement, death, disability or termination of employment. F-22 123 AAi.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (14) RELATED PARTY TRANSACTIONS The Company has operating lease agreements with Sunrise Properties, LLC and 299 Carpenter Street Associates, LLC, of which certain officers and shareholders of the Company are partners. The related rental expense charged to operations was approximately $500,500, $554,000, $471,000, $118,000 and $118,000 in the years ended December 31, 1995, 1996 and 1997 and the three months ended March 31, 1997 and April 4, 1998, respectively. The Company has guaranteed a mortgage note payable by Sunrise Properties, LLC aggregating $200,000. As of December 31, 1997, the outstanding balance of this note was approximately $130,000. During 1984, the Company sold 5% of its shares to an officer in exchange for a $100,000 non-interest-bearing promissory note. The proceeds from the note are credited to the common stock account as received. During 1996, the remaining balance under this promissory note was paid to the Company. In conjunction with the purchase of Foster Grant US, the Company entered into a lease of the building from which FG Holdings operates with BEC, the former owners of Foster Grant US. A member of the Marlin Capital, L.P. (see Note 2) is the chief executive officer of BEC and a director of the Company. The lease was established in December 1996 and extends for one year with automatic renewal for successive one-year periods unless either party provides notice. Rent expense was approximately $494,000, $124,000 and $124,000 in the year ended December 31, 1997 and the three months ended March 31, 1997 and April 4, 1998, respectively. On May 31, 1996, the Company, and its shareholders, including the management shareholders (Management Shareholders), entered into a tag-along, transfer restriction and voting agreement (the Shareholders Agreement). The Shareholders Agreement requires that any Management Shareholder wishing to transfer or sell common stock of the Company to provide right of first refusal and tag-along rights, on a pro rata basis, as defined, to all other shareholders' party to the Shareholders Agreement upon receipt of a third party offer to purchase the applicable restricted shares. Upon the death of a Management Shareholder, the personal representative of such Management Shareholder shall sell to the Company such Management Shareholder's shares based on an appraisal value, as defined, provided that the Company's obligation to purchase shares is limited to the amount of any proceeds paid to the Company under insurance policies insuring the life of the Management Shareholder. The Shareholders Agreement shall terminate upon the earlier of a qualified public offering as defined or when no shares of Series A Preferred Stock and warrants are outstanding, except as a result of the conversion, exchange or exercise of the Series A Preferred Stock or warrants. (15) COMMITMENTS AND CONTINGENCIES (a) Letters of Credit At April 4, 1998, the Company had approximately $250,000 of irrevocable letters of credit outstanding for the purchase of inventory. F-23 124 AAi.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (b) Operating Leases In addition to the operating leases described in Note 14, the Company also has operating leases for its other locations. Future minimum rental payments are as follows (in thousands): 1998........................................................ $463 1999........................................................ 128 2000........................................................ 67 2001........................................................ 69 2002........................................................ 72 Thereafter.................................................. 177 ---- $976 ====
The Company had an option to purchase its Smithfield, Rhode Island, facility. This option became exercisable in April 1993, extends throughout the term of the lease and provides for a purchase price of $2.3 million. On February 10, 1998, the Company exercised its option to purchase its Smithfield, Rhode Island facility. The Company is currently expanding this facility and estimates the total cost of the facility upon completion of its expansion to be approximately $5.0 million. (c) Royalties The Company has several royalty agreements that require payments based on a percentage of certain net product sales. Minimum royalty obligations relating to these agreements as of December 31, 1997 totaled approximately $1.9 million, $1.4 million and $0.3 million for 1998, 1999 and 2000, respectively. (d) Supply Agreement The Company has a supply agreement with a display manufacturer. The agreement requires that the Company purchase 70% of Foster Grant US's annual display purchases, as defined, from this supplier through December 2005. If the Company does not purchase 70% of Foster Grant US's displays from this manufacturer, it is required to make a payment equal to 30% of the annual shortfall. In addition, the Company and BEC are required to cumulatively purchase $32.3 million of displays over the term of this agreement. To the extent that total purchases do not meet this dollar level, the Company is required to make a payment equal to 30% of $32 million, less the Company's purchases, BEC's purchases and any amounts paid as a result of the annual shortfall discussed above. As of December 31, 1997, no amounts were due under this agreement as a result of a shortfall. (16) SIGNIFICANT CUSTOMERS AND SUPPLIERS During the years ended December 31, 1995, 1996 and 1997, one customer accounted for approximately 23.8%, 26.8% and 24.7% of net sales, respectively. This customer's accounts receivable balance represented approximately 17.1% and 23.6% of gross accounts receivable as of December 31, 1996 and 1997, respectively. During 1995, another customer also accounted for approximately 11.4% of net sales. The Company currently purchases a significant portion of its inventory from certain suppliers in Asia. Although there are other suppliers of the inventory items purchased, and management believes that these suppliers could provide similar inventory at fairly comparable terms, a change in suppliers could cause a delay in the Company's distribution process and a possible loss of sales, which would adversely affect operating results. F-24 125 AAi.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (17) ACCRUED EXPENSES Accrued expenses at December 31, 1996 and 1997 and April 4, 1998 consist of the following (in thousands):
DECEMBER 31, ----------------- APRIL 4, 1996 1997 1998 ------ ------- -------- Accrued payroll and payroll related items............... $1,728 $ 2,010 $1,266 Other accrued expenses.................................. 7,257 9,211 8,522 ------ ------- ------ $8,985 $11,221 $9,788 ====== ======= ======
(18) SUBSEQUENT EVENT -- NOTES OFFERING On July 21, 1998, the Company sold the Notes (see Note 1) to certain purchasers. Interest on the Notes is payable semiannually on each January 15 and July 15, commencing January 15, 1999. The Notes are redeemable at the option of the Company, in whole or in part, at any time on or after July 15, 2002, at 105.375% of their principal amount, plus accrued interest and Liquidated Damages (as defined), if any, with such percentage declining ratably to 100% as of July 15, 2004 and thereafter. At any time on or prior to July 15, 2001 and subject to certain conditions, up to 35% of the aggregate principal amount of the Notes may be redeemed, at the option of the Company, with the proceeds of certain equity offerings of the Company at 110.750% of the principal amount thereof, plus accrued interest and Liquidated Damages, if any. The Notes are general unsecured obligations of the Company, rank senior in right of payment to all future subordinated indebtedness of the Company and rank pari passu in right of payment to all existing and future unsubordinated indebtedness of the Company including the bank credit facility described in Note 6. The bank credit facility is secured by accounts receivable and inventory of the Company and its domestic subsidiaries. Accordingly, the Company's obligations under the bank credit facility will effectively rank senior in right of payment to the Notes to the extent of the assets subject to such security interest. The Notes are unconditionally guaranteed, on a senior basis, by each of the Company's current and future Domestic Subsidiaries (as defined) (the "Guarantors"). The net proceeds received by the Company from the issuance and sale of the Notes, approximately $72.0 million, was used to repay outstanding indebtedness under the credit facility with a bank (see Note 6) and the Subordinated Promissory Notes to shareholders (see Note 8), net of amounts due the Company from certain of these shareholders (see Note 4). The Indenture under which the Notes were issued (the "Indenture") imposes certain limitations on the ability of the Company, and its subsidiaries to, among other things, incur indebtedness, pay dividends, prepay subordinated indebtedness, repurchase capital stock, make investments, create liens, engage in transactions with shareholders and affiliates, sell assets and engage in mergers and consolidations. F-25 126 AAi.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (19) SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION The following is summarized consolidating financial information for the Company, segregating the Company and guarantor subsidiaries from nonguarantor subsidiaries as they relate to the Notes. The guarantor subsidiaries are domestic, wholly owned subsidiaries of the Company and the guarantees are full, unconditional and joint and several. Separate financial statements of the guarantor subsidiaries and the eliminating entries have not been included because management believes that they are not material to investors.
DECEMBER 31, 1996 DECEMBER 31, 1997 ------------------------------------------ ------------------------------------------ COMPANY AND COMPANY AND GUARANTOR NONGUARANTOR GUARANTOR NONGUARANTOR SUBSIDIARIES SUBSIDIARIES CONSOLIDATED SUBSIDIARIES SUBSIDIARIES CONSOLIDATED ------------ ------------ ------------ ------------ ------------ ------------ (IN THOUSANDS) CONSOLIDATING BALANCE SHEETS ASSETS Current assets Cash and cash equivalents...... $ 941 $ 536 $ 1,477 $ 2,536 $ 243 $ 2,779 Accounts receivable, net....... 13,926 319 14,245 17,534 789 18,323 Inventories.................... 36,036 424 36,460 32,469 326 32,795 Prepaid expenses and other current assets............... 1,575 -- 1,575 458 276 734 Deferred tax assets............ 1,491 14 1,505 8,992 1 8,993 ------- ------ ------- ------- ------ ------- Total current assets..... 53,969 1,293 55,262 61,989 1,635 63,624 Property and equipment, net..... 9,627 9 9,636 10,148 37 10,185 Other assets.................... 18,659 109 18,768 20,953 153 21,106 ------- ------ ------- ------- ------ ------- $82,255 $1,411 $83,666 $93,090 $1,825 $94,915 ======= ====== ======= ======= ====== ======= LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities Borrowings under revolving note payable...................... $25,873 $ -- $25,873 $27,598 $ -- $27,598 Current maturities of long-term obligations.................. 2,155 -- 2,155 3,361 -- 3,361 Accounts payable............... 16,845 58 16,903 13,314 803 14,117 Accrued expenses............... 9,470 139 9,609 12,933 393 13,326 Due (from) to affiliate........ (1,590) 1,590 -- (354) 354 -- ------- ------ ------- ------- ------ ------- Total current liabilities............. 52,753 1,787 54,540 56,852 1,550 58,402 Long-term obligations, less current maturities............. 3,208 -- 3,208 9,653 -- 9,653 Deferred tax liabilities........ 554 -- 554 689 -- 689 Subordinated promissory notes payable to shareholders........ 5,205 -- 5,205 5,487 -- 5,487 Redeemable preferred stock of a Subsidiary..................... 751 -- 751 835 -- 835 ------- ------ ------- ------- ------ ------- Preferred stock................. 23,587 -- 23,587 26,083 -- 26,083 ------- ------ ------- ------- ------ ------- Shareholders' equity (deficit)...................... (3,803) (376) (4,179) (6,509) 275 (6,234) ------- ------ ------- ------- ------ ------- $82,255 $1,411 $83,666 $93,090 $1,825 $94,915 ======= ====== ======= ======= ====== ======= APRIL 4, 1998 ------------------------------------------ COMPANY AND GUARANTOR NONGUARANTOR SUBSIDIARIES SUBSIDIARIES CONSOLIDATED ------------ ------------ ------------ (IN THOUSANDS) CONSOLIDATING BALANCE SHEETS ASSETS Current assets Cash and cash equivalents...... $ 170 $ 269 $ 439 Accounts receivable, net....... 30,144 4,784 34,928 Inventories.................... 31,565 3,308 34,873 Prepaid expenses and other current assets............... 352 257 609 Deferred tax assets............ 8,755 -- 8,755 -------- ------- -------- Total current assets..... 70,986 8,618 79,604 Property and equipment, net..... 16,986 1,191 18,177 Other assets.................... 23,319 659 23,978 -------- ------- -------- $111,291 $10,468 $121,759 ======== ======= ======== LIABILITIES AND SHAREHOLDERS' EQ Current liabilities Borrowings under revolving note payable...................... $ 45,041 $ -- $ 45,041 Current maturities of long-term obligations.................. 5,442 -- 5,442 Accounts payable............... 19,069 3,115 22,184 Accrued expenses............... 11,517 371 11,888 Due (from) to affiliate........ (5,706) 5,706 -- -------- ------- -------- Total current liabilities............. 75,363 9,192 84,555 Long-term obligations, less current maturities............. 9,917 -- 9,917 Deferred tax liabilities........ 689 -- 689 Subordinated promissory notes payable to shareholders........ 5,575 -- 5,575 Redeemable preferred stock of a Subsidiary..................... 847 -- 847 -------- ------- -------- Preferred stock................. 26,766 -- 26,766 -------- ------- -------- Shareholders' equity (deficit)...................... (7,866) 1,276 (6,590) -------- ------- -------- $111,291 $10,468 $121,759 ======== ======= ========
F-26 127 AAi.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED --------------------------------------------------------------------------------------- DECEMBER 31, 1995 DECEMBER 31, 1996 ------------------------------------------ ------------------------------------------ COMPANY AND COMPANY AND GUARANTOR NONGUARANTOR GUARANTOR NONGUARANTOR SUBSIDIARIES SUBSIDIARIES CONSOLIDATED SUBSIDIARIES SUBSIDIARIES CONSOLIDATED ------------ ------------ ------------ ------------ ------------ ------------ (IN THOUSANDS) CONSOLIDATING STATEMENTS OF OPERATIONS Net sales................................. $ 86,786 $1,264 $ 88,050 $ 83,875 $2,461 $ 86,336 Cost of goods sold........................ 42,985 705 43,690 46,582 1,289 47,871 -------- ------ -------- -------- ------ -------- Gross profit.............................. 43,801 559 44,360 37,293 1,172 38,465 Selling, general and administrative expense.................................. 33,866 916 34,782 34,425 1,253 35,678 -------- ------ -------- -------- ------ -------- Income from operations.................... 9,935 (357) 9,578 2,868 (81) 2,787 Interest expense.......................... (1,003) (23) (1,031) (1,375) (94) (1,469) Other income (expense), net............... (80) -- (80) (337) 6 (331) -------- ------ -------- -------- ------ -------- Income before income tax (expense) benefit and dividends and accretion on preferred stock.................................... 8,852 (385) 8,467 1,156 (169) 987 Income tax (expense) benefit.............. (42) -- (42) 204 -- 204 -------- ------ -------- -------- ------ -------- Net income (loss) before dividends and accretion on preferred stock............. 8,810 (385) 8,425 1,360 (169) 1,191 Dividends and accretion on preferred stock.................................... -- -- -- 1,123 -- 1,123 -------- ------ -------- -------- ------ -------- Net income (loss) applicable to common shareholders............................. $ 8,810 $ (385) $ 8,425 $ 237 $ (169) $ 68 ======== ====== ======== ======== ====== ======== CONSOLIDATING STATEMENTS OF CASH FLOWS Cash flows from operating activities...... $ 1,788 $ 30 $ 1,818 $ (318) $ 804 $ 486 Cash flows from investing activities: Purchase of property and equipment....... (1,552) (3) (1,555) (1,569) (3) (1,572) Acquisitions, net of cash acquired....... -- -- -- (9,620) (224) (9,844) Other investing activities............... (546) (3) (549) (3,718) (69) (3,787) -------- ------ -------- -------- ------ -------- Net cash used in investing activities....................... (2,098) (6) (2,104) (14,907) (296) (15,203) -------- ------ -------- -------- ------ -------- Cash flows from financing activities: Net borrowings under revolving note payable................................ 3,275 -- 3,275 3,311 -- 3,311 Proceeds from issuance of subordinated promissory notes payable to shareholders........................... -- -- -- 2,000 -- 2,000 Proceeds from issuance of long-term obligations............................ 319 -- 319 3,445 -- 3,445 Payments on long-term obligations........ (1,535) -- (1,535) (2,292) -- (2,292) Proceeds from issuance of preferred stock, net of issuance costs........... -- -- -- 22,464 -- 22,464 Other financing activities............... (1,800) -- 1,800 (12,769) -- (12,769) -------- ------ -------- -------- ------ -------- Net cash provided by financing activities....................... 259 259 16,159 16,159 -------- ------ -------- -------- ------ -------- Net (decrease) increase in cash and cash equivalents.............................. (51) 24 (27) 934 508 1,442 Cash and cash equivalents, beginning of period................................... 59 3 62 7 28 35 -------- ------ -------- -------- ------ -------- Cash and cash equivalents, end of period................................... $ 8 $ 27 $ 35 $ 941 $ 536 $ 1,477 ======== ====== ======== ======== ====== ======== YEARS ENDED ------------------------------------------ DECEMBER 31, 1997 ------------------------------------------ COMPANY AND GUARANTOR NONGUARANTOR SUBSIDIARIES SUBSIDIARIES CONSOLIDATED ------------ ------------ ------------ (IN THOUSANDS) CONSOLIDATING STATEMENTS OF OPERATIONS Net sales................................. $142,715 $6,696 $149,411 Cost of goods sold........................ 74,861 3,067 77,928 -------- ------ -------- Gross profit.............................. 67,854 3,629 71,483 Selling, general and administrative expense.................................. 62,523 2,762 65,285 -------- ------ -------- Income from operations.................... 5,331 867 6,198 Interest expense.......................... (4,127) (87) (4,214) Other income (expense), net............... 151 (120) 31 -------- ------ -------- Income before income tax (expense) benefit and dividends and accretion on preferred stock.................................... 1,355 660 2,015 Income tax (expense) benefit.............. (1,171) (6) (1,177) -------- ------ -------- Net income (loss) before dividends and accretion on preferred stock............. 184 654 838 Dividends and accretion on preferred stock.................................... 2,496 -- 2,496 -------- ------ -------- Net income (loss) applicable to common shareholders............................. $ (2,312) $ 654 $ (1,658) ======== ====== ======== CONSOLIDATING STATEMENTS OF CASH FLOWS Cash flows from operating activities...... $ 2,518 $1,023 $ 3,541 Cash flows from investing activities: Purchase of property and equipment....... (7,546) (37) (7,583) Acquisitions, net of cash acquired....... (599) (1,236) (1,835) Other investing activities............... (1,557) (43) (1,600) -------- ------ -------- Net cash used in investing activities....................... (9,702) (1,316) (11,018) -------- ------ -------- Cash flows from financing activities: Net borrowings under revolving note payable................................ 7,697 -- 7,697 Proceeds from issuance of subordinated promissory notes payable to shareholders........................... -- -- -- Proceeds from issuance of long-term obligations............................ 8,943 -- 8,943 Payments on long-term obligations........ (7,551) -- (7,551) Proceeds from issuance of preferred stock, net of issuance costs........... -- -- -- Other financing activities............... (310) -- (310) -------- ------ -------- Net cash provided by financing activities....................... 8,779 -- 8,779 -------- ------ -------- Net (decrease) increase in cash and cash equivalents.............................. 1,595 (293) 1,302 Cash and cash equivalents, beginning of period................................... 941 536 1,477 -------- ------ -------- Cash and cash equivalents, end of period................................... $ 2,536 $ 243 $ 2,779 ======== ====== ========
F-27 128 AAi.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED --------------------------------------------------------------------------------------- MARCH 31, 1997 APRIL 4, 1998 ------------------------------------------ ------------------------------------------ COMPANY AND COMPANY AND GUARANTOR NONGUARANTOR GUARANTOR NONGUARANTOR SUBSIDIARIES SUBSIDIARIES CONSOLIDATED SUBSIDIARIES SUBSIDIARIES CONSOLIDATED ------------ ------------ ------------ ------------ ------------ ------------ (IN THOUSANDS) CONSOLIDATING STATEMENTS OF OPERATIONS Net sales............................... $ 33,313 $1,538 $ 34,851 $38,627 $4,076 $42,703 Cost of goods sold...................... 18,239 784 19,023 21,583 1,848 23,431 -------- ------ -------- ------- ------ ------- Gross profit............................ 15,074 754 15,828 17,044 2,228 19,272 Selling general and administrative expense............................... 14,001 686 14,687 16,045 1,582 17,627 -------- ------ -------- ------- ------ ------- Income from operations.................. 1,073 68 1,141 999 646 1,645 Interest expense........................ (901) (27) (928) (1,110) (68) (1,178) Other income (expense), net............. (47) (1) (48) 108 (32) 76 -------- ------ -------- ------- ------ ------- Income before income taxes and dividends and accretion on preferred stock...... 125 40 165 (3) 546 543 Income taxes benefit.................... (96) -- (96) (148) (91) (239) -------- ------ -------- ------- ------ ------- Net income (loss) before dividends and accretion on preferred stock.......... $ 29 $ 40 $ 69 $ (151) $ 455 $ 304 -------- ------ -------- ------- ------ ------- Dividends and accretion on preferred stock................................. (597) -- 597 683 -- 683 -------- ------ -------- ------- ------ ------- Net Income (Loss) applicable to common shareholders.......................... $ (568) $ 40 $ (528) $ (834) $ 455 $ (379) ======== ====== ======== ======= ====== ======= CONSOLIDATING STATEMENTS OF CASH FLOWS Cash flows from operating activities.... $(10,037) $ (302) $(10,339) $(4,766) $ (78) $(4,844) Cash flows from investing activities: Purchase of property and equipment.... (1,465) (27) (1,492) (8,776) (297) (9,073) Acquisitions, net of cash received.... -- -- -- (6,042) 555 (5,487) Other investing activities............ (303) (183) (486) (2,482) (154) (2,636) -------- ------ -------- ------- ------ ------- Net cash (used in) provided by investing activities.......... (1,769) (209) (1,978) (17,300) 104 (17,196) -------- ------ -------- ------- ------ ------- Cash flows from financing activities: Net borrowings under revolving note payable............................. 12,237 -- 12,237 17,443 -- 17,443 Proceeds from term note payable....... -- -- -- 2,737 -- 2,737 Payments on long-term obligations..... -- -- -- (480) -- (480) -------- ------ -------- ------- ------ ------- Net cash provided by financing activities.................... 12,237 -- 12,237 19,700 -- 19,700 -------- ------ -------- ------- ------ ------- Net increase (decrease) in cash.......................... 431 (511) (80) (2,366) 26 (2,340) Cash and cash equivalents, beginning of period................................ 941 536 1,477 2,536 243 2,779 -------- ------ -------- ------- ------ ------- Cash and cash equivalents, end of period................................ $ 1,372 $ 25 $ 1,397 $ 170 $ 269 $ 439 ======== ====== ======== ======= ====== =======
F-28 129 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of AAi.FosterGrant, Inc. and Subsidiaries: We have audited the accompanying consolidated statements of operations and shareholder's equity and cash flows of Foster Grant Group L.P. (wholly-owned by BEC Group, Inc.) for the eleven months ended November 30, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated statements of operations and shareholder's equity and cash flows are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the statements of operations and shareholder's equity and cash flows. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated statements of operations and shareholder's equity and cash flows referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of Foster Grant Group L.P. for the eleven months ended November 30, 1996 in conformity with generally accepted accounting principles. Arthur Andersen LLP Boston, Massachusetts June 19, 1998 F-29 130 FOSTER GRANT GROUP L.P. CONSOLIDATED STATEMENT OF OPERATIONS AND SHAREHOLDER'S EQUITY (IN THOUSANDS)
ELEVEN MONTHS ENDED NOVEMBER 30, 1996 ----------------- Net sales................................................... $ 72,527 -------- Costs and expenses: Cost of sales.......................................... 51,771 Selling, general and administrative expenses........... 31,278 Non-recurring charges.................................. 7,412 Interest expense....................................... 2,231 Other income, net...................................... (100) -------- Total costs and expenses.......................... 92,592 -------- Net loss.................................................... $(20,065) ======== Shareholder's Equity - Beginning balance...................................... $ 34,095 Net loss............................................... (20,065) -------- Ending balance......................................... $ 14,030 ========
The accompanying notes are an integral part of these consolidated financial statements. F-30 131 FOSTER GRANT GROUP L.P. CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS)
ELEVEN MONTHS ENDED NOVEMBER 30, 1996 ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss............................................... $(20,065) Adjustments to reconcile net loss to net cash provided by operating activities- Non-recurring charges, net of payments............ 7,412 Depreciation and amortization..................... 8,488 Changes in current assets and liabilities: Accounts receivable.................................... 11,538 Inventories............................................ 19,738 Other assets........................................... (1,039) Accounts payable and accrued expenses.................. (7,558) -------- Net cash provided by operating activities......... 18,514 -------- CASH FLOWS USED IN INVESTING ACTIVITIES: Capital expenditures................................... (3,980) -------- CASH FLOWS USED IN FINANCING ACTIVITIES: Repayment of mortgages................................. (171) Repayment of advances from parent...................... (13,445) -------- Net cash used in financing activities............. (13,616) -------- Net increase in cash.............................. $ 918 ========
The accompanying notes are an integral part of these consolidated financial statements. F-31 132 FOSTER GRANT GROUP L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) BUSINESS (a) Business and Basis of Presentation Foster Grant Group L.P. (the Company) was wholly owned by BEC Group, Inc., formerly known as Benson Eyecare Corporation (BEC), a publicly traded company, until December 1996. The Company was organized as a partnership and its operations were comprised of three previously separate corporations acquired by BEC in 1993 and 1994. The accompanying financial statements include the accounts of these companies and their wholly-owned subsidiaries. All significant intercompany transactions, profits and accounts have been eliminated in consolidation. Except for interest expense, no intercorporate charges have been made since the Company was operated and managed as an autonomous entity. (b) Subsequent Event In December 1996, the common stock of the Company was sold to Foster Grant Holdings, Inc. (FG Holdings), a wholly owned subsidiary of AAi.FosterGrant, Inc. (AAi). AAi paid $10.0 million in cash and assumed certain liabilities in the amount of approximately $34.0 million. The purchase price was financed by $5.0 million of borrowings through AAi's credit facility and a $5.0 million equity investment in AAi by Marlin Group, a related party to BEC. In addition to the $10.0 million in cash, FG Holdings also issued 100 shares of Series A redeemable nonvoting preferred stock initially valued at approximately $0.8 million. The redemption value of this preferred stock is subject to upward adjustment based on annual sales of the Company, as defined, for the year ending January 1, 2000 or upon the completion of certain specific capital transactions. The maximum redemption amount was reduced from $6.0 million to $4.0 million in June 1998. Immediately prior to the sale of the common stock to FG Holdings, the building in which the main operations of the Company were located and the related mortgage payable were transferred to BEC. The Company subsequently leased the building from BEC (Note 4). The Company, under its new ownership, continues to be a distributor of value priced sunglasses and reading glasses to mass merchandisers, variety stores, chain drug stores and supermarkets in North America. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Revenue Recognition Revenue is recognized at time of shipment with estimates provided for returns and allowances based upon historical experience. Certain sales are subject to warranty against defects in material and workmanship for varying periods. The Company provides for such potential future costs at the time sales are recorded. (b) Cost of Goods Sold Cost of goods sold includes the cost of material, direct labor and overhead relating to products sold. (c) Major Customers During the eleven months ended November 30, 1996, two customers accounted for approximately 12% and 11% of net sales, respectively. (d) Depreciation and Amortization Depreciation of property and equipment is computed on a straight line basis for financial reporting purposes over the estimated useful lives of the assets. Useful lives range from three to five years for office equipment to 30 years for buildings. Displays and fixtures are depreciated over their expected useful lives, generally one to three years. Depreciation expense recorded for the eleven months ended November 30, 1996 was $7,599,000. F-32 133 FOSTER GRANT GROUP L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Goodwill and intangible assets are amortized on a straight line basis over estimated useful lives; which approximate 30 years for goodwill and 20 years for trademarks, and from three to five years for other identifiable intangibles. At each balance sheet date, the Company evaluates the realizability of goodwill and other intangible assets based upon expectations of undiscounted cash flows. Should this review indicate that goodwill or other intangible assets will not be recoverable, the Company's carrying value of the goodwill or intangible assets will be reduced by the estimated shortfall of discounted cash flows. Based upon its most recent analysis the Company believes that no material impairment of goodwill or intangible assets exists. Amortization of goodwill and intangible assets recorded for the eleven months ended November 30 1996 was approximately $889,000. (e) Income Taxes Deferred income taxes are provided on the difference in basis of assets and liabilities between financial reporting and tax returns using enacted tax rates. A valuation allowance is recorded when realization of deferred tax assets is not assured. During the eleven months ended November 30, 1996, the Company provided a full valuation allowance on the deferred tax assets, consisting of net operating losses and nondeductible reserves, generated during the period. (f) New Account Pronouncements Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, establishes financial accounting and reporting requirements for stock-based employee compensation plans. The Company adopted the reporting requirements of SFAS No. 123 in 1996 noting that the implementation of the new standard did not have a significant impact on its financial position or results of operations. SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, establishes financial accounting standards for the impairment of long-lived assets. The Company adopted SFAS No. 121 in 1996 (Note 3). (g) Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. (3) NON-RECURRING CHARGES During the eleven months ended November 30, 1996, the Company wrote-off (i) approximately $4.2 million of display fixtures and (ii) approximately $3.2 million of barter credits for which it was determined during 1996 that the value of the assets would not be realized. F-33 134 FOSTER GRANT GROUP L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (4) LEASE COMMITMENTS The Company leases administrative office and warehouse facilities under operating leases. Future minimum lease payments are as follows (in thousand): 1997........................................................ $468 1998........................................................ 342 1999........................................................ 74 2000........................................................ 3 ---- $887 ====
Rent expense, including common area and other charges, during the eleven months ended November 30, 1996 was approximately $711,000. (5) RELATED PARTY TRANSACTIONS During the eleven months ended November 30, 1996, the Company was party to a revolving intercompany credit arrangement with BEC whereby interest was charged at a rate of 8.0% on outstanding borrowings. Interest paid in connection with this arrangement was approximately $2.2 million which is included in interest expense in the accompanying statement of operations and shareholder's equity. All income taxes were paid by BEC during 1996. (6) STOCK OPTIONS The employees of the Company participate in a stock option plan administered by BEC. (7) COMMITMENTS AND CONTINGENCIES Supply Agreement The Company has a supply agreement with a display manufacturer. The agreement requires that the Company purchase 70.0% of its annual display purchases, as defined, from this supplier through December 2005. If the Company does not purchase 70.0% of its displays from this manufacturer, it is required to make a payment equal to 30.0% of the annual shortfall. In addition, the Company and BEC are required to cumulatively purchase $32.3 million of displays over the term of this agreement. To the extent that total purchases do not meet this dollar level, the Company is required to make a payment equal to 30.0% of $32.3 million less the Company's purchases, BEC's purchases and any amounts paid as a result of the annual shortfall discussed above. During the eleven months ended November 30, 1996, the Company purchased $2.4 million of such displays. Litigation The Company is subject to various litigation incidental to the business. Irrespective of any indemnification that may be received, the Company does not believe that exposure on any matter will result in a significant impact on the Company. F-34 135 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholder of Foster Grant Group L.P. (wholly-owned by BEC Group, Inc.) In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, of shareholder's equity and of cash flows present fairly, in all material respects, the financial position of Foster Grant Group L.P. and its subsidiaries (the "Company") at December 31, 1995, and the results of their operations and their cash flows for the year in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. As discussed in Note 1, in December 1996, the Company's parent, BEC Group, Inc. sold the common stock of the Company to Accessories Associates, Inc. We have not audited the consolidated financial statements of Foster Grant Group L.P. and its subsidiaries for any period subsequent to December 31, 1995. PRICE WATERHOUSE LLP Dallas, Texas December 30, 1997 F-35 136 FOSTER GRANT GROUP L.P. (WHOLLY-OWNED BY BEC GROUP, INC.) CONSOLIDATED BALANCE SHEET (IN THOUSANDS)
DECEMBER 31, 1995 ------------ ASSETS Current assets: Cash and cash equivalents................................. $ 499 Trade receivables, less allowance for doubtful accounts of $1,281................................................. 16,585 Inventories, net.......................................... 37,401 Deferred taxes............................................ 10,291 Other current assets...................................... 2,935 -------- Total current assets.............................. 67,711 Property and equipment, net................................. 8,721 Goodwill, net............................................... 5,743 Intangible assets, net...................................... 8,660 Other assets................................................ 11,985 -------- Total assets...................................... $102,820 ======== LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities: Short-term debt........................................... $ 132 Accounts payable.......................................... 18,431 Accrued compensation...................................... 714 Due to parent............................................. 33,745 Deferred taxes............................................ 6,770 Other accrued expenses.................................... 5,114 -------- Total current liabilities......................... 64,906 Mortgage payable............................................ 3,819 -------- Total liabilities................................. 68,725 -------- Commitments and contingencies Shareholder's equity: Investment by BEC......................................... 34,095 -------- Total shareholder's equity........................ 34,095 -------- Total liabilities and shareholder's equity........ $102,820 ========
See accompanying notes to consolidated financial statements. F-36 137 FOSTER GRANT GROUP L.P. (WHOLLY-OWNED BY BEC GROUP, INC.) CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1995 ------------ Net sales................................................... $ 96,399 Costs and expenses: Cost of sales............................................. 54,638 Selling, general and administrative....................... 42,178 Special charges........................................... 11,560 Interest expense.......................................... 2,977 Other income, net......................................... (372) -------- Total costs and expenses.......................... 110,981 -------- Loss before income taxes.................................... (14,582) Income tax benefit.......................................... (4,869) -------- Net loss.................................................... $ (9,713) ========
See accompanying notes to consolidated financial statements. F-37 138 FOSTER GRANT GROUP L.P. (WHOLLY-OWNED BY BEC GROUP, INC.) CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY (IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1995 ------------ Balance as of December 31, 1994............................. $ 43,036 Common stock issued pursuant to contingency agreement in connection with acquisition of Foster Grant by BEC..... 833 Net loss.................................................. (9,713) Cumulative translation adjustment......................... (61) -------- Balance as of December 31, 1995............................. $ 34,095 ========
See accompanying notes to consolidated financial statements. F-38 139 FOSTER GRANT GROUP L.P. (WHOLLY-OWNED BY BEC GROUP, INC.) CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1995 ----------------- Cash flows from operating activities: Net loss.................................................. $ (9,713) Adjustments to reconcile net loss to net cash used by operating activities: Special charges, net of payments....................... 6,044 Depreciation and amortization.......................... 7,971 Bad debt expense....................................... 11 Loss on sale of property and equipment................. 46 Deferred tax benefit................................... (4,869) Change in current assets and liabilities: Accounts receivable....................................... 255 Inventories............................................... (16,470) Other assets.............................................. (2,853) Accounts payable.......................................... 2,265 Accrued expenses and other................................ (1,065) -------- Net cash used by operating activities.................. (18,378) -------- Cash flows from investing activities: Capital expenditures...................................... (16,238) Proceeds from sale of fixed assets........................ 7 -------- Net cash used by investing activities.................. (16,231) -------- Cash flows from financing activities: Proceeds from mortgages................................... 3,945 Advances from parent...................................... 31,020 -------- Net cash provided by financing activities.............. 34,965 -------- Effect on cash of changes in foreign exchange rates......... 26 -------- Net increase in cash........................................ 382 Cash and cash equivalents at beginning of year.............. 117 -------- Cash and cash equivalents at end of year.................... $ 499 ========
See accompanying notes to consolidated financial statements. F-39 140 FOSTER GRANT GROUP L.P. (WHOLLY-OWNED BY BEC GROUP, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS) 1. SUBSEQUENT EVENTS In December 1996, the common stock of the Company was sold to Foster Grant Holdings, Inc. ("FG Holdings"), a wholly owned subsidiary of AAi.FosterGrant, Inc. ("AAi"). AAi paid $10 million in cash and assumed certain liabilities in the amount of approximately $34.0 million. The purchase price was financed by $5.0 million of borrowings through AAi's credit facility and a $5.0 million equity investment in AAi by Marlin Group, a related party to BEC Group, Inc. ("BEC"). In addition to the $10.0 million in cash, FG Holdings also issued 100 shares of Series A redeemable nonvoting preferred stock initially valued at approximately $.8 million. The redemption value of this preferred stock is subject to upward adjustment based on annual sales of the Company, as defined, for the year ending January 1, 2000 or upon the completion of certain specific capital transactions. The maximum redemption amount was reduced from $6.0 million to $4.0 million in June 1998. Immediately prior to the sale of the common stock to AAi, the building in which the main operations of the Company were located (Note 5) and the related mortgage payable (Note 7) were transferred to BEC. The Company subsequently leased the building from BEC. 2. BUSINESS AND BASIS OF PRESENTATION Foster Grant Group L.P. (the "Company") is wholly owned by BEC (formerly known as Benson Eyecare Corporation), a publicly traded company. The operations of the Foster Grant Group L.P. are comprised primarily of three previously separate companies (Opti-Ray Inc., The Bonneau Company, and International Eyewear & Accessories) acquired by BEC in 1993 and 1994. The accompanying financial statements include the accounts of these companies and their wholly-owned subsidiaries. Except for interest expense, no intercorporate charges have been made since the Company was operated and managed as an autonomous entity. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions, profits and accounts have been eliminated in consolidation. Cash Equivalents Cash equivalents include all temporary cash investments with original maturities of three months or less. The carrying value is equal to market value. Revenue Recognition Revenue is recognized at time of shipment with estimates provided for returns based upon historical experience. Concentration of Credit Risk and Major Customers Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of trade accounts receivable, primarily to mass merchant customers in the retail industry. Trade receivables arising from sales to customers are not collateralized and as a result management continually monitors the financial condition of these customers to reduce the risk of loss. During the year ended December 31, 1995 two customers accounted for approximately 12% and 14% of net sales, respectively. F-40 141 FOSTER GRANT GROUP L.P. (WHOLLY-OWNED BY BEC GROUP, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS) (CONTINUED) Foreign Currency Translation All balance sheet accounts of foreign operations are translated at the current exchange rate as of the end of the period. Results of operations are translated at average currency exchange rates. The resulting translation adjustment is recorded as a separate component of shareholders' equity. Inventories Inventories, which consist primarily of finished goods held for resale, are stated at the lower of cost, determined on a first-in first-out basis, or market. Costs include material, direct labor, and overhead. Warranties Certain sales are subject to warranty against defects in material and workmanship for varying periods. The Company provides for such potential future costs at the time the sales are recorded. Property and Equipment Property and equipment are stated at cost. Additions and improvements are capitalized. Maintenance and repairs are expensed as incurred. Depreciation is computed on a straight line basis for financial reporting purposes, and on an accelerated basis for tax purposes, over the estimated useful lives of the assets. Useful lives range from 3 to 5 years for office equipment to 30 years for buildings. Asset cost and accumulated depreciation amounts are removed for dispositions and retirements, with resulting gains and losses reflected in earnings. Displays The Company capitalizes the cost of display fixtures shipped to customers. The displays are depreciated over the expected useful lives of the displays, generally one to three years. Depreciation expense recorded for the year ended December 31, 1995 was $6,418. Displays costs of $9,912, net of depreciation, are included in "Other Assets". Goodwill and Intangible Assets Goodwill represents the excess cost over the fair value of net assets acquired in business combinations accounted for under the purchase method. Intangible assets consist principally of trademarks and other identifiable intangible assets. Goodwill and intangible assets are amortized on a straight line basis over estimated useful lives of 30 years for goodwill, 20 years for trademarks, and from 3 to 5 years for other identifiable intangibles. At each balance sheet date, the Company evaluates the realizability of goodwill and intangible assets based upon expectations of undiscounted cash flows. Should this review indicate that goodwill or intangible assets will not be recoverable, the Company's carrying value of the goodwill or intangible assets will be reduced by the estimated shortfall of discounted cash flows. Based upon its most recent analysis, the Company believes that no material impairment of goodwill or intangible assets exists. Amortization of goodwill recorded for the year ended December 31, 1995 was $183. F-41 142 FOSTER GRANT GROUP L.P. (WHOLLY-OWNED BY BEC GROUP, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS) (CONTINUED) Income Taxes Deferred income taxes are provided on the difference in basis of assets and liabilities between financial reporting and tax returns using enacted tax rates. A valuation allowance is recorded when realization of deferred tax assets is not assured. New Accounting Pronouncements Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation", establishes financial accounting and reporting requirements for stock-based employee compensation plans. The Company adopted the reporting requirements of SFAS 123 in 1996. There was no impact on its financial position or results of operations as a result of this adoption. SFAS No. 121, "Accounting for the Impairment of Long Lived Assets and for Long Lived Assets to be Disposed of", establishes financial accounting standards for the impairment of long lived assets. The Company adopted SFAS No. 121 in 1996. There was no significant effect on the financial statements of the Company as a result of this adoption. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. 4. SPECIAL CHARGES Starting in the third quarter and culminating in the fourth quarter of 1995, the Company took actions to reorganize its distribution operations and exit the display production business. Special charges of $11,560 for the year included: (i) a $6,700 provision for realigning the in-house display function in connection with the sale of the display manufacturing business to HMG Worldwide; (ii) a $4,200 charge for reorganization and integration of the distribution operations, including costs to terminate certain employees and close the California distribution facility, resolution of distribution integration issues, streamlining new Dallas warehousing operations, and reorganization of the SKU numbering system; and (iii) $660 of deferred financing costs in connection with a change in the Company's banking syndicate in September 1995. 5. PROPERTY AND EQUIPMENT Property and equipment consists of the following at December 31, 1995: Land........................................................ $ 1,005 Buildings (See Note 1)...................................... 5,138 Machinery and equipment..................................... 3,208 Furniture and fixtures...................................... 496 ------- 9,847 Less accumulated depreciation............................... (1,126) ------- Net property and equipment............................. $ 8,721 =======
F-42 143 FOSTER GRANT GROUP L.P. (WHOLLY-OWNED BY BEC GROUP, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS) (CONTINUED) Depreciation expense for the year ended December 31, 1995 was $606. 6. INTANGIBLE ASSETS Intangible assets and accumulated amortization consist of the following at December 31, 1995: Trademarks.................................................. $ 9,358 Other identifiable intangible assets........................ 1,189 Less accumulated amortization............................... (1,887) ------- Net intangible assets.................................. $ 8,660 =======
Amortization expense for the year ended December 31, 1995 was $764. 7. MORTGAGE PAYABLE The Company's mortgage payable is a $3,951 mortgage bearing interest at LIBOR plus 1.85 basis points, secured by land and buildings in Dallas, Texas, and guaranteed by BEC, with monthly principal and interest payments of $41 due through April 2001. See Note 1. 8. INCOME TAXES The Company accounts for income taxes under SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 requires an asset and liability approach to accounting for income taxes. The income tax benefit consists of the following for the year ended December 31, 1995: Current: Federal................................................... $ -- State and local........................................... -- Deferred.................................................... (4,869) ------- $(4,869) =======
The Company's effective tax rate differs from the Federal statutory rate as follows for the year ended December 31, 1995: Expected tax benefit at statutory rate...................... (35.0)% State income taxes.......................................... (1.0)% Goodwill amortization....................................... 1.3% Other, net.................................................. .7% ------ Income tax benefit.......................................... (34.0)% ======
F-43 144 FOSTER GRANT GROUP L.P. (WHOLLY-OWNED BY BEC GROUP, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS) (CONTINUED) Significant components of deferred income taxes are as follows at December 31, 1995: Loss carryforward........................................... $ 6,773 Accounts receivable......................................... 1,454 Inventories................................................. 1,138 Other, net.................................................. 926 ------- Deferred tax asset........................................ 10,291 ------- Displays.................................................... 3,843 Fixed assets................................................ 34 Intangible assets........................................... 2,893 ------- Deferred tax liability.................................... 6,770 ------- Net deferred tax asset.................................... $ 3,521 =======
No valuation allowance has been established against deferred tax assets as realization is considered to be more likely than not. Net operating loss carryforwards amount to approximately $20 million at December 31, 1995. The operating loss carryforwards will expire beginning in the year 2008. 9. LEASE COMMITMENTS The Company leases administrative office and warehouse facilities under operating leases. Future minimum lease payments are as follows: 1996................................................ $ 832 1997................................................ 468 1998................................................ 342 1999................................................ 74 2000................................................ 3 ------ $1,719 ======
Rent expense including common area and other charges during 1995 was $739. 10. RELATED PARTY TRANSACTIONS During the year ended December 31, 1995, the Company was party to a revolving intercompany credit arrangement with BEC whereby interest was charged at a rate of 8%. Interest expense in connection with this arrangement was approximately $3.0 million for the year ended December 31, 1995. Balances related to this agreement have been disclosed under the captions "Due to Parent" and "Interest Expense." All interest and income taxes were paid by BEC during 1995. 11. STOCK OPTIONS The employees of the Company participate in a stock option plan administered by BEC. F-44 145 FOSTER GRANT GROUP L.P. (WHOLLY-OWNED BY BEC GROUP, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS) (CONTINUED) 12. COMMITMENTS AND CONTINGENCIES Supply Agreement The Company has a supply agreement with HMG Worldwide. The agreement requires that the Company purchase 70% of its annual display purchases, as defined, from this supplier through December 2005. If the Company does not purchase 70% of the Company's displays from this manufacturer, it is required to make a payment equal to 30% of the annual shortfall. In addition, the Company and BEC are required to cumulatively purchase $32.3 million of displays over the term of this agreement. To the extent that total purchases do not meet this dollar level, the Company is required to make a payment equal to 30% of $32.3 million, less the Company's purchases, BEC's purchases and any amounts paid as a result of the annual shortfall discussed above. As of December 31, 1995, no amounts were due under this agreement as a result of a shortfall. During the period from September 30, 1995 through December 31, 1995, the Company purchased $1.2 million of such displays. During the years ended December 31, 1996 and 1997, the Company purchased $2.4 million and $3.5 million of such displays, respectively. Litigation The Company is subject to various litigation incidental to the business. Irrespective of any indemnification that may be received, the Company does not believe that exposure on any matter will result in a significant impact on the Company. F-45 146 ------------------------------------------------------ ------------------------------------------------------ NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS OR THE ACCOMPANYING LETTER OF TRANSMITTAL IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. NEITHER THIS PROSPECTUS NOR THE ACCOMPANYING LETTER OF TRANSMITTAL CONSTITUTES AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE NEW NOTES IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS OR THE ACCOMPANYING LETTER OF TRANSMITTAL NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THE INFORMATION CONTAINED HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS NOT BEEN A CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. ------------------------ TABLE OF CONTENTS
PAGE ---- Summary............................... 1 Risk Factors.......................... 14 The Company........................... 21 Use of Proceeds....................... 22 The Exchange Offer.................... 22 Capitalization........................ 30 Selected Pro Forma Financial Information......................... 31 Selected Historical Financial Information......................... 36 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 37 Business.............................. 45 Management............................ 54 Security Ownership of Management and Certain Beneficial Owners........... 60 Certain Transactions.................. 61 Description of Senior Credit Facility............................ 64 Description of Notes.................. 65 Description of Capital Stock.......... 89 Certain United States Federal Tax Considerations...................... 92 Plan of Distribution.................. 92 Legal Matters......................... 92 Experts............................... 93 Available Information................. 93 Index to Consolidated Financial Statements.......................... 94
UNTIL , 1998 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ [AAI.FOSTER GRANT LOGO] OFFER TO EXCHANGE $75,000,000 OF ITS 10 3/4% SENIOR NOTES DUE 2006, WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT, FOR $75,000,000 OF ITS OUTSTANDING 10 3/4% SENIOR NOTES DUE 2006 ---------------------------------- PROSPECTUS ---------------------------------- , 1998 ------------------------------------------------------ ------------------------------------------------------ 147 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Article SIXTH of the Company's Restated Articles of Incorporation provides that a director shall not be liable to the Registrant or its shareholders for breach of fiduciary duty as a director, other than liability for (a) breach of the director's duty of loyalty to the Company or its shareholders, (b) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (c) unlawful payment of a dividend or unlawful stock purchase or redemption, or (d) any transaction from which the director derived an improper personal benefit. Section 4.1 of the Rhode Island Business Corporation Act authorizes indemnification of directors and officers of Rhode Island corporations. Article XI of the Company's by-laws (i) authorizes the indemnification of directors and officers (the "Indemnified Person") under specified circumstances to the fullest extent authorized, (ii) provides for the advancement of expenses to the Indemnified Persons for defending any proceedings related to the specified circumstances and (iii) gives the Indemnified Persons the right to bring suit against the Company to enforce the foregoing rights to indemnification and advancement of expenses. The Company currently maintains one or more policies of insurance under which the directors and officers of the Company are insured, within the limits and subject to the limitations of the policies, against certain expenses in connection with the defense of actions, suits, or proceedings, and certain liabilities which might be imposed as a result of such action, suits or proceedings, to which they are parties by reason of being or having been such directors or officers. The Purchase Agreement filed as Exhibit 4.2 to this Registration Statement provides for indemnification of the Company, the Guarantors and their respective directors and officers and certain other persons against certain liabilities, including liabilities under the Exchange Act. ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits. The Index to Exhibits to this Registration Statement is incorporated herein by reference. (b) Financial Statement Schedules. Schedule II - Valuation and Qualifying Accounts
ITEM 22. UNDERTAKINGS. (a) The undersigned registrants hereby undertake as follows: (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 the 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 end 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 a 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; II-1 148 (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; provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) shall not apply if the registration statement is on Form S-3 or Form S-8 and the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed by the registrant pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (b) The undersigned registrants hereby undertake that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrants' annual reports pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (c) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrants pursuant to the foregoing provisions, or otherwise, the registrants have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrants of expenses incurred or paid by a director, officer or controlling person of the registrants in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrants will, unless in the opinion of their counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue. (d) The undersigned registrants hereby undertake to respond to requests for information that is incorporated by reference into the prospectus pursuant to Items 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. (e) The undersigned registrants hereby undertake 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-2 149 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Registration Statement on Form S-4 to be signed on its behalf by the undersigned, thereunto duly authorized, in the Town of Smithfield, State of Rhode Island, on August 10, 1998. AAI.FOSTERGRANT, INC. By: /s/ GERALD F. CERCE ---------------------------------- GERALD F. CERCE PRESIDENT AND CHIEF EXECUTIVE OFFICER Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement on Form S-4 has been signed by the following persons in the capacities indicated, on August 10, 1998.
SIGNATURE TITLE --------- ----- /s/ GERALD F. CERCE President, Chief Executive Officer and - ----------------------------------------------------- Chairman of the Board GERALD F. CERCE (Principal Executive Officer) /s/ DUANE M. DESISTO Chief Financial Officer - ----------------------------------------------------- (Principal Financial Officer) DUANE M. DESISTO /s/ STEPHEN J. KOROTSKY Controller (Principal Accounting Officer) - ----------------------------------------------------- STEPHEN J. KOROTSKY * Director - ----------------------------------------------------- STEPHEN J. CARLOTTI /s/ MICHAEL F. CRONIN Director - ----------------------------------------------------- MICHAEL F. CRONIN /s/ JOHN H. FLYNN, JR. Director - ----------------------------------------------------- JOHN H. FLYNN, JR. /s/ MICHAEL E. FRANKLIN Director - ----------------------------------------------------- MICHAEL E. FRANKLIN /s/ GEORGE GRABOYS Director - ----------------------------------------------------- GEORGE GRABOYS BY: /s/ DUANE M. DESISTO ------------------------------------------------ DUANE M. DESISTO (Attorney-in-fact for persons indicated by as asterisk)
II-3 150 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Registration Statement on Form S-4 to be signed on its behalf by the undersigned, thereunto duly authorized, in the Town of Smithfield, State of Rhode Island, on August 10, 1998. THE BONNEAU COMPANY By: /s/ GERALD F. CERCE ---------------------------------- GERALD F. CERCE PRESIDENT Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement on Form S-4 has been signed by the following persons in the capacities indicated, on August 10, 1998.
SIGNATURE TITLE --------- ----- /s/ GERALD F. CERCE President and Director - ----------------------------------------------------- (Principal Executive Officer) GERALD F. CERCE /s/ DUANE M. DESISTO Chief Financial Officer and Director - ----------------------------------------------------- (Principal Financial Officer) DUANE M. DESISTO /s/ STEPHEN J. KOROTSKY Controller - ----------------------------------------------------- (Principal Accounting Officer) STEPHEN J. KOROTSKY /s/ JOHN H. FLYNN, JR. Director - ----------------------------------------------------- JOHN H. FLYNN, JR.
II-4 151 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Registration Statement on Form S-4 to be signed on its behalf by the undersigned, thereunto duly authorized, in the Town of Smithfield, State of Rhode Island, on August 10, 1998. BONNEAU GENERAL INC. By: /s/ GERALD F. CERCE ---------------------------------- GERALD F. CERCE PRESIDENT Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement on Form S-4 has been signed by the following persons in the capacities indicated, on August 10, 1998.
SIGNATURE TITLE --------- ----- /s/ GERALD F. CERCE President and Director - ----------------------------------------------------- (Principal Executive Officer) GERALD F. CERCE /s/ DUANE M. DESISTO Chief Financial Officer and Director - ----------------------------------------------------- (Principal Financial Officer) DUANE M. DESISTO /s/ STEPHEN J. KOROTSKY Controller - ----------------------------------------------------- (Principal Accounting Officer) STEPHEN J. KOROTSKY /s/ JOHN H. FLYNN, JR. Director - ----------------------------------------------------- JOHN H. FLYNN, JR.
II-5 152 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Registration Statement on Form S-4 to be signed on its behalf by the undersigned, thereunto duly authorized, in the Town of Smithfield, State of Rhode Island, on August 10, 1998. BONNEAU HOLDINGS, INC. By: /s/ GERALD F. CERCE ---------------------------------- GERALD F. CERCE PRESIDENT Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement on Form S-4 has been signed by the following persons in the capacities indicated, on August 10, 1998.
SIGNATURE TITLE --------- ----- /s/ GERALD F. CERCE President and Director - ----------------------------------------------------- (Principal Executive Officer) GERALD F. CERCE /s/ DUANE M. DESISTO Chief Financial Officer and Director - ----------------------------------------------------- (Principal Financial Officer) DUANE M. DESISTO /s/ STEPHEN J. KOROTSKY Controller - ----------------------------------------------------- (Principal Accounting Officer) STEPHEN J. KOROTSKY /s/ JOHN H. FLYNN, JR. Director - ----------------------------------------------------- JOHN H. FLYNN, JR.
II-6 153 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Registration Statement on Form S-4 to be signed on its behalf by the undersigned, thereunto duly authorized, in the Town of Smithfield, State of Rhode Island, on August 10, 1998. F.G.G. INVESTMENTS, INC. By: /s/ GERALD F. CERCE ---------------------------------- GERALD F. CERCE PRESIDENT Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement on Form S-4 has been signed by the following persons in the capacities indicated, on August 10, 1998.
SIGNATURE TITLE --------- ----- /s/ GERALD F. CERCE President and Director - ----------------------------------------------------- (Principal Executive Officer) GERALD F. CERCE /s/ DUANE M. DESISTO Chief Financial Officer - ----------------------------------------------------- (Principal Financial Officer) DUANE M. DESISTO /s/ STEPHEN J. KOROTSKY Controller - ----------------------------------------------------- (Principal Accounting Officer) STEPHEN J. KOROTSKY /s/ JOHN H. FLYNN, JR. Director - ----------------------------------------------------- JOHN H. FLYNN, JR. /s/ THOMAS M. STRAUSS Director - ----------------------------------------------------- THOMAS M. STRAUSS
II-7 154 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Registration Statement on Form S-4 to be signed on its behalf by the undersigned, thereunto duly authorized, in the Town of Smithfield, State of Rhode Island, on August 10, 1998. FANTASMA, LLC By: /s/ ROGER D. DREYER ---------------------------------- ROGER D. DREYER PRESIDENT Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement on Form S-4 has been signed by the following persons in the capacities indicated, on August 10, 1998.
SIGNATURE TITLE --------- ----- /s/ ROGER D. DREYER President - ----------------------------------------------------- (Principal Executive Officer) ROGER D. DREYER /s/ DUANE M. DESISTO Treasurer - ----------------------------------------------------- (Principal Financial Officer) DUANE M. DESISTO /s/ STEPHEN J. KOROTSKY Controller - ----------------------------------------------------- (Principal Accounting Officer) STEPHEN J. KOROTSKY AAi.FosterGrant, Inc. BY: /s/ GERALD F. CERCE Member - ---------------------------------------------------- GERALD F. CERCE PRESIDENT Houdini Capital Ltd. By: /s/ ROGER D. DREYER Member - ---------------------------------------------------- ROGER D. DREYER PRESIDENT
II-8 155 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Registration Statement on Form S-4 to be signed on its behalf by the undersigned, thereunto duly authorized, in the Town of Smithfield, State of Rhode Island, on August 10, 1998. FOSTER GRANT GROUP, L.P. By: /s/ GERALD F. CERCE ---------------------------------- GERALD F. CERCE PRESIDENT AND CHIEF EXECUTIVE OFFICER Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement on Form S-4 has been signed by the following persons in the capacities indicated, on August 10, 1998.
SIGNATURE TITLE --------- ----- /s/ GERALD F. CERCE President and Chief Executive Officer - ----------------------------------------------------- (Principal Executive Officer) GERALD F. CERCE /s/ DUANE M. DESISTO Chief Financial Officer - ----------------------------------------------------- (Principal Financial Officer) DUANE M. DESISTO /s/ STEPHEN J. KOROTSKY Controller - ----------------------------------------------------- (Principal Accounting Officer) STEPHEN J. KOROTSKY Bonneau General, Inc., General Partner its General Partner By: /s/ GERALD F. CERCE - ---------------------------------------------------- GERALD F. CERCE PRESIDENT
II-9 156 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Registration Statement on Form S-4 to be signed on its behalf by the undersigned, thereunto duly authorized, in the Town of Smithfield, State of Rhode Island, on August 10, 1998. FOSTER GRANT HOLDINGS, INC. By: /s/ GERALD F. CERCE ---------------------------------- GERALD F. CERCE PRESIDENT Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement on Form S-4 has been signed by the following persons in the capacities indicated, on August 10, 1998.
SIGNATURE TITLE --------- ----- /s/ GERALD F. CERCE President and Director - ----------------------------------------------------- (Principal Executive Officer) GERALD F. CERCE /s/ DUANE M. DESISTO Treasurer and Director - ----------------------------------------------------- (Principal Financial Officer) DUANE M. DESISTO /s/ STEPHEN J. KOROTSKY Controller - ----------------------------------------------------- (Principal Accounting Officer) STEPHEN J. KOROTSKY /s/ JOHN H. FLYNN, JR. Director - ----------------------------------------------------- JOHN H. FLYNN, JR.
II-10 157 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Registration Statement on Form S-4 to be signed on its behalf by the undersigned, thereunto duly authorized, in the Town of Smithfield, State of Rhode Island, on August 10, 1998. OPTI-RAY, INC. By: /s/ GERALD F. CERCE ---------------------------------- GERALD F. CERCE PRESIDENT Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement on Form S-4 has been signed by the following persons in the capacities indicated, on August 10, 1998.
SIGNATURE TITLE --------- ----- /s/ GERALD F. CERCE President and Director - ----------------------------------------------------- (Principal Executive Officer) GERALD F. CERCE /s/ DUANE M. DESISTO Chief Financial Officer and Director - ----------------------------------------------------- (Principal Financial Officer) DUANE M. DESISTO /s/ STEPHEN J. KOROTSKY Controller - ----------------------------------------------------- (Principal Accounting Officer) STEPHEN J. KOROTSKY /s/ JOHN H. FLYNN, JR. Director - ----------------------------------------------------- JOHN H. FLYNN, JR.
II-11 158 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Registration Statement on Form S-4 to be signed on its behalf by the undersigned, thereunto duly authorized, in the Town of Smithfield, State of Rhode Island, on August 10, 1998. O-RAY HOLDINGS, INC. By: /s/ GERALD F. CERCE ---------------------------------- GERALD F. CERCE PRESIDENT Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement on Form S-4 has been signed by the following persons in the capacities indicated, on August 10, 1998.
SIGNATURE TITLE --------- ----- /s/ GERALD F. CERCE President and Director - ----------------------------------------------------- (Principal Executive Officer) GERALD F. CERCE /s/ DUANE M. DESISTO Chief Financial Officer and Director - ----------------------------------------------------- (Principal Financial Officer) DUANE M. DESISTO /s/ STEPHEN J. KOROTSKY Controller - ----------------------------------------------------- (Principal Accounting Officer) STEPHEN J. KOROTSKY /s/ JOHN H. FLYNN, JR. Director - ----------------------------------------------------- JOHN H. FLYNN, JR.
II-12 159 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE To the Shareholders of AAi.FosterGrant, Inc. and Subsidiaries: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements of AAi.FosterGrant, Inc. and Subsidiaries included in this registration statement and have issued our report thereon dated February 2, 1998 (except with respect to matters discussed in Notes 6, 7 and 18 as to which the date is July 21, 1998). Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in Item 21(b) is the responsibility of the company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Boston, Massachusetts February 2, 1998 160 SCHEDULE II AAi.FOSTERGRANT, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
ADDITIONS BALANCE AT CHARGED TO DEDUCTIONS BALANCE AT BEGINNING COSTS AND FROM END OF OF PERIOD EXPENSES RESERVES(1) OTHER(2) PERIOD ----------- ----------- ----------- -------- ----------- Accounts Receivable Reserves: December 31, 1995.................... $ 900 $12,538 $12,710 $ -- $ 728 December 31, 1996.................... 728 16,265 13,721 9,810 13,082 December 31, 1997.................... 13,082 27,477 31,130 909 10,338
- --------------- (1) Amounts deemed uncollectible. (2) Reserves related to Accounts Receivable acquired in acquisitions. S-1 161 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 3.1.1 Restated Articles of Incorporation of AAi.FOSTERGRANT, Inc. 3.1.2 Amended and Restated By-laws of AAi.FOSTERGRANT, Inc. 3.2.1 Restated Articles of Incorporation of The Bonneau Company 3.2.2 By-laws of The Bonneau Company 3.3.1 Certificate of Incorporation of Bonneau General, Inc. 3.3.2 By-laws of Bonneau General, Inc. 3.4.1 Certificate of Incorporation of Bonneau Holdings, Inc. 3.4.2 By-laws of Bonneau Holdings, Inc. 3.5.1 Restated Certificate of Incorporation of F.G.G. Investments, Inc. 3.5.2 By-laws of F.G.G. Investments, Inc. 3.6.1 Certificate of Formation of Fantasma, LLC *3.6.2 Amended and Restated Operating Agreement of Fantasma, LLC 3.7.1 Certificate of Limited Partnership of Foster Grant Group, L.P. 3.7.2 Amended and Restated Agreement of Limited Partnership of Foster Grant Group, L.P. 3.8.1 Restated Certificate of Incorporation of Foster Grant Holdings, Inc. 3.8.2 Amended and Restated By-laws of Foster Grant Holdings, Inc. 3.9.1 Restated Certificate of Incorporation of Opti-Ray, Inc. 3.9.2 By-laws of Opti-Ray, Inc. 3.10.1 Certificate of Incorporation of O-Ray Holdings, Inc. 3.10.2 By-laws of O-Ray Holdings, Inc. 4.1 Indenture dated as of July 21, 1998, by and among AAi.FOSTERGRANT, Inc. ("AAi"), its domestic subsidiaries named therein (the "Guarantors") and IBJ Schroder Bank & Trust Company, as Trustee, with respect to the Series A and Series B 10 3/4% Senior Notes due 2006. 4.2 Purchase Agreement dated as of July 16, 1998, by and among AAi, the Guarantors and NationsBanc Montgomery Securities LLC, Prudential Securities Incorporated and BancBoston Securities Inc. (the "Initial Purchasers"). 4.3 Registration Rights Agreement dated as of July 21, 1998, by and among AAi, the Guarantors and the Initial Purchasers. 4.4 Form of New Note (contained in Exhibit 4.1). *5.1 Opinion of Hinckley, Allen & Snyder as to the legality of the securities registered hereunder. 9.1 Letter Agreement of Weston Presidio Capital II, L.P. regarding voting of the Preferred Stock of AAi dated December 9, 1996. 9.2 Tag-Along Transfer Restriction and Voting Agreement among AAi, Weston Presidio Capital, II, L.P. and certain other investors and certain shareholders of the Company dated May 31, 1996, as amended on December 11, 1996. 10.1 Second Amended and Restated Financing and Security Agreement by and among AAi, certain of its Subsidiaries, NationsBank, N.A., as agent, and other lenders party thereto, dated July 21, 1998. 10.2 Agreement of Amendment, Termination & Modification between AAi, Bolle, Inc., Foster Grant Group, LP and Foster Grant Holdings, Inc. dated June 1998. 10.3 Stock Purchase Agreement by and among AAi, BEC Group, Inc., Foster Grant Group, L.P. and Foster Grant Holdings, Inc., dated May 31, 1996, as amended by a side letter dated December 11, 1996. 10.4 Securities Purchase Agreement among AAi, Weston Presidio Capital II, L.P. and certain other investors, dated May 31, 1996.
162
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.5 Registration Rights Agreement among AAi, Weston Presidio Capital II, L.P. and certain other investors and certain shareholders of the Company dated May 31, 1996, as amended on December 11, 1996. 10.6 Fantasma, LLC Member Agreement by and among AAi, Roger D. Dreyer and Houdini Capital LTD dated as of June 23, 1998. 10.7 Fantasma, LLC Member Agreement by and among AAi and Paul Michaels dated as of June 23, 1998. 10.8 Incentive Stock Plan of AAi. 10.9 Employment Agreement between AAi and Gerald F. Cerce dated May 31, 1996. 10.10 Employment Agreement between AAi and Duane M. DeSisto dated May 31, 1996. 10.11 Employment Agreement between AAi and John H. Flynn, Jr. dated May 31, 1996. 10.12 Employment Agreement between AAi and Robert V. Lallo dated May 31, 1996. 10.13 Employment Agreement between AAi and Felix A. Porcaro, Jr. dated May 31, 1996. 10.14 Supplemental Executive Retirement Plan between AAi and Gerald F. Cerce dated September 29, 1994, as amended on December 29, 1995 and May 31, 1996. 12.1 Computation of ratio of earnings to fixed charges. 21.1 Subsidiaries of AAi. 23.1 Consent of Hinckley, Allen & Snyder (contained in Exhibit 5.1). 23.2 Consent of Arthur Andersen LLP. 23.3 Consent of PricewaterhouseCoopers LLP. 24.1 Power of Attorney of certain directors and officers of the Company. 24.2 Power of Attorney of certain directors and officers of The Bonneau Company. 24.3 Power of Attorney of certain directors and officers of Bonneau General, Inc. 24.4 Power of Attorney of certain directors and officers of Bonneau Holdings, Inc. 24.5 Power of Attorney of certain directors and officers of F.G.G. Investments, Inc. *24.6 Power of Attorney of certain directors and officers of Fantasma, LLC. 24.7 Power of Attorney of certain directors and officers of Foster Grant Group, L.P. 24.8 Power of Attorney of certain directors and officers of Foster Grant Holdings, Inc. 24.9 Power of Attorney of certain directors and officers of Opti-Ray, Inc. 24.10 Power of Attorney of certain directors and officers of O-Ray Holdings, Inc. 25.1 Form T-1 Statement of Eligibility and Qualification under the Trust Indenture Act of 1939, as amended, of IBJ Schroder Bank & Trust Company, as Trustee. 27.1 Financial Data Schedule. 99.1 Form of Letter of Transmittal with respect to the Exchange Offer. 99.2 Form of Letter of Guaranteed Delivery. 99.3 Form of Letter to Brokers, Dealers. *99.4 Form of Exchange Agency Agreement between AAi and IBJ Schroder Bank & Trust Company.
- --------------- * To be filed by amendment EX-3.1.1 2 RESTATED ARTICLES OF INCORPORATION-AAI.FOSTERGRANT 1 Exhibit 3.1.1 ID NUMBER: 36896 FILING FEE: $70.00 BUSINESS CORPORATION ----------------- RESTATED ARTICLES OF INCORPORATION OF AAi.FOSTERGRANT, INC. Pursuant to the provisions of Section 7-1.1-59 of the General Laws, 1956, as amended, the undersigned corporation adopts the following Restated Articles of Incorporation: 1. The name of the corporation is AAi.FOSTERGRANT, INC. ----------------------------------------- 2. The period of its duration is (if perpetual, so state) PERPETUAL ------------------ 3. The specific purpose or purposes which the corporation is authorized to pursue are: TO BUY, SELL, AND DISTRIBUTE OPTICAL PRODUCTS, JEWELRY, WATCHES, CLOCKS AND OTHER ACCESSORIES AND SMALL PACKAGE PRODUCTS, AND TO TRANSACT ANY OR ALL OTHER LAWFUL BUSINESS FOR WHICH CORPORATIONS MAY BE INCORPORATED UNDER THE RHODE ISLAND BUSINESS CORPORATION ACT, AS THE SAME MAY BE FROM TIME TO TIME AMENDED HEREAFTER. 4. The aggregate number of shares which the corporation has authority to issue is: (a) If only one class: Total number of shares _________ (If the authorized shares consist of one class only state the par value of such shares or a statement that all such shares are to be without par value.): or (b) If more than one class: Total number of shares of all classes of stock: See below (State (A) the number of shares of each class thereof that are to have par value and the par value of each share of each such class, and/or (B) the number of such shares that are to be without par value, and (C) a statement of all or any of the designations and the powers, preferences and rights, including voting rights, and the qualifications, limitations or restrictions thereof, which are permitted by the provisions of Chapter 7-1.1 of the General Laws in respect of any class or classes of stock of the corporation insofar as the same are fixed in the articles of incorporation, and a statement of any authority vested in the board of directors to establish series and fix and determine the variations in the relative rights and preferences as between series): 5,000,000 SHARES, CONSISTING OF (i) 4,800,000 SHARES OF COMMON STOCK WITH A PAR VALUE OF ONE CENT ($.01) PER SHARE (THE "COMMON STOCK"), AND (ii) 200,000 2 SHARES OF PREFERRED STOCK WITH A PAR VALUE OF ONE CENT ($.01) PER SHARE (THE "PREFERRED STOCK"). 1. DESIGNATION AND AMOUNT. The Preferred Stock shall be divided into one or more series. The designation of the first series of the Preferred Stock shall be Series A Redeemable Convertible Preferred Stock (the "Series A Preferred Stock"). The number of shares of Series A Preferred Stock shall be 43,700 subject to increase (but only as to shares of Preferred Stock authorized by the Articles of Incorporation, as amended, with respect to which the powers, designations, preferences and rights shall not then have been previously designated) or decrease (but not below the number of shares thereof then outstanding) from time to time by action of the Board of Directors. The Series A Preferred Stock has been issued pursuant to a Securities Purchase Agreement dated May 31, 1996 by and among the Corporation, Weston Presidio Capital II, L.P., and certain other investors (as from time to time in effect, the "Weston Presidio Purchase Agreement) and that certain Stock Purchase Agreement dated as of November 13, 1996 by and among the Corporation, BEC Group, Inc., Foster Grant Group, L.P., and Foster Grant Holdings, Inc. (as from time to time in effect, the "Foster Grant Purchase Agreement"). The Weston Presidio Purchase Agreement and the Foster Grant Purchase Agreement, as may be amended from time to time, are hereinafter collectively referred to as the "Purchase Agreements". A copy of the Purchase Agreements will be provided to any registered holder of shares of capital stock of the Corporation following written request directed to the Secretary of the Corporation at its registered address. The relative powers, preferences and rights, and relative participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, granted to or imposed on the Series A Preferred Stock are set forth below: 2. DEFINITIONS. Certain capitalized terms are used in these Articles of Amendment as specifically defined below in this Section 2. Except as the context otherwise explicitly requires, (a) the capitalized term "Section" refers to sections of these Articles of Amendment, (b) references to a particular Section include all subsections thereof, (c) the word "including" shall be construed as "including without limitation", (d) accounting terms not otherwise defined herein have the meaning provided under generally accepted accounting principles, (e) references to a particular statute or regulation include all rules and regulations thereunder and any successor statute, regulation or rules, in each case as from time to time in effect and (f) references to a particular Person include such Person's successors and assigns to the extent not prohibited by these Articles of Amendment and the Purchase Agreements. References to "the date hereof" mean the effective date of these Articles of Amendment. 2.1. "ACCEPTED SHARES" is defined in Section 10.2. 2.2. "ADDITIONAL SHARES OF COMMON STOCK" is defined in Section 8.4.1(d). 2 3 2.3. "BY-LAWS" means all written rules, regulations, procedures and by-laws and all other similar documents, relating to the management, governance or internal regulation of a Person other than an individual, or interpretive of the Charter of such Person, each as from time to time amended or modified. 2.4. "CALCULATION DATE" is defined in Section 4. 2.5. "COMMON STOCK" means the common stock $0.01 par value, of the Corporation. 2.6. "CORPORATION" as defined in the Preamble. 2.7. "CONVERSION PRICE" is defined in Section 8.1. 2.8. "CONVERTIBLE SECURITIES" is defined in Section 8.4.1(c). 2.9. "FUTURE SHARES" is defined in Section 10.1. 2.10. "FUTURE SHARES EXERCISE PERIOD" is defined in Section 10.1. 2.11. "INDEBTEDNESS" means (a) all debt for borrowed money and similar monetary obligations evidenced by bonds, notes, debentures, capitalized lease obligations, deferred purchase price of property (other than ordinary trade payables ) or otherwise, whether direct or indirect; and (b) all liabilities secured by any liens existing on property owned or acquired, whether or not the liability secured thereby shall have been assumed. 2.12. "INVESTOR AGREEMENT" is defined in the Weston Presidio Purchase Agreement. 2.13. "NOTICE OF PURCHASE" is defined in Section 10.2. 2.14. "OFFEREE" is defined in Section 10.1. 2.15. "OPTIONS" is defined in Section 8.4.1(a). 2.16. "ORGANIC CHANGE" is defined in Section 6.2. 2.17. "ORIGINAL ISSUE DATE" is defined in Section 8.4.1(b). 2.18. "PERSON" means an individual, partnership, corporation, company, association, trust, joint venture, unincorporated organization, business trust, limited liability company and any governmental department or agency or political subdivision. 2.19. "PREFERENTIAL AMOUNT" is defined in Section 4. 3 4 2.20. "PREFERRED DIRECTOR" is defined in Section 5.3. 2.21. "PREFERRED STOCK" is defined in Section 1. 2.22. "PROPORTIONATE PERCENTAGE" is defined in Section 10.1. 2.23. "PROPOSAL" is defined in Section 10.1. 2.24. "PURCHASE AGREEMENTS" is defined in Section 1. 2.25. "QUALIFIED PUBLIC OFFERING" is defined in Section 8.2. 2.26. "RELATED AGREEMENTS" is defined in the Weston Presidio Purchase Agreement. 2.27. "REMEDY EVENT" is defined in Section 7. 2.28. "REMEDY NOTICE" is defined in Section 5.2.2. 2.29. "REQUIRED HOLDERS" means the holders of two-thirds of the outstanding Series A Preferred Stock. 2.30. "SERIES A PREFERRED STOCK" is defined in Section 1. 2.31. "WARRANTS" is defined in Section 6.3. 3. DIVIDENDS. No dividends of cash or other property (other than additional shares of Common Stock) shall be paid on the Common Stock unless the shares of Series A Preferred Stock receive the same dividends that such shares would have received had they been converted into Common Stock immediately prior to the record date for such dividend. 4. LIQUIDATION PREFERENCE. In the event of (a) any liquidation, dissolution or winding up of the Corporation, either voluntary or involuntary, or (b) unless agreed otherwise in writing by the Required Holders, a merger or consolidation of the Corporation, distributions to the stockholders of the Corporation shall be made in the following manner. The holders of Series A Preferred Stock shall first be entitled to receive, prior and in preference to any distribution of any of the assets of the Corporation to the holders of any other series of Preferred Stock, Common Stock or other capital stock of the Corporation by reason of their ownership of such stock, an amount per share equal to the sum of (a) $526.32 plus (b) an amount in the form of a dividend which would equal a 10% rate of return compounded annually on the amount in clause (a) above from the date of original issuance of the Series A Preferred Stock to the date of distribution (the "CALCULATION DATE") plus (c) accrued and unpaid dividends, if any, on the Series A Preferred Stock due under Section 3 (such sum being referred to as the "PREFERENTIAL AMOUNT"). If the assets and funds of the Corporation shall be insufficient to permit the payment of the full Preferential Amount to the holders of 4 5 Series A Preferred Stock, then the entire assets of the Corporation legally available for distribution shall be distributed ratably among the holders of Series A Preferred Stock in accordance with the aggregate liquidation preference of the shares of Series A Preferred Stock held by each of them. After payment has been made to the holders of Series A Preferred Stock of the full amounts to which they are entitled, the holders of Common Stock shall be entitled to share ratably in the remaining assets without participation by the holders of Series A Preferred Stock. 5. VOTING RIGHTS; REPRESENTATIVE DIRECTORS; ETC. 5.1. VOTES PER SHARE; NOTICES. Except as otherwise provided herein (including the election of Preferred Directors pursuant to Section 5.2.1 and a majority of the members of the Corporation's Board of Directors pursuant to Section 5.2.2) or required by law, the holders of Series A Preferred Stock (a) prior to December 1, 1996, shall not vote on any matter submitted to the holders of Common Stock and (b) from and after December 1, 1996, shall vote as a single class with the holders of Common Stock and shall have such votes in respect of each share of Series A Preferred Stock on any matter submitted to the holders of Common Stock as the number of shares of Common Stock into which shares of Series A Preferred Stock may then be converted. Record holders of Series A Preferred Stock shall be entitled to notice of any stockholders' meeting or solicitation of stockholders' consents in the manner provided in the Bylaws of the Corporation for general notices. 5.2. PREFERRED DIRECTORS. 5.2.1. REPRESENTATIVE DIRECTORS. In addition to the rights set forth in Section 5.2.2, the holders of a majority of the shares of Series A Preferred Stock, voting separately as a single class, shall be entitled to elect two directors. Except as provided in Section 5.2.2, the number of directors of the Corporation shall not exceed seven. 5.2.2. MAJORITY DIRECTORS (a) In the event that any Remedy Event shall occur, then, upon notice to the Corporation given by the Required Holders (a "REMEDY NOTICE"), the number of directors shall be increased as provided in Section 5.2.2(b) and the holders of Series A Preferred Stock, voting separately as a single class, shall become entitled to elect a majority of the Board of Directors of the Corporation until any such Remedy Event shall have been rectified or cured to the written satisfaction of the Required Holders, whereupon such right of the holders of the Series A Preferred Stock to elect a majority of the Board of Directors of the Corporation shall cease, and the maximum number of directors shall be reduced to seven, subject to being again revived from time to time upon the reoccurrence of the conditions above described. (b) Immediately upon receipt by the Corporation of a Remedy Notice pursuant to paragraph (a) above, the number of directors of the Corporation 5 6 shall automatically be increased to the minimum number sufficient to permit the election of additional directors so that after such election a majority of directors will have been elected by the holders of the Series A Preferred Stock. Upon such increase, the directors of the Corporation shall thereupon be divided into classes. One class shall consist of a number of directors equal to a majority of all of the directors and shall be elected solely by the holders of Series A Preferred Stock, voting separately as a single class, and the other class shall consist of the remaining directors and shall be elected by the holders of the capital stock of the Corporation entitled to vote generally in elections of directors. Subject to Section 7, any director then in office who was elected pursuant to Section 5.2.1 shall automatically become a member of the class of directors elected solely by the holders of Series A Preferred Stock. 5.3. TENURE. Each Director elected by the holders of Series A Preferred Stock pursuant to Section 5.2 (a "PREFERRED DIRECTOR") shall serve for a term of the lesser of (a) one year and until such Preferred Director's successor is elected and qualified, or (b) until the right to elect such Preferred Director ceases (at which time such Preferred Director will be deemed to be removed). So long as the holders of Series A Preferred Stock are entitled to elect Preferred Directors, any vacancy in the position of a Preferred Director may be filled only by vote of the holders of a majority of the shares of Series A Preferred Stock entitled to vote thereon. A Preferred Director may, during such Preferred Director's term of office, be removed at any time, with or without cause, only by the affirmative vote of the holders of a majority of the outstanding shares of Series A Preferred Stock. 6. REDEMPTION. 6.1. MANDATORY REDEMPTION. Except as set forth in Section 6.3, irrespective of any other redemptions or acquisitions of shares of the Series A Preferred Stock, the Corporation will redeem at a price equal to the Preferential Amount that number of shares of Series A Preferred Stock equal to 5% of the total number of issued and outstanding shares of Series A Preferred Stock as of March 31, 2002 (or such lesser number as is then outstanding) on the last day of each March, June, September and December, commencing in June, 2002. 6.2. MANDATORY CONTINGENT REDEMPTION. Upon the earliest to occur of: (a) the sale by the Corporation of all or a substantial portion of its assets, (b) the merger of the Corporation with, or the consolidation of the Corporation into, any other corporation as a result of which the stockholders of the Corporation immediately prior to such merger or consolidation do not own stock having more than 50% of the outstanding voting power (assuming conversion of all convertible securities and exercise of all outstanding options and warrants) of the surviving corporation, (c) The dissolution or liquidation of the Corporation, 6 7 (d) Gerald Cerce ceasing for any reason to be Chairman of, and actively involved in the executive management of, the Corporation and a replacement satisfactory to the Required Holders shall not be in place within 180 days, (e) except as a result of a Qualified Public Offering and stock passing by death, more than 50% of the outstanding voting stock of the Corporation becomes owned by Persons other than (i) holders of Series A Preferred Stock and their transferees and (ii) stockholders of record on the Original Issue Date (the foregoing events described in clauses (a) through (e) shall constitute an "ORGANIC CHANGE"), or (f) a Remedy Event, each holder of Series A Preferred Stock may require the Corporation to redeem all or any portion of the then outstanding shares of the Series A Preferred Stock of such holder, at the holder's option either (A) at a price equal to the preferential Amount or (B) at a price equal to the sum of (1) the Conversion Price PLUS (2) accrued and unpaid dividends, if any, on the Series A Preferred Stock due under Section 3, together with, for purposes only of this clause (B), Warrants on the same terms as described in Section 6.3. 6.3. VOLUNTARY REDEMPTION. Pursuant to the consent or vote of a majority of the disinterested directors of the Corporation, the Corporation may redeem at the Preferential Amount pro rata from all holders of Series A Preferred Stock an aggregate number of shares of Series A Preferred Stock specified in the notice delivered pursuant to Section 6.4. Such redemption shall take place at the time and on the date set forth in such notice. At the closing of such redemption, the Corporation shall deliver to each holder of Series A Preferred Stock whose shares are being redeemed warrants in substantially the form of Exhibit 2.1A to the Weston Presidio Purchase Agreement (the "WARRANTS") to purchase the number of shares of Common Stock into which the shares of Series A Preferred Stock so redeemed could at the time have been converted at a purchase price per share equal to the aggregate cash consideration received by the holder in connection with the redemption divided by such number of shares of Common Stock. The number of shares for which each Warrant shall be exercisable shall be reduced in proportion to the mandatory redemption of Series A Preferred Stock under Section 6.1. At the option of the Corporation, any redemption under this Section 6.3 may be applied against, and shall relieve the Corporation of, the next succeeding redemption obligations under Section 6.1 to the extent of the shares redeemed under this Section 6.3. 6.4. NOTICE OF REDEMPTION: PRO RATA TREATMENT. Written notice of redemption of Series A Preferred Stock pursuant to Sections 6.1 and 6.3 shall be given not fewer than 30 days prior to the redemption date by first class mail, postage prepaid, to each holder of record of shares of the Series A Preferred Stock, at such holder's address on the books of the Corporation. Each such notice shall state: (a) the 7 8 redemption date; (b) the number of shares of the Series A Preferred Stock to be redeemed; (c) the Preferential Amount; (d) the place or places where certificates for such shares are to be surrendered for payment of the Preferential Amount; and (e) that dividends on the shares to be redeemed will cease to accrue on such redemption date. Redemptions under Sections 6.1 and 6.3 shall be made pro rata among all holders of Series A Preferred Stock. 6.5. SPECIFIC PERFORMANCE. If any holder becomes obligated so to deliver any shares of Series A Preferred Stock to the Corporation upon any redemption under this Section 6 and fails to deliver the certificate therefor in accordance with these Articles of Amendment, the Corporation may, at its option, in addition to all other remedies it may have, cancel on its books such certificate representing such shares to be redeemed. 6.6. SUSPENSION OF REDEMPTION OBLIGATION. Notwithstanding any provision of this Section 6 to the contrary, if at any time the Corporation shall have outstanding any Indebtedness (as hereinafter defined) the terms of which restrict the Corporation's ability to redeem, in whole or in part, the Series A Preferred Stock ("Restrictive Indebtedness"), then in such event the Corporation's obligations under Section 6.1 and Section 6.2 to redeem any shares of Series A Preferred Stock shall be suspended until ninety-one (91) days after the date that such Restrictive Indebtedness is no longer outstanding. The Corporation shall notify the holders of the Series A Preferred Stock in writing within ten (10) days of its incurrence of any Restrictive Indebtedness which under this Section 6.6 would require the suspension of its redemption obligations under Sections 6.1 and 6.2 hereof. Within ten days after the expiration of ninety-one (91) days after the date of the payment of such Restrictive Indebtedness in full, the Corporation shall issue a written notice of redemption in accordance with Section 6.5 hereof for such number of shares of Series A Preferred Stock as the Corporation would have been obligated to redeem, pursuant to the provisions of Sections 6.1 or 6.2 hereof, on or prior to such notice date, but for the provisions of this Section 6.6. Nothing in this Section 6.6 shall affect or impair the rights granted the holders of Series A Preferred Stock pursuant to Section 5 hereof, nor shall it affect or impair any of the provisions relating to conversion set forth in Section 8 hereof. Notwithstanding any other provision of this Section 6 to the contrary, unless approved by the Preferred Directors, the aggregate principal amount of Restrictive Indebtedness shall not exceed at any time $150 million. For purposes of this Section 6.6, "Indebtedness" shall mean (i) any obligation of the Corporation or its subsidiaries for borrowed money, (ii) any obligation of the Corporation or its subsidiaries evidenced by bonds, debentures, notes or similar instruments, and (iii) any reimbursement obligation of the Corporation or its subsidiaries with respect to letters of credit, bankers' acceptances or similar facilities issued for the account of the Corporation and/or its subsidiaries, in each case, other than any obligation owed to a Person who directly or indirectly is controlling or controlled by or under direct or indirect common control with the Corporation. 7. REMEDY EVENT. The term "REMEDY EVENT" shall mean the occurrence and continuance of any of the following events for a period exceeding 8 9 30 days (unless otherwise specified below) after written notice of the occurrence of such event has been furnished to the Corporation at its registered address: (a) The Corporation shall fail to make any payment in respect of dividends on or redemptions of any shares of Series A Preferred Stock as the same shall become due. (b) The Corporation shall fail to perform or observe any of the material covenants, agreements or other provisions set forth in these Articles of Amendment. (c) Any written representation or warranty of or with respect to the Corporation made in, or pursuant to the express requirements of, the Weston Presidio Purchase Agreement shall prove to have been false in any material respect on the date as of which it was made without reference to whether such representation or warranty was made with knowledge or without knowledge. (d) The Corporation or any of its Subsidiaries shall fail to make any required payment on any indebtedness exceeding $100,000 in principal amount of (or guaranteed by) the Corporation or any of its Subsidiaries or with respect to any share of capital stock (whether because funds are not legally available therefor or otherwise), or the Corporation or any of its Subsidiaries shall fail to perform or observe any of the covenants or provisions required to be performed or observed by it pursuant to any senior lending agreement (as from time to time in effect), and (i) such failure shall continue, without having been duly cured, waived or consented to, beyond the period of grace, if any, therein specified or (ii) any security interest in or other lien on any property securing any such indebtedness shall be enforced, unless contested in good faith by the Corporation by appropriate proceedings or (iii) any such indebtedness shall become due and payable prior to stated maturity. (e) The Corporation shall fail to keep reserved a sufficient number of shares of Common Stock for issuance upon conversion of the Series A Preferred Stock or shall fail to issue an amount of shares of Common Stock upon the conversion by the holders thereof of the Series A Preferred Stock. (f) An Organic Change shall occur. (g) The sum of (i) consolidated stockholders' equity of the Corporation and its subsidiaries, and (ii) (to the extent not included in the stockholders' equity) the Series A Preferred Stock and (iii) up to $5 million outstanding in respect of notes issued by the Corporation on the Original Issue Date to its stockholders on such date and to the initial purchasers of the Series A Preferred Stock, all determined in accordance with generally accepted accounting principles consistently applied, shall at any time be less than $19,500,000 (the "Minimum Amount") provided, however, that the Minimum Amount shall be reduced dollar for dollar by any payments with respect of the principal balance of the notes referred to in clause (iii) hereof. 9 10 (h) A final judgment which, in the aggregate with other outstanding final judgments against the Corporation or any of its Subsidiaries, exceeds $500,000 above insurance coverage shall be rendered against the Corporation or any of its Subsidiaries and, within 30 days after entry thereof, such judgment shall not have been discharged or stayed pending appeal, or within 30 days after expiration of such stay such judgment shall not have been discharged. (i) The Corporation or any of its Subsidiaries or their Affiliates shall fail to perform or observe any other covenant, other agreement or provision to be performed or observed by it under the Purchase Agreements or any Investor Agreement to which the Corporation is a party and such failure shall not be rectified or cured to the satisfaction of the Required Holders within 30 days after actual knowledge by an executive officer of the Corporation; PROVIDED, HOWEVER, that the breach by an employee of any employment agreement between the Corporation and such employee shall not in any event constitute a Remedy Event. (j) The Corporation or any of its subsidiaries owning at least 20% of the assets, or contributing over the past fiscal year at least 20% of the cash flow, of the Corporation and its subsidiaries on a consolidated basis shall: (i) commence a voluntary case under Title 11 of the United States as from time to time in effect, or authorize, by appropriate proceedings of its board of directors or other governing body, the commencement of such a voluntary case; (ii) have filed against it a petition commencing an involuntary case under such Title 11 and such petition is not dismissed within 30 days; (iii) seek relief as a debtor under any applicable law, other than such Title 11, of any jurisdiction relating to the liquidation or reorganization of debtors or to the modification or alteration of the rights of creditors, or consent to or acquiesce in such relief; (iv) have entered against it any order by a court of competent jurisdiction (A) finding it to be bankrupt or insolvent, (B) ordering or approving its liquidation, reorganization or any modification or alteration of the rights of its creditors, or (C) assuming custody of, or appointing a receiver or other custodian for, all or a substantial part of its property; or (v) make an assignment for the benefit of, or enter into a composition with, its creditors, or appoint or consent to the appointment of a receiver or other custodian for all or a substantial part of its property. 8. CONVERSION 8.1. RIGHT OF CONVERSION. Each share of Series A Preferred Stock shall be convertible, at the option of the holder thereof at any time at the office of the Corporation or any transfer agent for the Series A Preferred Stock into the number of shares of the Common Stock of the Corporation obtained by dividing $526.32 by 10 11 the then effective conversion price of the Series A Preferred Stock (as from time to time adjusted by this Section 8, the "CONVERSION PRICE"). The initial Conversion Price shall be $52.63 per share. All calculations under this Section 8 shall be made to the nearest one hundredth of a cent. 8.2. AUTOMATIC CONVERSION. Each share of Series A Preferred Stock shall automatically be converted into shares of Common Stock at the then effective Conversion Price at any time upon the closing of an underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, with managing underwriters reasonably satisfactory to the Required Holders, covering the offer and sale of Common Stock for the account of the Corporation to the public generally providing net proceeds to the Corporation (after underwriter commissions and discounts, but before other offering expenses) of not less than $20,000,000 and at a price per share of Common Stock equal to 137.8% of the initial Conversion Price if such underwritten public offering shall be consummated on or before May 31, 1999, and thereafter 175% of the initial Conversion Price, in each case adjusted for stock splits and stock dividends after the Original Issue Date (a "QUALIFIED PUBLIC OFFERING"). 8.3. MECHANICS OF CONVERSION. Before any holder of Series A Preferred Stock shall be entitled to convert the same into shares of Common Stock and to receive certificates therefor, such holder shall surrender the Series A Preferred Stock certificates, duly endorsed, at the office of the Corporation or of any transfer agent for the Series A Preferred Stock, and shall give written notice to the Corporation at such office that such holder elects to convert the same; PROVIDED, HOWEVER, that in the event of an automatic conversion pursuant to Section 8.2, the outstanding shares of Series A Preferred Stock shall be converted automatically without any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the Corporation or its transfer agent; and PROVIDED, FURTHER that the Corporation shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such automatic conversion unless the certificates evidencing such shares of Series A Preferred Stock are either delivered to the Corporation or its transfer agent as provided above, or the holder notifies the Corporation or its transfer agent that such certificates have been lost, stolen or destroyed and executes an agreement reasonably satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection with such certificates. The Corporation shall, as soon as practicable after such delivery, or execution of such agreement in the case of a lost certificate, issue and deliver at such office to such holder of Series A Preferred Stock, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid and a check payable to the holder in the amount of any cash amounts payable as the result of a conversion into fractional shares of Common Stock plus all accrued and unpaid dividends on such holder's Series A Preferred Stock so converted. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Series A Preferred Stock to be converted, or in the case of automatic conversion immediately upon closing of the Qualified Public Offering, and the person entitled to receive the shares of Common Stock issuable 11 12 upon such conversion shall be treated for all purposes as the record holder of such shares of Common Stock on such date. 8.4. ADJUSTMENT OF CONVERSION PRICE DUE TO ISSUANCE OF ADDITIONAL SHARES. The Conversion Price shall be subject to adjustment as follows: 8.4.1. SPECIAL DEFINITIONS. (a) "OPTIONS" shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire either Common Stock or Convertible Securities. (b) "ORIGINAL ISSUE DATE" shall mean the date on which the Series A Preferred Stock is first issued by the Corporation. (c) "CONVERTIBLE SECURITIES" shall mean any indebtedness, shares or other securities convertible into or exchangeable for Common Stock. (d) "ADDITIONAL SHARES OF COMMON STOCK" shall mean all shares of Common Stock issued (or, pursuant to Section 8.4.5, deemed to be issued) by the Corporation after the Original Issue Date, other than shares of Common Stock issued or issuable (or, pursuant to Section 8.4.5, deemed to be issued) at any time: (i) upon conversion of the Series A Preferred Stock authorized herein or upon exercise or conversion of the Warrants or the other options and warrants set forth in Exhibit 4.3.1 to the Weston Presidio Purchase Agreement; (ii) as a stock dividend, stock split or similar distribution on the Series A Preferred Stock or any other event for which adjustment is made pursuant to Section 8.4.3; (iii) pursuant to a stock option, stock bonus or other employee stock plan permitted by Section 5.14 of the Weston Presidio Purchase Agreement or approved by the Preferred Directors at a meeting or by unanimous written consent of the Board of Directors or approved by the Required Holders, which approval shall specify the numbers of Common Stock available for distribution under any such plan; or (iv) by way of dividend or other distribution on shares of Common Stock excluded from the definition of Additional Shares of Common Stock by the foregoing clauses (i), (ii), (iii) or this clause (iv); or (v) in connection with sales of Common Stock or other Future Shares to the holders of the Series A Preferred Stock pursuant to the exercise by such holders of their rights under Section 10.1. 8.4.2. NO ADJUSTMENT OF CONVERSION PRICE. No adjustment in the Conversion Price shall be made in respect of the issuance of Additional Shares of Common 12 13 Stock (a) unless the consideration per share (determined pursuant to Section 8.4.6) for an Additional Share of Common Stock issued or deemed to be issued by the Corporation is less than the applicable Conversion Price in effect on the date of, and immediately prior to, such issue or (b) if prior to such issuance the Required Holders give a written waiver of such adjustment. 8.4.3. ADJUSTMENT OF CONVERSION PRICE UPON ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK. In the event the Corporation shall issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Section 8.4.5) for a consideration per share less than the applicable Conversion Price of the Series A Preferred Stock in effect on the date of and immediately prior to such issue, then and in such event, the applicable Conversion Price shall be reduced, concurrently with such issue (calculated to the nearest one hundredth of a cent), to a new Conversion Price obtained by dividing (a) an amount equal to the sum of (i) the number of shares of Common Stock outstanding immediately prior to such issue multiplied by the then applicable Conversion Price and (ii) the consideration, if any, deemed received by the Corporation upon such issue by (b) the total number of shares of Common Stock deemed to be outstanding immediately after such issue; PROVIDED, HOWEVER, that, for purposes of any calculation under this Section 8.4.3, all shares of Common Stock outstanding and issuable upon conversion of outstanding Options, Convertible Securities and the Series A Preferred Stock immediately prior to giving affect to such calculation shall be deemed to be outstanding. In no event will the Conversion Price be adjusted as the result of any issuance of any Additional Shares of Common Stock to any amount higher than the Conversion Price in effect immediately prior to such issuance. 8.4.4. ADJUSTMENTS FOR SUBDIVISIONS, STOCK DIVIDENDS, COMBINATIONS OR CONSOLIDATION OF COMMON STOCK. In the event the outstanding shares of Common Stock shall be increased by way of stock issued as a dividend for no consideration of subdivided (by stock split or otherwise) into a greater number of shares of Common Stock, the respective Conversion Prices then in effect shall, concurrently with the effectiveness of such increase or subdivision, be proportionately decreased. In the event the outstanding shares of Common Stock shall be combined or consolidated, by reclassification or otherwise, into a lesser number of shares of Common Stock, the respective Conversion Prices then in effect shall, concurrently with the effectiveness of such combination or consolidation, be proportionately increased. 8.4.5. DEEMED ISSUE OF ADDITIONAL SHARES OF COMMON STOCK - OPTIONS AND CONVERTIBLE SECURITIES. Except as provided in Section 8.4.3 or Section 8.4.4, in the event the Corporation at any time after the Original Issue Date shall issue any Options or Convertible Securities or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the maximum number of shares (as set forth in the instrument relating thereto without regard to any provisions contained therein for a subsequent adjustment of such number) of Common Stock issuable upon the exercise of such Options or, in the case of Convertible Securities and Options 13 14 therefor, the conversion or exchange of such Convertible Securities, shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date; PROVIDED, HOWEVER, that Additional Shares of Common Stock shall not be deemed to have been issued unless the consideration per share (determined pursuant to Section 8.4.6) of such Additional Shares of Common Stock would be less than the applicable Conversion Price in effect on the date of, and immediately prior to, such issue, or such record date, as the case may be; and PROVIDED, FURTHER, that in any such case in which Additional Shares of Common Stock are deemed to be issued: (a) no further adjustment in the applicable Conversion Price shall be made upon the subsequent issue of shares of Common Stock upon the exercise of such Options or conversion or exchange of such Convertible Securities of upon the subsequent issue of each Convertible Securities or Options; (b) if such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase in the consideration payable to the Corporation, or any increase in the number of shares of Common Stock issuable, upon the exercise, conversion or exchange thereof, the applicable Conversion Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon shall, upon any such increase becoming effective, be recomputed to reflect such increase insofar as it affects such Options or the rights of conversion or exchange under such Convertible Securities; (c) upon the expiration of any such Options or any rights of conversion or exchange under such Convertible Securities which shall not have been exercised, the applicable Conversion Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon shall remain in effect upon and after such expiration, but the Additional Shares of Common Stock deemed issued as the result of the original issue of such Option or rights shall not be deemed issued for the purposes of any subsequent adjustment to the Conversion Price; (d) in the event of any changes in the number of shares of Common Stock issuable upon the exercise, conversion or exchange of such Options or Convertible Securities, including a change resulting from the anti-dilution provisions thereof, the Conversion Price then in effect shall be readjusted to the Conversion Price that would have been in effect if the adjustment which was made upon the issuance of such Options or Convertible Securities had been made upon the basis of such change; (e) no readjustment pursuant to clauses (b) or (d) above shall have the effect of increasing the applicable Conversion Price to an amount which exceeds the lower of (i) the applicable Conversion Price on the original adjustment date, or (ii) the applicable Conversion Price that resulted from the issuance or 14 15 deemed issuance of other Additional Shares of Common Stock between the original adjustment date and such readjustment date; and (f) in the event the Corporation amends the terms of any Options or Convertible Securities (whether such Options or Convertible Securities were outstanding on the Original Issue Date or were issued after the Original Issue Date), then such Options or Convertible Securities, as so amended, shall be deemed to have been issued after the Original Issue Date and the provisions of this Section 8.4.5 shall apply. 8.4.6. DETERMINATION OF CONSIDERATION. For purposes of this Section 8.4, the consideration received by the Corporation for the issue of any Additional Shares of Common Stock shall be computed as follows: (a) CASH AND PROPERTY: Such consideration shall: (i) insofar as it consists of cash, be computed at the aggregate amount of net cash proceeds received by the Corporation excluding amounts paid or payable for accrued interest or accrued dividends; (ii) insofar as it consists of property other than cash, be computed at the fair value thereof at the time of such issue, as determined in good faith by the Board of Directors of the Corporation; and (iii) in the event Additional Shares of Common Stock are issued together with other shares or securities or other assets of the Corporation for consideration which covers both, be the proportion of such consideration so received, computed as provided in clauses (i) and (ii) above, which is allocated to the Additional shares of Common Stock as determined in good faith by the Board of Directors. (b) OPTIONS AND CONVERTIBLE SECURITIES: The consideration per share received by the Corporation for Additional Shares of Common Stock deemed to have been issued pursuant to Section 8.4.5, relating to Options and Convertible Securities, shall be determined by dividing (i) the total amount, if any, received or receivable by the Corporation as consideration for the issue of such Options or Convertible Securities, plus, subject to Section 8.4.5(b), the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Corporation upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities by (ii) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein 15 16 for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion of exchange of such Convertible Securities. 8.4.7. OTHER DILUTIVE EVENTS. In case any event shall occur as to which the other provisions of this Section 8.4 are not strictly applicable, but the failure to make any adjustment in the Conversion Price would not fairly protect the conversion rights represented by the Series A Preferred Stock in accordance with the intention of this Section 8, then, upon request of the Required Holders, the Board of Directors of the Corporation shall appoint a firm of independent public accountants of recognized national standing (which may be the regular auditors of the Corporation) to give their opinion as to the adjustment, if any, on a basis consistent with the intention of this Section 8, necessary to preserve without dilution the conversion rights represented by the Series A Preferred Stock. Upon receipt of such opinion, the Corporation will promptly furnish a copy thereof to the holders of the Series A Preferred Stock and the Conversion Price shall be adjusted in accordance therewith to the extent recommended by such accountants. The fees and expenses of such accountants shall be paid by the Corporation; PROVIDED, HOWEVER, that if such accountants opine that the total adjustment per share of Series A Preferred Stock is less than 10% of the previous per share Conversion Price, such fees and expenses will be paid by the holders of the Series A Preferred Stock. 8.5. OTHER DISTRIBUTIONS. In the event the Corporation shall declare a distribution payable in securities of the Corporation (other than shares of Common Stock), securities of other entities, securities evidencing indebtedness issued by the Corporation or other entities, assets (including cash dividends) or options or rights, then, in each such case for the purpose of this Section 8, the holders of the Series A Preferred Stock shall be entitled to a proportionate share of any such distribution as though they were the holders of the number of shares of Common Stock of the Corporation into which their shares of such Series A Preferred Stock were convertible as of the record date fixed for the determination of the holders of Common Stock of the Corporation entitled to receive such distribution. 8.6. SUBSEQUENT EVENTS. In the event of any recapitalization, consolidation or merger of the Corporation or its successor which does not require redemption of the Series A Preferred Stock pursuant to Section 6.2, the shares of Series A Preferred Stock shall be convertible into such shares or other interests as the Series A Preferred Stock would have been entitled if the Series A Preferred Stock had been converted into Common Stock immediately prior to such event. 8.7. CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of each adjustment or readjustment of the Conversion Price pursuant to this Section 8, the Corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to each holder of Series A Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment is based. The Corporation shall, upon the written request at any time of any holder of Series A Preferred Stock, furnish or cause to be furnished to such holder a certificate 16 17 setting forth (a) all such adjustments and readjustments previously made, (b) the Conversion Price at the time in effect, and (c) the number of shares of Common Stock and the amount, if any, of other property which at such time would be received upon the conversion of Series A Preferred Stock. 8.8. ISSUE TAX. The issuance of certificates for shares of Common Stock upon conversion of Series A Preferred Stock shall be made without charge to the holders thereof for any issuance tax; PROVIDED, HOWEVER, that the Corporation shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any certificate in a name other than the name of the holder of the Series A Preferred Stock which is being converted. 9. COVENANTS. 9.1. SPECIAL RESTRICTIONS. At any time when shares of Series A Preferred Stock are outstanding, except where the vote or written consent of the holders of a greater number of shares of the Corporation is required by law or by the Articles of Incorporation, as amended, and in addition to any other vote required by law or the Articles of Incorporation, as amended, without the consent of the Required Holders, given in writing or by vote at a meeting, consenting or voting (as the case may be) separately as a class, the Corporation will not: (a) create or authorize the creation of any additional class or series of shares of stock, or issue any shares thereof, unless the same ranks junior to the Series A Preferred Stock as to the distribution of assets on the liquidation, dissolution or winding up of the Corporation or increase the authorized amount of the Series A Preferred Stock or increase the authorized amount of any additional class or series of shares of stock unless the same ranks junior to the Series A Preferred Stock as the distribution of assets on the liquidation, dissolution or winding up of the Corporation, or create or authorize any instrument or security convertible into shares of Series A Preferred Stock or into shares of any other class or series of stock unless the same ranks junior to the Series A Preferred Stock as to the distribution of assets on the liquidation, dissolution or winding up of the Corporation, whether any such creation, authorization or increase shall be by means of amendment to the Articles of Incorporation or by merger, consolidation or otherwise: (b) amend, alter or repeal its Articles of Incorporation or By-Laws in a manner that is adverse to the holders of Series A Preferred Stock in any respect or for which the holders of Series A Preferred Stock did not receive prior written notice; (c) purchase or set aside any sums for the purchase of any shares of stock other than the Series A Preferred Stock, except for the purchase of shares of Common Stock from former employees of the Corporation who acquired such shares directly from the Corporation or the Stock Option Plan (as defined in the Weston Presidio Purchase Agreement), if each such purchase is made pursuant to contractual rights held by the Corporation relating to the termination of 17 18 employment of any such former employee and the total purchase price does not exceed $200,000 plus any applicable life insurance payments for all such purchases from each such former employee; (d) redeem or otherwise acquire any shares of Series A Preferred Stock except as expressly authorized in Section 6 or pursuant to a purchase offer made pro rata to all holders of the shares of Series A Preferred Stock on the basis of the aggregate number of outstanding shares of Series A Preferred Stock then held by each such holder; (e) consent to any liquidation, dissolution or winding up of the Corporation; or (f) consolidate or merge into or with any other entity or entities or sell or transfer all or substantially all its assets, except that the Corporation may, without the consent of the holders of at least a majority of the then outstanding shares of Series A Preferred Stock, effectuate a merger in which (i) the Corporation is the surviving corporation and (ii) the stockholders of the Corporation immediately prior to the merger hold more than 50% of the outstanding voting power of the surviving corporation (assuming conversion fall convertible securities and exercise of all outstanding options and warrants). 9.2. NO IMPAIRMENT. The Corporation will not by amendment of its Articles of Incorporation or through any reorganization, recapitalization, transfer of all or a substantial portion of its assets, consolidation, merger, dissolution, issue or sale of securities, closing of transfer books or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed under these Articles of Amendment by the Corporation, but will at all times in good faith assist in carrying out all the provisions of these Articles of Amendment and in taking all such action as may be necessary or appropriate in order to protect the conversion and other rights of the holders of Series A Preferred Stock against impairment. 9.3. RESERVATION OF SHARES. So long as any share of Series A Preferred Stock shall remain outstanding, the Corporation shall at all times reserve and keep available, free from preemptive rights, out of its authorized capital stock, for the purpose of issuance upon conversion of the Series A Preferred Stock, the full number of shares of Common Stock then issuable upon exercise of all outstanding shares of Series A Preferred Stock. If the Corporation's Common Stock shall be listed on any national stock exchange, the Corporation at its expense shall include in its listing application all of the shares of Common Stock reserved for issuance upon conversion of the Series A Preferred Stock (subject to issuance or notice of issuance to the exchange) and will similarly procure the listing of any further Common Stock reserved for issuance upon conversion of the Series A Preferred Stock at any subsequent time as a result of adjustments in the outstanding Common Stock or otherwise. 18 19 9.4. VALIDITY OF SHARES. The Corporation will from time to time take all such action as may be required to assure that all shares of Common Stock which may be issued upon conversion of any share of the Series A Preferred Stock will, upon issuance, be legally and validly issued, fully paid and non-assessable and free from all taxes, liens and charges with respect to the issuance thereof. Without limiting the generality of the foregoing, the Corporation will from time to time take all such action as may be required to assure that the par value per share, if any, of the Common Stock is at all times equal to or less than the lowest quotient obtained by dividing the then current par value of the Series A Preferred Stock by the number of shares of Common Stock into which each shares of Series A Preferred Stock can, from time to time, be converted. 9.5. NOTICE OF CERTAIN EVENTS. If at any time: (a) the Corporation shall declare any dividend or distribution payable to the holders of its Common Stock; (b) the Corporation shall offer for subscription pro rata to the holders of Common Stock any additional shares of stock of any class or any other rights; (c) any recapitalization of the Corporation, or consolidation or merger of the Corporation with, or sale of all or substantially all of its assets to, another corporation or business organization shall occur; or (d) a voluntary or involuntary dissolution, liquidation or winding up of the Corporation shall occur; then, in any one or more of such cases, the Corporation shall give the registered holders of the Preferred Stock written notice, by registered mail, of the date on which a record shall be taken for such dividend, distribution or subscription rights or for determining stockholders entitled to vote upon such recapitalization, consolidation, merger, sale, dissolution, liquidation or winding up and of the date when any such transaction shall take place, as the case may be. Such notice shall also specify the date as of which the holders of Common Stock of record shall participate in such dividend, distribution or subscription rights, or shall be entitled to exchange their Common Stock for securities or other property deliverable upon such recapitalization, consolidation, merger, sale, dissolution, liquidation or winding up, as the case may be. Such written notice shall be given 20 days prior to the record date with respect thereto. 9.6. NO REISSUANCE OF PREFERRED STOCK. No shares of Series A Preferred Stock acquired by the Corporation by reason of redemption, purchase, conversion or otherwise shall be reissued, and all such shares shall be canceled, retired and eliminated from the shares which the Corporation shall be authorized to issue. The Corporation may from time to time take such appropriate corporate action as may be necessary to reduce the authorized number of shares of Preferred Stock accordingly. 19 20 10. PREEMPTIVE RIGHTS. 10.1. RIGHT OF FIRST OFFER. Until the closing, including the closing under any over-allotment option, under a Qualified Public Offering, the Corporation shall not issue or sell any Common Stock (including securities convertible into, or options, warrants or other rights to purchase Common Stock, but excluding the shares described in Section 10.7) (collectively, the "FUTURE SHARES") to any Person (an "OFFEREE") without first providing each holder of Series A Preferred Stock the right to subscribe for its Proportionate Percentage of the Future Shares at a price and on such other terms which are at least as favorable as shall have been offered or are proposed to be offered by the Corporation to such Offeree and which shall have been specified by the Corporation in a notice delivered to each holder of Series A Preferred Stock (the "PROPOSAL"); PROVIDED, HOWEVER, that the holder of Series A Preferred Stock shall have the option to purchase Future Shares with cash, regardless of the method of purchase offered to such Offeree. The Proposal by its terms shall remain open and irrevocable for a period of 30 days from the date it is delivered by the Corporation to each holder of Series A Preferred Stock (the "FUTURE SHARES EXERCISE PERIOD"). The Proposal shall also certify that the Corporation has either (a) received a bona fide offer from a prospective purchaser, who shall be identified in such certification, and that the Corporation in good faith believes a binding agreement of sale is obtainable for consideration having a fair market, cash equivalent or present value set forth in such certification; or (b) intends in good faith to make an offering of its securities to prospective purchasers, who shall be identified to the extent possible in such certification at the price and on the terms set forth in such certification. "PROPORTIONATE PERCENTAGE" means, for any holder of Series A Preferred Stock, the percentage of Future Shares covered by the Proposal equal to (i) the number of shares of Common Stock into which the shares of Series A Preferred Stock held by such holder would then be convertible divided by (ii) the total number of shares of Common Stock outstanding at the time of delivery of the Proposal PLUS the aggregate number of shares of Common Stock into which all shares of Series A Preferred Stock would then be convertible. 10.2. NOTICE. Notice of each holder of Series A Preferred Stock's intention to accept the Proposal made pursuant to Section 10.1 shall be evidenced by writing signed by such holder and delivered to the Corporation prior to the end of the Future Shares Exercise Period (the "NOTICE OF PURCHASE") setting forth that portion of the Future Shares such holder elects to purchase (the "ACCEPTED SHARES"). The failure of a holder to deliver such a Notice of Purchase shall constitute a rejection of the Proposal. 10.3. FULL ACCEPTANCE. In the event that each holder of Series A Preferred Stock elects to purchase all of the shares offered to such holder in the Proposal, the Corporation shall sell to each such holder, pursuant to Section 10.6, the number of Accepted Shares set forth in such holder's Notice of Purchase. 20 21 10.4. PARTIAL ACCEPTANCE. In the event that one or more holders of Series A Preferred Stock do not elect to purchase all of the shares offered to such holders in the Proposal, the Corporation shall sell to each such holder, pursuant to Section 10.6, the number of Accepted Shares, if any, set forth in such holder's Notice of Purchase. Holders of Series A Preferred Stock may purchase pursuant to Section 10.6 any remaining shares offered in the Proposal not purchased by the other holders of Series A Preferred Stock pro rata based on the respective Proportionate Percentages of such holders wishing to purchase additional shares, or as they may otherwise agree. 10.5. NO FRACTIONAL SHARES. For the purpose of avoiding fractions as to Future Shares, the Corporation may adjust upward or downward by not more than one full share the number of Future Shares which any holder of Series A Preferred Stock would otherwise be entitled to purchase. 10.6. SALE OF SHARES. No later than 30 days after the expiration of the Future Shares Exercise Period, the Corporation shall deliver to each holder of Series A Preferred Stock who has submitted a Notice of Purchase to the Corporation a notice indicating the number of Future Shares which the Corporation shall sell to such holder pursuant to this Section 10 and the terms and conditions of such sale, which shall be in all respects (including unit price and interest rates) the same as specified in the proposal. The sale to such holders of such Future Shares shall take place not later than 10 days after receipt of such notice. Any sale to an Offeree of Future Shares that were not selected for purchase by the holders of Series A Preferred Stock as provided above shall take place not later than 90 days after the expiration of the Future Shares Exercise Period. Such sale shall be upon terms and conditions in all respects (including unit price and interest rates) which are no more favorable to such Offeree or less favorable to the Corporation than those set forth in the Proposal. Any refused Future Shares not purchased by the Offeree as contemplated by the Proposal within the 90-day period specified above shall remain subject to this Section 10. 10.7. EXCLUSION OF CERTAIN SHARES. Notwithstanding any contrary provision of this Section 10, Future Shares shall not include: 10.7.1. shares of Common Stock issuable upon conversion of the Series A Preferred Stock or upon exercise or conversion of the Warrants. 10.7.2. shares of Common Stock issued pursuant to the exercise of options granted under a stock option plan described in Section 8.4.1(d). 10.7.3. shares of Common Stock issued in connection with mergers permitted by Section 5.9 of the Weston Presidio Purchase Agreement or otherwise permitted to be issued by Section 5.14 of the Weston Presidio Purchase Agreement. 10.7.4. shares of Common Stock issued to the original holders of Series A Preferred Stock pursuant to the Purchase Agreements. 21 22 11. AMENDMENTS. The provisions of these terms of the Series A Preferred Stock may not be amended, modified or waived without the written consent or affirmative vote of the Required Holders; PROVIDED, HOWEVER, that any amendment reducing or postponing the payment of dividends or redemptions or postponing or increasing the amount of the Conversion Price shall require the written consent or affirmative vote of holders of 90% of the then outstanding shares of Series A Preferred Stock. Except to the extent required by law, the vote of the holders of any other class of capital stock of the Corporation is not required for the amendment, modification or waiver of the terms of these Articles of Amendment. 12. The Corporation may issue such additional series of Preferred Stock as the Board of Directors may establish by the adoption of a resolution or resolutions relating thereto, each such additional series to have such voting powers, full or limited, or no voting powers, and such designations, preferences and relative, participating, optional or other special rights and qualifications, limitations or restrictions thereof, as shall be stated and expressed in the resolution or resolutions providing for the issue of such series adopted by the Board of Directors pursuant to authority to do so, which authority is hereby granted to the Board of Directors. Unless otherwise expressly set forth in the designation therefor, no series of Preferred Stock shall have the right to vote as a class in connection with the issuance of any additional series of Preferred Stock, whether such additional series shall have rights greater, lesser or identical to the rights of any existing series of Preferred Stock. 5. Existing provisions limiting or denying to shareholders the preemptive right to acquire additional or treasury shares of the corporation are: The pre-emptive rights set forth in Rhode Island General Laws, (1956), as amended, Section 7-1.1-24 are denied to the stockholders. 6. Existing provisions of the charter for the regulation of the internal affairs of the corporation are: a. WRITTEN CONSENT OF SHAREHOLDERS. Except as otherwise provided by the Rhode Island Business Corporation Act, as amended, (the "Act"), any action required or permitted to be taken at a meeting of shareholders by the Act, by these Articles of Incorporation or by the By-laws of the Corporation may be taken without a meeting upon the written consent of less than all of the shareholders entitled to vote thereon if the shareholders who so consent would be entitled to cast at least the minimum number of votes which would be required to take such action at a meeting at which all shareholders entitled to vote thereon are present. b. ELIMINATION OF DIRECTORS' LIABILITY. A director of the Corporation shall not be personally liable to the Corporation or its shareholders for monetary damages for breach of the director's duty as a director, except for (i) liability for any breach of the director's duty of loyalty to the Corporation or its shareholders, (ii) liability for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) liability imposed pursuant to the 22 23 provisions of Section 43 of the Act, or (iv) liability for any transaction from which the director derived an improper personal benefit (unless said transaction is permitted by Section 37.1 of the Act). If the Act is amended to authorized corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the Act. Any repeal or modification of this Section (b) of Article 6 by the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification. c. INDEMNIFICATION. (i) BY-LAW AND INDEMNITY AGREEMENTS: STATUTORY PROVISIONS. The Board of Directors of the Corporation may include provisions in its By-laws, or may authorize agreements to be entered into with each director, officer, employee or other agent of the Corporation (an "Indemnified Person") for the purpose of indemnifying an Indemnified Person in the manner and to the extent permitted by Section 4.1 of the Act. (ii) BY-LAW AND INDEMNITY AGREEMENTS: OTHER PROVISIONS. In addition to the authority conferred upon the Board of Directors of the Corporation by Paragraph c(i) hereof, the Board of Directors of the Corporation may include provisions in its By-laws, or may authorize agreements to be entered into with each Indemnified Person, for the purpose of indemnifying such person in the manner and to the extent provided herein: (1) The By-law provisions or agreements authorized hereby may provide that the Corporation shall, subject to the provisions of this Section (c) of Article 6, pay, on behalf of an Indemnified Person any Loss or Expenses arising from any claim or claims which are made against the Indemnified Person (whether individually or jointly with other Indemnified Persons) by reason of any Covered Act of the Indemnified Person. (2) For the purposes of this Section (c) of Article 6, when used herein: (a) "Loss" means any amount which an Indemnified Person is legally obligated to pay for any claim for Covered Acts and shall include, without being limited to, damages, settlements, fines, penalties or, with respect to employee benefit plans, excise taxes; (b) "Expenses" means any expenses incurred in connection with the defense against any claim for Covered Acts, including, without being limited to, legal, accounting or investigative fees and expenses; and (c) "Covered Act" means any act or omission of an Indemnified Person in the Indemnified Person's capacity as a official capacity with the Corporation. 23 24 (3) The By-law provisions or agreements authorized hereby may cover Loss or Expenses arising from any claims made against a retired Indemnified Person, the estate, heirs or legal representative of a deceased Indemnified Person or the legal representative of an incompetent, insolvent or bankrupt Indemnified Person, where the Indemnified Person was an Indemnified Person at the time the Covered Act upon which such claims are based occurred. (4) Any By-law provisions or agreements authorized hereby may provide for the advancement of Expenses to an Indemnified Person prior to the final disposition of any action, suit or proceeding, or any appeal therefrom, involving such Indemnified Person and based on the alleged commission by such Indemnified Person of a Covered Act, subject to an undertaking by or on behalf of such Indemnified Person to repay the same to the Corporation if the Covered Act involves a claim for which indemnification is not permitted under clause (e), below, and the final disposition of such action, suit, proceeding or appeal results in an adjudication adverse to such director or officer. (5) The By-law provisions or agreements authorized hereby may not indemnify an Indemnified Person from and against any Loss, and the Corporation shall not reimburse for any Expenses, in connection with any claim or claims made against an Indemnified Person: (1) any breach of the Indemnified Person's duty of loyalty to the Corporation or its shareholders; (2) acts or omissions not in good faith or which involve intentional misconduct or knowing violation of law; (3) action contravening Section 43 of the Act; (4) the realization by the Indemnified Person of profits subject to the provisions of Section 16(b) of the Securities Exchange Act of 1934; or (5) a transaction from which the person seeking indemnification derived improper personal benefit (unless the transaction is permitted by Section 37.1 of the Act). (6) The By-law provisions or agreements authorized hereby may contain such other terms and conditions as the Board of Directors, in its sole discretion, determines to be consistent with the provisions of this Article. d. DISTRIBUTION OF CAPITAL SURPLUS. The Board of Directors shall have the authority to make distributions to shareholders from the capital surplus of the Corporation without the approval of the holders of shares of any class. e. AMENDMENT OF BY-LAWS. The Board of Directors may from time to time make, amend, supplement or repeal the By-laws; PROVIDED, HOWEVER, that the shareholders may change or repeal any By-law adopted by the Board of Directors; and PROVIDED, FURTHER, that no amendment or supplement to the By-laws adopted by the Board of Directors shall vary or conflict with any amendment or supplement adopted by the shareholders. f. AMENDMENT OF ARTICLES OF INCORPORATION. The Corporation reserves the right to amend, alter, change or repeal any provision contained in these Articles of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon shareholders herein are granted subject to this reservation. 24 25 7. The restated charter correctly sets forth without change the corresponding provisions of the charter as heretofore amended, and supersedes the original charter and all amendments thereto. 8. The restated charter correctly sets forth without change the corresponding provisions of the charter as heretofore amended, and supersedes the original charter and all amendments thereto. Dated: August 4, 1998 AAi.FOSTERGRANT, Inc. By /s/ Gerald F. Cerce -------------------------- Gerald F. Cerce, President and /s/ Duane M. DeSisto -------------------------- Duane M. DeSisto, Assistant Secretary STATE OF RHODE ISLAND SC. COUNTY OF PROVIDENCE At Smithfield, RI in said county on this 4th day of August, 1998, personally appeared before me Duane M. DeSisto, who being by me first duly sworn, declared that he is the Assistant Secretary of AAi.FOSTERGRANT, Inc., that he signed the foregoing document as Secretary of the corporation, and that the statements therein contained are true. /s/ Laurie C. Wilkins ------------------------------ Notary Public My Commission Expires: _______ (NOTARIAL SEAL) 25 EX-3.1.2 3 AMENDED & RESTATED BY-LAWS OF AA1.FOSTERGRANT, INC 1 Exihibit 3.1.2 AMENDED AND RESTATED BY-LAWS OF AAi. FOSTER GRANT, INC. ARTICLE I OFFICES SECTION 1. RHODE ISLAND OFFICE. The office of Accessories Associates, Inc. (the "Corporation") within the State of Rhode Island shall be in the Town of Smithfield. SECTION 2. OTHER OFFICES. The Corporation may also have an office or offices and keep the books and records of the Corporation, except as otherwise may be required by law, in such other place or places, either within or without the State of Rhode Island, as the Board of Directors of the Corporation (the "Board") may from time to time determine or the business of the Corporation may require. ARTICLE II MEETINGS OF SHAREHOLDERS SECTION 1. PLACE OF MEETINGS. All meetings of holders of shares of capital stock of the Corporation shall be held at the office of the Corporation in the State of Rhode Island or at such other place, within or without the State of Rhode Island, as may from time to time be fixed by the Board or specified or fixed in the respective notices or waivers of notice thereof. SECTION 2. ANNUAL MEETINGS. An annual meeting of shareholders of the Corporation for the election of directors and for the transaction of such other business as may properly come before the meeting (an "Annual Meeting") shall be held at 11:00 a.m. on the third Tuesday in the month of May of each year or on such other date and at such other time as may be fixed by the Board. If the Annual Meeting shall not be held on the day designated, the Board shall call a special meeting of shareholders as soon as practicable for the election of directors. Failure to hold the Annual Meeting at the designated time shall not work a forfeiture or dissolution of the Corporation. SECTION 3. SPECIAL MEETINGS. Special meetings of shareholders, unless otherwise provided by law, may be called at any time by the Board pursuant to a resolution adopted by a majority of the then authorized number of directors (as determined in accordance with Section 2 of Article III of these By-laws), or by the Chairman or the President. Any such call must specify the matter or matters to be acted upon at such meeting and only such matter or matters shall be acted upon thereat. SECTION 4. NOTICE OF MEETINGS. Except as otherwise may be required by law, notice of each meeting of shareholders, whether an Annual Meeting or a special meeting, shall be in writing, shall state the place, date and hour of the meeting and, in the case of a special meeting, 1 2 shall state the purpose or purposes of the meeting and indicate that the notice is being issued by or at the direction of the person or persons calling the meeting, and a copy of such notice shall be delivered or sent by mail, not less than 10 or more than 60 days before the date of said meeting, to each shareholder entitled to vote at such meeting. If mailed, such notice shall be directed to such shareholder at his address as it appears on the stock records of the Corporation, unless he shall have filed with the Secretary a written request that notices to him be mailed to some other address, in which case it shall be directed to him at such other address. Notice of an adjourned meeting need not be given if the time and place to which the meeting is to be adjourned was announced at the meeting at which the adjournment was taken, unless (i) the adjournment is for more than 30 days, or (ii) the Board shall fix a new record date for such adjourned meeting after the adjournment. SECTION 5. QUORUM. At each meeting of shareholders of the Corporation, the holders of shares having a majority of the voting power of the capital stock of the Corporation issued and outstanding and entitled to vote thereat shall be present or represented by proxy to constitute a quorum for the transaction of business, except as otherwise provided by law. SECTION 6. ADJOURNMENTS. In the absence of a quorum at any meeting of shareholders or any adjournment or adjournments thereof, holders of shares having a majority of the voting power of the capital stock present or represented by proxy at the meeting may adjourn the meeting from time to time until a quorum shall be present or represented by proxy. At any such adjourned meeting at which a quorum shall be present or represented by proxy, any business may be transacted which might have been transacted at the meeting as originally called if a quorum had been present or represented by proxy thereat. SECTION 7. ORDER OF BUSINESS. (a) At any Annual Meeting, only such business shall be conducted as shall have been brought before the Annual Meeting (i) by or at the direction of the Board of Directors, or (ii) by any shareholder who complies with the procedures set forth in this Section 7. (b) For business properly to be brought before an Annual Meeting by a shareholder, the shareholder must have given timely notice thereof in proper written form to the Secretary of the Corporation. To be timely, a shareholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation not less than 30 days nor more than 60 days prior to the Annual Meeting; PROVIDED, HOWEVER, that in the event that less than 40 days notice or prior public disclosure of the date of the Annual Meeting is given or made to shareholders, notice by the shareholder to be timely must be received not later than the close of business on the tenth day following the day on which such notice of the date of the Annual Meeting was mailed or such public disclosure was made. To be in proper written form, a shareholder's notice to the Secretary shall set forth in writing as to each matter the shareholder proposes to bring before the Annual Meeting: (i) a brief description of the business desired to be brought before the Annual Meeting and the reasons for conducting such business at the Annual Meeting; (ii) the name and address, as they appear on the Corporation's books, of the shareholder proposing such business; (iii) the class and number of shares of the Corporation which are beneficially owned by the shareholder; and (iv) any material interest of the shareholder in such business. Notwithstanding anything in these By-laws to the contrary, no business shall be conducted at an Annual Meeting except in accordance with the procedures set forth in this Section 7. The chairman of an Annual Meeting shall, if the facts warrant, determine and declare to the Annual Meeting that business was not properly brought before the Annual Meeting in accordance with the provisions of this Section 7 and, if he should so determine, he shall so declare to the Annual Meeting and any such business not properly brought before the Annual Meeting shall not be transacted. Notwithstanding anything in these By- 2 3 laws to the contrary, the Corporation shall include any such proposals in its proxy statement only if the shareholder has fully complied with all requirements of Rule 4a-8 of the Securities Exchange Act of 1934, as amended (as in effect as of the effective date of these By-laws or as subsequently amended, including any successor regulation). SECTION 8. VOTING. (a) Except as otherwise provided in the Articles of Incorporation or in any Preferred Stock of the Corporation ("Preferred Stock"), at each meeting of shareholders, every shareholder of the Corporation shall be entitled to one vote for every share of capital stock standing in his name on the stock records of the Corporation (i) at the time fixed pursuant to Section 6 of Article VII of these By-laws as the record date for the determination of shareholders entitled to vote at such meeting, or (ii) if no such record date shall have been fixed, then at the close of business on the day next preceding the day on which notice thereof shall be given. At each meeting of shareholders, all matters (except in cases where a larger vote is required by law or by the Articles of Incorporation of the Corporation or these By-laws) shall be decided by a majority of the votes cast at such meeting by the holders of shares of capital stock present or represented by proxy and entitled to vote thereon, a quorum being present. (b) No share of common stock or Preferred Stock of the Corporation shall be voted at any meeting of shareholders or counted in determining the total number of outstanding shares at any given time if (i) the consideration for the shares has not been fully paid to the Corporation or (ii) if the shares are Treasury shares or are shares held directly or indirectly by another corporation if a majority of shares entitled to vote for the election of directors of such other corporation is held by the Corporation. Nothing contained herein shall be construed as limiting the right of any corporation to vote stock, including but not limited to its own stock, held in a fiduciary capacity. (c) Shares standing in the name of another corporation, domestic or foreign, may be voted by such officer, agent or proxy as the By-laws of the other corporation may prescribe, or, in the absence of such provision, as the board of directors of the other corporation may determine; or, in the absence of such provision or determination, as the president or vice-president, secretary or assistant secretary of the other corporation may by proxy, duly executed and sealed, designate. (d) Shares held by an administrator, executor, guardian, or conservator may be voted by him, either in person or by proxy, without a transfer of such shares into his name. Shares standing in the name of a trustee may be voted by him, either in person or by proxy, but no trustee shall be entitled to vote shares held by him without a transfer of such shares into his name. It shall not be necessary for the fiduciary to obtain a court order authorizing him to vote such shares. The general proxy of a fiduciary shall be given the same weight and effect as the general proxy of an individual or corporation. 3 4 (e) Shares standing in the name of a receiver may be voted by such receiver, and shares held by or under the control of a receiver may be voted by such receiver without the transfer thereof into his name if authority so to do be contained in an appropriate order of the court by which the receiver was appointed. (f) A shareholder whose shares are pledged shall be entitled to vote such shares until his shares have been transferred into the name of the pledgee, and thereafter only the pledgee shall be entitled to vote the shares so transferred. SECTION 9. ACTION BY CONSENT. Any action required or permitted to be taken at a meeting of shareholders may be taken without a meeting if all the shareholders entitled to vote thereon consent thereto in writing. In addition to the foregoing, except as otherwise provided by the Rhode Island Business Corporation Act, any action required or permitted to be taken at a meeting of the shareholders by the Act, the Certificate of Incorporation or these By-Laws, may be taken without a meeting upon the written consent of less than all the shareholders entitled to vote thereon if the shareholders who so consent would be entitled to cast at least the minimum number of votes which would be required to take such action at a meeting at which all shareholders entitled to vote thereon are present. Prompt notice of such action shall be given to all shareholders who would have been entitled to vote upon the action if such meeting were held. The written consent of shareholders to any action shall be filed with the minutes of proceedings of shareholders. SECTION 10. INSPECTORS. For each election of directors by the shareholders and in any other case in which it shall be advisable, in the opinion of the Board, that the voting upon any matter shall be conducted by inspectors of election, the Board shall appoint two inspectors of election. If, for any such election of directors or the voting upon any such other matter, any inspector appointed by the Board shall be unwilling or unable to serve, or if the Board shall fail to appoint inspectors, the chairman of the meeting shall appoint the necessary inspector or inspectors. The inspectors so appointed, before entering upon the discharge of their duties, shall be sworn faithfully to execute the duties of inspectors with strict impartiality, and according to the best of their ability, and the oath so taken shall be subscribed by them. Such inspectors shall determine the number of shares of capital stock of the Corporation outstanding and the voting power of each of the shares represented at the meeting, the existence of a quorum, and the validity and effect of proxies, and shall receive votes, ballots or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots or consents, determine the result, and do such acts as are proper to conduct the election or vote with fairness to all shareholders. On request of the chairman of the meeting or any shareholder entitled to vote thereat, the inspectors shall make a report in writing of any challenge, question or matter determined by them and shall execute a certificate of any fact found by them. No director or candidate for the office of director shall act as an inspector of election of directors. Inspectors need not be shareholders. 4 5 ARTICLE III DIRECTORS SECTION 1. POWERS. The business of the Corporation shall be managed under the direction of the Board. The Board may exercise all such authority and powers of the Corporation and do all such lawful acts and things as are not by law or otherwise directed or required to be exercised or done by the shareholders. SECTION 2. NUMBER, ELECTION AND TERMS. The authorized number of directors shall be seven and PROVIDED, HOWEVER, that such number may be increased pursuant to vote of the holders of, adopted pursuant to the Articles of Incorporation, establishing the Preferred Stock as therein provided. SECTION 3. NOMINATIONS OF DIRECTORS; ELECTION. Nominations for the election of directors may be made by the Board or a committee appointed by the Board, or by any shareholder entitled to vote generally in the election of directors who complies with the procedures set forth in this Section 3. Directors shall be at least 21 years of age. Directors need not be shareholders. At each meeting of shareholders for the election of directors at which a quorum is present, the persons receiving a plurality of the votes cast shall be elected directors. All nominations by shareholders shall be made pursuant to timely notice in proper written form to the Secretary of the Corporation. To be timely, a shareholder's notice shall be delivered to or mailed and received at the principal executive offices of the Corporation not less than 30 days nor more than 60 days prior to the meeting; PROVIDED, HOWEVER, that in the event that less than 40 days notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholder to be timely must be so received not later than the close of business on the tenth day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. To be in proper written form, such shareholder's notice shall set forth in writing (i) as to each person whom the shareholder proposes to nominate for election or re-election as a director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, including, without limitation, such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected; and (ii) as to the shareholder giving the notice, the (x) name and address, as they appear on the Corporation's books, of such shareholder and (y) the class and number of shares of the Corporation which are beneficially owned by such shareholder. At the request of the Board of Directors, any person nominated by the Board of Directors for election as a director shall furnish to the Secretary of the Corporation the information required to be set forth in a shareholder's notice of nomination which pertains to the nominee. SECTION 4. PLACE OF MEETINGS. Meetings of the Board shall be held at the Corporation's office in the State of Rhode Island or at such other place, within or without such State, as the Board may from time to time determine or as shall be specified or fixed in the notice or waiver of notice of any such meeting. 5 6 SECTION 5. REGULAR MEETINGS. Regular meetings of the Board shall be held in accordance with a yearly meeting schedule as determined by the Board; or such meetings may be held on such other days and at such other times as the Board may from time to time determine. Notice of regular meetings of the Board need not be given except as otherwise required by these By-laws. SECTION 6. SPECIAL MEETINGS. Special meetings of the Board may be called by the Chairman or President and shall be called by the Secretary at the request of any two of the other directors. SECTION 7. NOTICE OF MEETINGS. Notice of each special meeting of the Board (and of each regular meeting for which notice shall be required), stating the time, place and purposes thereof, shall be mailed to each director, addressed to him at his residence or usual place of business, or shall be sent to him by telex, cable or telegram so addressed, or shall be given personally or by telephone, on 24 hours' notice. SECTION 8. QUORUM AND MANNER OF ACTING. The presence of at least a majority of the authorized number of directors shall be necessary and sufficient to constitute a quorum for the transaction of business at any meeting of the Board. If a quorum shall not be present at any meeting of the Board, a majority of the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Except where a different vote is required or permitted by law or these By-laws or otherwise, the act of a majority of the directors present at any meeting at which a quorum shall be present shall be the act of the Board. Any action required or permitted to be taken by the Board may be taken without a meeting if all the directors consent in writing to the adoption of a resolution authorizing the action. The resolution and the written consents thereto by the directors shall be filed with the minutes of the proceedings of the Board. Any one or more directors may participate in any meeting of the Board by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time. Participation by such means shall be deemed to constitute presence in person at a meeting of the Board. SECTION 9. RESIGNATION. Any director may resign at any time by giving written notice to the Corporation; PROVIDED, HOWEVER, that written notice to the Board, the Chairman of the Board, the President or the Secretary shall be deemed to constitute notice to the Corporation. Such resignation shall take effect upon receipt of such notice or at any later time specified therein and, unless otherwise specified therein, acceptance of such resignation shall not be necessary to make it effective. SECTION 10. REMOVAL OF DIRECTORS. Subject to the rights of the holders of the Preferred Stock, any director may be removed from office with or without cause by a vote of majority in number of the entire Board of Directors. SECTION 11. COMPENSATION OF DIRECTORS. The Board may provide for the payment to any of the directors, other than officers or employees of the Corporation, of a 6 7 specified amount for services as director or member of a committee of the Board, or of a specified amount for attendance at each regular or special Board meeting or committee meeting, or of both, and all directors shall be reimbursed for expenses of attendance at any such meeting; PROVIDED, HOWEVER, that nothing herein contained shall be construed to preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. ARTICLE IV COMMITTEES OF THE BOARD SECTION 1. APPOINTMENT AND POWERS OF AUDIT COMMITTEE. The Board may, by resolution adopted by the affirmative vote of a majority of the authorized number of directors, designate an Audit Committee of the Board, which shall consist of such number of members as the Board shall determine. The Audit committee shall (i) make recommendations to the Board as to the independent accountants to be appointed by the Board; (ii) review with the independent accountants the scope of their examination; (iii) receive the reports of the independent accountants and meet with representatives of such accountants for the purpose of reviewing and considering questions relating to their examination and such reports; (iv) review, either directly or through the independent accountants, the internal accounting and auditing procedures of the Corporation; and (v) perform such other functions as may be assigned to it from time to time by the Board. The Audit Committee may determine its manner of acting and fix the time and place of its meetings, unless the Board shall otherwise provide. A majority of the members of the Audit Committee shall constitute a quorum for the transaction of business by the committee and the act of a majority of the members of the committee present at a meeting at which a quorum shall be present shall be the act of the committee. SECTION 2. COMPENSATION COMMITTEE; OTHER COMMITTEES. The Board may, by resolution adopted by the affirmative vote of a majority of the authorized number of directors, designate members of the Board to constitute a Compensation Committee and such other committees of the Board as the Board may determine. Such committees shall in each case consist of such number of directors as the Board may determine, and shall have and may exercise, to the extent permitted by law, such powers as the Board may delegate to them in the respective resolutions appointing them. Each such committee may determine its manner of acting and fix the time and place of its meetings, unless the Board shall otherwise provide. A majority of the members of any such committee shall constitute a quorum for the transaction of business by the committee and the act of a majority of the members of such committee present at a meeting at which a quorum shall be present shall be the act of the committee. SECTION 3. ACTION BY CONSENT; PARTICIPATION BY TELEPHONE OR SIMILAR EQUIPMENT. Unless the Board shall otherwise provide, any action required or permitted to be taken by any committee may be taken without a meeting if all members of the committee consent in writing to the adoption of a resolution authorizing the action. The resolution and the written consents thereto by the members of the committee shall be filed with the minutes of the proceedings of the committee. Unless the Board shall otherwise provide, any one or more members of any such committee may participate in any meeting of the committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can 7 8 hear each other. Participation by such means shall constitute presence in person at a meeting of the committee. SECTION 4. CHANGES IN COMMITTEES; RESIGNATIONS; REMOVALS. Subject to the provisions of the Preferred Stock, the Board shall have power, by the affirmative vote of a majority of the authorized number of directors, at any time to change the members of, to fill vacancies in, and to discharge any committee of the Board. The Chairman of the Board may designate one or more directors as alternate members of any committee who may act in the place and stead of members who temporarily cannot attend any such meeting. Any member of any such committee may resign at any time by giving notice to the Corporation; PROVIDED, HOWEVER, that notice to the Board, the Chairman of the Board, the President, the chairman of such committee or the Secretary shall be deemed to constitute notice to the Corporation. Such resignation shall take effect upon receipt of such notice or at any later time specified therein; and, unless otherwise specified therein, acceptance of such resignation shall not be necessary to make it effective. Any member of any such committee may be removed at any time, either with or without cause, by the affirmative vote of a majority of the authorized number of directors at any meeting of the Board called for that purpose. ARTICLE V OFFICERS SECTION 1. NUMBER AND QUALIFICATION. The Corporation shall have such officers as may be necessary or desirable for the business of the Corporation. Each officer of the Corporation shall have a title set forth below or as may be prescribed by the Board and shall hold his office for such term as may be prescribed by the Board PROVIDED, HOWEVER, that the term for the Chairman of the Board and Vice Chairman of the Board shall automatically terminate upon the termination of such officer's term as a director of the Corporation. There shall be elected from among the officers of the Corporation, persons having the titles and exercising the duties (as prescribed by the By-laws or by the Board) of Chairman of the Board and Chief Executive Officer, Vice Chairman of the Board, President, one or more Executive Vice Presidents, one or more Vice Presidents, the Treasurer and the Secretary, and such other persons having such other titles and such other duties as the Board may prescribe. The same person may hold more than one office other than the offices of Chairman of the Board and Vice Chairman of the Board. The Chairman of the Board and the Vice Chairman of the Board shall be elected from among the directors. The Chairman of the Board may appoint one or more deputies, associates or assistant officers or such other agents as may be necessary or desirable for the business of the Corporation. In case one or more deputies, associates or assistant officers shall be appointed, the officer such appointee assists may delegate to the appointee the authority to perform such of the officer's duties as the officer may determine. SECTION 2. RESIGNATIONS. Any officer may resign at any time by giving written notice to the Corporation; PROVIDED HOWEVER, that notice to the Board, Chairman of the Board, the President or the Secretary shall be deemed to constitute notice to the Corporation. Such resignation shall take effect upon receipt of such notice or at any later time specified therein; and, 8 9 unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. SECTION 3. REMOVAL. Any officer or agent may be removed, either with or without cause, at any time, by the Board at any meeting called for that purpose; PROVIDED, HOWEVER, that the Chairman of the Board, Vice Chairman of the Board and President may remove any agent appointed by him. Any removal shall be without prejudice to the contract rights, if any, of the person so removed. SECTION 4. VACANCIES. Any vacancy among the officers, whether caused by death, resignation, removal or any other cause, shall be filled in the manner prescribed for election or appointment to such office. SECTION 5. CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER. The Chairman of the Board and Chief Executive Officer shall, if present, preside at all meetings of the Board and, if present, at all meetings of the shareholders. He shall perform the duties incident to the office of the Chairman of the Board and, under the direction of the Board, shall have actual management of the operations, business and affairs of the Corporation. SECTION 6. VICE CHAIRMAN OF THE BOARD. Subject to the Chairman of the Board of Directors, the Executive Committee and the Board of Directors itself, the Vice Chairman of the Board of Directors shall preside at all meetings of the Board of Directors in the Chairman's absence, and shall, in general, during the Chairman's absence perform all duties incident to the office of Chairman of the Board but shall not act as Chief Executive Officer. The Vice Chairman of the Board have such other duties as may be assigned to him by the Board of Directors or the Executive Committee. SECTION 7. PRESIDENT. The President shall have such powers and perform such duties as provided in these By-laws or as the Board of Directors, the Chairman, or in the absence of the Chairman, the Vice Chairman, may assign to him. He shall at all times see that all resolutions or determinations of the Board are carried into effect. He shall perform the duties incident to the office of the President and all such other duties as are specified in these By-laws or as shall be assigned to him from time to time by the Board. In the event that there is a vacancy in the position of President, which shall not have been filled as provided in the By-laws, the Board of Directors may designate one or more of the principal officers of the Corporation to perform such duties as may be required of the President by the By-laws or by law. In the absence of the Chairman of the Board and the Vice Chairman of the Board, the President shall preside at all meetings of the Board of Directors and all meetings of the shareholders. SECTION 8. EXECUTIVE VICE-PRESIDENT AND VICE PRESIDENT. There may be one or more Executive Vice-Presidents and as many Vice-Presidents as the Board of Directors may elect or appoint. Any Executive Vice-President and each Vice-President shall have such power and perform such duties as the Board of Directors may prescribe or as the Chairman may delegate to him. 9 10 SECTION 9. TREASURER AND CHIEF FINANCIAL OFFICER. The Treasurer and Chief Financial Officer shall have charge and custody of, and be responsible for, all funds and securities of the Corporation, shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation, shall deposit all moneys and other valuables to the credit of the Corporation in such depositories as may be designated pursuant to these By-laws, shall receive, and give receipts for, moneys due and payable to the Corporation from any source whatsoever, shall disburse the funds of the Corporation and shall render to all regular meetings of the Board, or whenever the Board may require, an account of all his transactions as Treasurer. He shall, in general, perform all the duties incident to the office of Treasurer and all such other duties as may be assigned to him from time to time by the Chairman or such other officer to whom the Treasurer reports. SECTION 10. SECRETARY. The Secretary shall, if present, act as secretary of, and keep the minutes of, all meetings of the Board, the Executive Committee and other committees of the Board and the shareholders in one or more books provided for that purpose, shall see that all notices are duly given in accordance with these By-laws and as required by law, shall be custodian of the seal of the Corporation and shall affix and attest the seal to all documents to be executed on behalf of the Corporation under its seal. He shall, in general, perform all the duties incident to the office of Secretary and all such other duties as may be assigned to him from time to time by the President or such other officer to whom the Secretary reports. SECTION 11. BONDS OF OFFICERS. If required by the Board, any officer of the Corporation shall give a bond for the faithful discharge of his duties in such amount and with such surety or sureties as the Board may require. SECTION 12. COMPENSATION. The salaries of the officers shall be fixed from time to time by the Compensation Committee of the Board; PROVIDED, HOWEVER, that the Chairman may fix or delegate to others the authority to fix the salaries of any agents appointed by the Chairman. No officer shall be prevented from receiving his salary by reason of the fact that he is also a director of the Corporation. SECTION 13. OFFICERS OF OPERATING COMPANIES OR DIVISIONS. The Chairman shall have the power to appoint, remove, and prescribe the terms of office, responsibilities, duties and salaries of, the officers of the operating companies or divisions, other than those who are officers of the Corporation. ARTICLE VI CONTRACTS, CHECKS, LOANS, DEPOSITS, ETC. SECTION 1. CONTRACTS. The Board may authorize any officer or officers, agent or agents, in the name and on behalf of the Corporation, to enter into any contract or to execute and deliver any instrument, which authorization may be general or confined to specific instances; and, unless so authorized by the Board, no officer, agent or employee shall have any power or authority to bind the Corporation by any contract or engagement or to pledge its credit or to render it liable pecuniarily for any purpose or for any amount. 10 11 SECTION 2. CHECKS, ETC. All checks, drafts, bills of exchange or other orders for the payment of money out of the funds of the Corporation, and all notes or other evidences of indebtedness of the Corporation, shall be signed in the name and on behalf of the Corporation in such manner as shall from time to time be authorized by the Board, which authorization may be general or confined to specific instances. SECTION 3. LOANS. No loan shall be contracted on behalf of the Corporation, and no negotiable paper shall be issued in its name, unless authorized by the Board, which authorization may be general or confined to specific instances. All bonds, debentures, notes and other obligations or evidences of indebtedness of the Corporation issued for such loans shall be made, executed and delivered as the Board shall authorize. SECTION 4. DEPOSITS. All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation in such banks, trust companies or other depositories as may be selected by or in the manner designated by the Board. The Board or its designees may make such special rules and regulations with respect to such bank accounts, not inconsistent with the provisions of the Certificate of Incorporation or these By-laws, as them may deem advisable. ARTICLE VII CAPITAL STOCK SECTION 1. STOCK CERTIFICATES. Each shareholder shall be entitled to have, in such form as shall be approved by the Board, a certificate or certificates signed by the Chairman of the Board or President and by either the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary (except that, when any such certificate is countersigned by a transfer agent or registered by a registrar other than the Corporation or an employee of the Corporation, the signatures of any such officers may be facsimiles, engraved or printed), which may be sealed with the seal of the Corporation (which seal may be a facsimile, engraved or printed), certifying the number of shares of capital stock of the Corporation owned by such shareholder. In the event any officer who has signed or whose facsimile signature has been placed upon any such certificate shall have ceased to be such officer before such certificate is issued, such certificate may be issued by the Corporation with the same effect as if he were such officer at the date of its issue. SECTION 2. LISTS OF SHAREHOLDERS ENTITLED TO VOTE. The officer of the Corporation who has charge of the stock ledger of the Corporation shall prepare and make or cause to be prepared or made, at least 10 days before every meeting of shareholders, a complete list of the shareholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each shareholder and the number of shares of capital stock registered in the name of each shareholder. Such list shall be open to the examination of any shareholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least 10 days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the 11 12 meeting for the duration thereof, and may be inspected by any shareholder of the Corporation who is present. SECTION 3. STOCK LEDGER. The stock ledger of the Corporation shall be the only evidence as to who are the shareholders entitled to examine the stock ledger, the list required by Section 2 of this Article VII or the books of the Corporation, or to vote in person or by proxy at any meeting of shareholders. SECTION 4. TRANSFERS OF CAPITAL STOCK. Transfers of shares of capital stock of the Corporation shall be made only on the stock ledger of the Corporation by the holder of record thereof, by his attorney thereunto authorized by power of attorney duly executed and filed with the Secretary of the Corporation, or by the transfer agent of the Corporation, and only on surrender of the certificate or certificates representing such shares, properly endorsed or accompanied by a duly executed stock transfer power. The Board may make such additional rules and regulations as it may deem advisable concerning the issue and transfer of certificates representing shares of the capital stock of the Corporation. SECTION 5. LOST CERTIFICATES. The Board of Directors may direct a new certificate to be issued in place of any certificate theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate, or his legal representative, to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen or destroyed. SECTION 6. FIXING OF RECORD DATE. In order that the Corporation may determine the shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or entitled to receive payment of any dividends or other distributions or allotments of any rights, or entitled to exercise any rights in respect to any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board may fix, in advance, a record date, which shall not be more than 60 days nor less than 10 days before the date of such meeting, nor more than 60 days prior to any other action. A determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders shall apply to any adjournment of the meeting; PROVIDED, HOWEVER, that the Board of Directors may fix a new record date for the adjourned meeting. SECTION 7. BENEFICIAL OWNERS. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such shares on the part of any other person, whether or not the Corporation shall have express or other notice thereof, except as otherwise provided by law. 12 13 ARTICLE VIII FISCAL YEAR The Corporation's fiscal year-end shall be the Saturday closest to December 31st. ARTICLE IX SEAL The Corporation's seal shall be circular in form and shall include the words "Accessories Associates, Inc., Rhode Island, 1985, Corporate Seal." ARTICLE X WAIVER OF NOTICE Whenever any notice is required by law, the Articles of Incorporation or these By-Laws to be given to any director, member of a committee or shareholder, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether signed before or after the time stated in such written waiver, shall be deemed equivalent to such notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when such person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business on the grounds that the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any meeting of the shareholders, directors, or members of a committee of directors need be specified in any written waiver of notice. ARTICLE XI INDEMNIFICATION SECTION 1. RIGHT TO INDEMNIFICATION. (a) Each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she, or the person of whom he or she is the legal representative, is or was a director or officer of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action or inaction in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Rhode Island Business Corporation Act, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said law permitted the Corporation to provide prior to such amendment), against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith and such indemnification shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure 13 14 to the benefit of his or her heirs, executors and administrators; PROVIDED, HOWEVER, that, except as provided in this Article XI, the Corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. The right to indemnification conferred in this Article XI shall be a contract right and shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that, if the Rhode Island Business Corporation Act requires, the payment of such expenses incurred by a director or officer in his or her capacity as a director or officer of the Corporation (and not in any other capacity in which service was or is rendered by such person while a director or officer, including, without limitation, service to an employee benefit plan) in advance of the final disposition of a proceeding, shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified under this Section or otherwise. The Corporation may, by action of its Board of Directors, provide indemnification to employees and agents of the Corporation with the same scope and effect as the foregoing indemnification of directors and officers. SECTION 2. RIGHT OF CLAIMANT TO BRING SUIT. If a claim under SECTION 1 is not paid in full by the Corporation within 30 days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceedings in advance of its final disposition where the required undertaking, if any is required, has been tendered to the Corporation) that the claimant has not met the standards of conduct which make it permissible under the Rhode Island Business Corporation Act for the Corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or its shareholders) to have made a determination prior to the commencement of such action that indemnification or the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the Rhode Island Business Corporation Act, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel, or its shareholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. SECTION 3. NON-EXCLUSIVITY OF RIGHTS. The right to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this Article XI shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the Articles of Incorporation, By-laws, agreement, vote of shareholders or disinterested directors or otherwise. SECTION 4. INSURANCE. The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability 14 15 or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Rhode Island Business Corporation Act. ARTICLE XII AMENDMENTS These By-laws or any of them may be amended or supplemented in any respect at any time, either (i) at any meeting of shareholders, provided that any amendment or supplement proposed to be acted upon at any such meeting shall have been described or referred to in the notice of such meeting; or (ii) at any meeting of the Board, provided that any amendment or supplement proposed to be acted upon at any such meeting shall have been described or referred to in the notice of such meeting or an announcement with respect thereto shall have been made at the last previous Board meeting, and provided further that no amendment or supplement adopted by the Board shall vary or conflict with any amendment or supplement adopted by the shareholders. 15 EX-3.2.1 4 RESTATED ARTICLES OF INCORPORATION- BONNEAU CO. 1 Exhibit 3.2.1 RESTATED ARTICLES OF INCORPORATION OF THE BONNEAU COMPANY ARTICLE I The Bonneau Company, pursuant to the provisions of Article 4.07 of the Texas Business Corporation Act, hereby adopts these Restated Articles of Incorporation, which accurately copy the Articles of Incorporation, as restated and amended by these Restated Articles of Incorporation, are set forth below and contain no other changes in any provisions. ARTICLE II The following amendments to the Articles of Incorporation were adopted by written consent of the sole shareholder of the corporation on October 15, 1991: This amendment deletes all of Article IV of the original Articles of Incorporation and replaces it with: The aggregate number of shares which the corporation has authority to issue is One Hundred Thousand (100,000) shares of One Dollar ($1.00) par value per share. The shares are designated as common stock and have identical rights and privileges in every respect. This amendment deletes all of Article V of the original Articles of Incorporation and replaces it with the following: Any action required by applicable law to be taken at any annual or special meeting of the shareholders, or any action which may be taken at any annual or special meeting of the shareholders, may be taken without a meeting, without prior notice, and without a vote, if a consent or consents in writing, setting forth the actions so taken, is signed by the holders of shares having not less than the minimum number of votes necessary to take such action at a meeting at which the holders of all shares entitled to vote on the action were present and voted. 2 This Amendment deletes all of Article VI of the original Articles of Incorporation and replaces it with the following: No holder of any share of the corporation, whether now or hereafter authorized, or other person shall have any pre-emptive or preferential right to purchase, receive or subscribe to (a) any unissued or treasury shares of any class of stock of the corporation, (b) any obligations, evidences of indebtedness or other securities of the corporation convertible into or exchangeable for, or carrying or accompanied by, any rights to receive, purchase or subscribe to, any such treasury or unissued shares, (c) any warrant or option for the purchase of any of the foregoing securities, or (d) any of the securities that may be issued or sold by the corporation. This amendment deletes all of Article VII of the original Articles of Incorporation and replaces it with the following: Cumulative voting by the shareholders of the corporation at any election for directors is expressly prohibited. The shareholders entitled to vote for directors in such election shall be entitled to cast one vote per directorship for each share held, and no more. This amendment deletes all of Article VIII of the original Articles of Incorporation and replaces it with the following: The corporation will not commence business until it has received for the issuance of its shares consideration of the value of One Thousand Dollars ($1,000,000), consisting of money, labor done, or property actually received. The following amendments are in addition to the original Articles of Incorporation and the full text of these provisions added reads as follows: ARTICLE IX To the fullest extent permitted by Article 2.02-1 of the Texas Business Corporation Act, as amended from time to time, the corporation shall indemnify the directors and officers of the corporation. 2 3 ARTICLE X The street address of the registered office of the corporation is c/o The Prentice-Hall Corporation System, Inc., 400 North St. Paul, Dallas, Texas 75201, and the name of its registered agent at such address is The Prentice-Hall Corporation System, Inc. ARTICLE XI Subject to changes authorized by the Bylaws of the corporation, the number of directors constituting the board of directors is twelve (12), and the names and addresses of the persons who are presently serving as directors until their successors are elected and qualified are: Edwin V. Bonneau 1601 Valleyview Lane Farmers Branch, Texas 75234 Barbara Bonneau 1601 Valleyview Lane Farmers Branch, Texas 75234 Steven P. Watten 633 Raven Coppell, Texas 75019 A. Rene Watten 633 Raven Coppell, Texas 75019 Shannon Bonneau 1601 Valleyview Lane Farmers Branch, Texas 75234 Marsha Bonneau 1601 Valleyview Lane Farmers Branch, Texas 75234 J. Dan Heard 1601 Valleyview Lane Farmers Branch, Texas 75234 Kelly Heard 1601 Valleyview Lane Farmers Branch, Texas 75234 Todd Bonneau 1601 Valleyview Lane Farmers Branch, Texas 75234 Julie Bonneau 1601 Valleyview Lane Farmers Branch, Texas 75234 3 4 ARTICLE XII To the extent permitted by the Texas Miscellaneous Corporation Laws Act, as amended from time to time, the directors of the corporation shall not be liable to the corporation or its shareholders for monetary damages for an act or omission in the director's capacity as a director. ARTICLE III Each statement made by these Restated Articles of Incorporation has been effected in conformity with the provisions of the Texas Business Corporation Act. These Restated Articles of Incorporation and each amendment made by these Restated Articles of Incorporation were adopted by the sole shareholder of the corporation on October ___, 1991. ARTICLE IV The number of shares of the corporation outstanding at the time of the adoption was one thousand (1,000); and the number of shares entitled to a vote on the amendments was one thousand (1,000). ARTICLE V The holder of all of the shares outstanding and entitled to vote on the amendments has signed a consent in writing adopting the amendments. ARTICLE VI The Articles of Incorporation and all amendments and supplements to them are superseded by the following Restated Articles of Incorporation, which accurately copy the entire text of the articles, as well as incorporate the amendments set forth above: 4 5 ARTICLES OF INCORPORATION OF THE BONNEAU COMPANY ARTICLE I NAME The name of the corporation is THE BONNEAU COMPANY. ARTICLE II DURATION The period of its duration is perpetual. ARTICLE III PURPOSE The corporation is organized for the purpose of engaging in the business of any or all lawful business for which corporations may be incorporated under the Texas Business Corporation Act. The corporation shall have all powers now or that hereafter may be conferred upon corporations organized under the Texas Corporation Act by law. ARTICLE IV SHARES The aggregate number of shares which the corporation has authority to issue is One Hundred Thousand (100,000) share of One Dollar ($1.00) par value per share. The shares are designated as common stock and have identical rights and privileges in every respect. 5 6 ARTICLE V SHAREHOLDERS MEETINGS Any action required by applicable law to be taken at any annual or special meeting of shareholders, or any action which may be taken at any annual or special meeting of shareholders, may be taken without a meeting, without prior notice, and without a vote, if a consent or consents in writing, setting forth the action so taken, is signed by the holders of shares having not less than the minimum number of votes necessary to take such action at a meeting at which the holders of all shares entitled to vote on the action were present and votes. ARTICLE VI DENIAL OF PREEMPTIVE RIGHTS No holder of any share of the corporation, whether now or hereafter authorized, or other person shall have any preemptive or preferential right to purchase, receive or subscribe to (a) any unissued or treasury shares of any class of stock of the corporation, (b) any obligations, evidences of indebtedness or other securities of the corporation convertible into or exchangeable for, or carrying or accompanied by, any rights to receive, purchase or subscribe to, any such treasury or unissued shares, (c) any warrant or option for the purchase of any of the foregoing securities, or (d) any other securities that may be issued or sold by the corporation. ARTICLE VII NONCUMULATIVE VOTING Cumulative voting by the shareholders of the corporation at any election for directors is expressly prohibited. The shareholders entitled to vote for directors in such election shall be entitled to cast one vote per directorship for each share held, and no more. 6 7 ARTICLE VIII COMMENCEMENT OF BUSINESS The corporation will not commence business until it has received for the issuance of its shares consideration of the value of One Thousand Dollars ($1,000.00), consisting of money, labor done, or property actually received. ARTICLE IX MANDATORY INDEMNIFICATION AND ADVANCEMENT OF EXPENSES To the fullest extent permitted by Article 2.02-1 of the Texas Business Corporation Act, as amended from time to time, the corporation shall indemnify the directors and officers of the corporation. ARTICLE X REGISTERED OFFICE AND AGENT The street address of the registered office of the corporation is c/o The Prentice-Hall Corporation System, Inc., 400 North St. Paul, Dallas, Texas 75201 and the name of its registered agent at such address is The Prentice-Hall Corporation System, Inc. ARTICLE XI DIRECTORS Subject to changes authorized by the Bylaws of the corporation, the number of directors constituting the board of directors is twelve (12), and the names and addresses of the persons who are presently serving as directors until their successors are elected and qualified are: Edwin V. Bonneau 1601 Valleyview Lane Farmers Branch, Texas 75234 Barbara Bonneau 1601 Valleyview Lane Farmers Branch, Texas 75234 7 8 Steven P. Watten 633 Raven Coppell, Texas 75019 A. Rene Watten 633 Raven Coppell, Texas 75019 Shannon Bonneau 1601 Valleyview Lane Farmers Branch, Texas 75234 Marsha Bonneau 1601 Valleyview Lane Farmers Branch, Texas 75234 J. Dan Heard 1601 Valleyview Lane Farmers Branch, Texas 75234 Kelly Heard 1601 Valleyview Lane Farmers Branch, Texas 75234 Todd Bonneau 1601 Valleyview Lane Farmers Branch, Texas 75234 Julia Bonneau 1601 Valleyview Lane Farmers Branch, Texas 75234 ARTICLE XII LIMITATION OF LIABILITY OF DIRECTORS To the extent permitted by the Texas Miscellaneous Corporation Laws Act, as amended from time to time, the directors of the corporation shall not be liable to the corporation or its shareholders for monetary damages for an act or omission in the director's capacity as a director. THE BONNEAU COMPANY By: /s/ Edwin B. Bonneau ------------------------------------- Edwin V. Bonneau, President 8 EX-3.2.2 5 BY-LAWS OF THE BONNEAU COMPANY 1 Exhibit 3.2.2 BYLAWS OF THE BONNEAU COMPANY ARTICLE I OFFICES SECTION 1. PRINCIPAL OFFICE. The principal office of The Bonneau Company (the "Corporation") shall be in Dallas County, Texas. SECTION 2. OTHER OFFICES. The Corporation may also have offices at such other places both within and without the State of Texas as the Board of Directors may from time to time determine or the business of the Corporation may require. ARTICLE II SHAREHOLDERS SECTION 1. TIME AND PLACE OF MEETINGS. Meetings of the shareholders shall be held at such time and at such place, within or without the State of Texas, as shall be determined by the Board of Directors. SECTION 2. ANNUAL MEETINGS. Annual meetings of shareholders shall be held on the second Tuesday of February at 12:00 P.M., noon, at a location to be determined by the Board of Directors, or at such time as shall be otherwise determined by the Board of Directors. At each annual meeting the shareholders shall elect a Board of Directors and transact such other business as may properly be brought before the meeting. SECTION 3. SPECIAL MEETINGS. Special meetings of the shareholders may be called at any time by the Chief Executive Officer or the Board of Directors, and shall be called by the Chief Executive Officer or the Secretary at the request in writing of the holders of not less than ten percent (10%) of the voting power represented by all the shares issued, outstanding and entitled to be voted at the proposed special meeting, unless the Articles of Incorporation provide for a different percentage, in which event such provision shall govern. Such request shall state the purpose or purposes of the proposed meeting. Business transacted at special meetings shall be confined to the purposes stated in the notice of the meeting. SECTION 4. NOTICE. Written or printed notice stating the place, day and hour of any shareholders' meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten (10) nor more than sixty (60) days before the date of the meeting, either personally or by mail, by or at the direction of the Chief Executive Officer, the Secretary or the officer or person calling the meeting, to each shareholder entitled to vote at such meeting. If mailed, such notice shall 2 be deemed to be delivered when deposited with the United States postal Service, postage prepaid, addressed to the shareholder at his address as it appears on the share transfer records of the Corporation. SECTION 5. CLOSING OF SHARE TRANSFER RECORDS AND FIXING RECORD DATES FOR MATTERS OTHER THAN CONSENTS TO ACTION. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or entitled to receive payment of any distribution or share dividend, or in order to make a determination of shareholders for any other proper purpose (other than determining shareholders entitled to consent to action by shareholders proposed to be taken without a meeting of shareholders), the Board of Directors of the Corporation may provide that the share transfer records shall be closed for a stated period but not to exceed, in any case, sixty (60) days. If the share transfer records shall be closed for the purpose of determining shareholders, such records shall be closed for at least ten (10) days immediately preceding such meeting. In lieu of closing the share transfer records, the Board of Directors may fix in advance a date as the record date for any such determination of shareholders, such date in any case to be not more than sixty (60) days and, in the case of a meeting of shareholders, not less than ten (10) days prior to the date on which the particular action requiring such determination of shareholders is to be taken. If the share transfer records are not closed and no record date is fixed for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders, or shareholders entitled to receive payment of a distribution (other than a distribution involving a purchase or redemption by the Corporation of any of its own shares) or share dividend, the date on which notice of the meeting is mailed or the date on which the resolution of the Board of Directors declaring such distribution or share dividend is adopted, as the case may be, shall be the record date for such determination of shareholders. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this section, such determination shall apply to any adjournment thereof except where the determination has been made through the closing of share transfer records and the stated period of closing has expired. SECTION 6. FIXING RECORD DATES FOR CONSENTS TO ACTION. Unless a record date shall have previously been fixed or determined pursuant to this SECTION 6, whenever action by shareholders is proposed to be taken by consent in writing without a meeting of shareholders, the Board of Directors may fix a record date for the purpose of determining shareholders entitled to consent to that action which record date shall not precede, and shall not be more than ten (10) days after, the date upon which the resolution fixing the record date is adopted by the Board of Directors. If no record date has been fixed by the Board of Directors and the prior action of the Board of Directors is not required by the Texas Business Corporation Act (herein called the "Act"), the record date for determining shareholders entitled to consent to action in writing without a meeting shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation by delivery to its registered office, its principal place of business, or an officer or agent of the Corporation having custody of the records in which proceedings of meetings of shareholders are recorded. Delivery shall be by hand or 2 3 by certified or registered mail, return receipt requested. Delivery to the Corporation's principal place of business shall be addressed to the president or the chief executive officer of the Corporation. If no record date shall have been fixed by the board of Directors and prior action of the Board of Directors is required by the Act, the record date for determining shareholders entitled to consent to action in writing without a meeting shall be at the close of business on the date on which the Board of Directors adopts a resolution taking such prior action. SECTION 7. LIST OF SHAREHOLDERS. The officer or agent of the corporation having charge of the share transfer books for shares of the corporation shall make, at least ten (10) days before each meeting of the shareholders, a complete list of the shareholders entitled to vote at such meeting or any adjournment thereof, arranged in alphabetical order, with the address of and the number of voting shares held by each, which list, for a period of ten (10) days prior to such meeting, shall be kept on file at the registered office or principal place of business of the Corporation and shall be subject to inspection by any shareholder at any time during the usual business hours of the Corporation. Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any shareholder during the whole time of the meeting. The original share transfer records shall be prima facie evidence as to who are the shareholders entitled to examine such list or transfer records or to vote at any meeting of shareholders. Failure to comply with the requirements of this SECTION 7 shall not affect the validity of any action taken at such meeting. SECTION 8. QUORUM. A quorum shall be present at a meeting of shareholders if the holders of shares having a majority of the voting power represented by all issued and outstanding shares entitled to vote at the meeting are present in person or represented by proxy at such meeting, unless otherwise provided by the Articles of Incorporation in accordance with the Act. Once a quorum is present at a meeting of shareholders, the shareholders represented in person or by proxy at the meeting may conduct such business as may properly be brought before the meeting until it is adjourned, and the subsequent withdrawal from the meeting of any shareholder or the refusal of any shareholder represented in person or by proxy to vote shall not affect the presence of a quorum at the meeting. If, however, a quorum shall not be present at any meeting of shareholders, the shareholders entitled to vote, present or in person or represented by proxy, shall have power to adjourn the meeting, without notice other than announcement at the meeting, until such time and to such place as may be determined by a vote of the holders of a majority of the shares represented in person or by proxy at such meeting until a quorum shall be present. At such adjourned meeting at which a quorum is present, any business may be transacted which might have been transacted at the meeting as originally noticed. SECTION 9. VOTING. When a quorum is present at any meeting, the vote of the holders of a majority of the shares entitled to vote, present in person or represented by proxy at such meeting, shall decide any matter brought before such meeting, other than the election of directors or a matter for which the affirmative vote of the holders of a specified portion of the holders of the shares entitled to vote is required by the Act, and shall be the 3 4 act of the shareholders, unless otherwise provided by the Articles of Incorporation or these Bylaws in accordance with the Act. Unless otherwise provided in the Articles of Incorporation or these Bylaws in accordance with the Act, directors of the Corporation shall be elected by a plurality of the votes cast by the holders of shares entitled to vote in the election of directors at a meeting of shareholders at which a quorum is present. At every meeting of the shareholders, each shareholder shall be entitled to such number of votes, in person or by proxy, for each share having voting power held by such shareholder, as is specified in the Articles of Incorporation (including the resolution of the Board of Directors (or a committee thereof) creating such shares), except to the extent that the voting rights of the shares of any class or series are limited or denied by the Articles of Incorporation. At each election of directors, every shareholder shall be entitled to cast, in person or by proxy, the number of votes to which the shares owned by him are entitled for as many persons as there are directors to be elected and for whose election he has a right to vote. Cumulative voting is prohibited by the Articles of Incorporation. Every proxy must be executed in writing by the shareholder. A telegram, telex, cablegram, or similar transmission by the shareholder, or a photographic, photostatic, facsimile, or similar reproduction of a writing executed by the shareholder, shall be treated as an execution in writing for the purposes of this SECTION 9. No proxy shall be valid after eleven (11) months from the date of its execution unless otherwise provided therein. Each proxy shall be revocable unless (i) the proxy form conspicuously states that the proxy is irrevocable, and (ii) the proxy is coupled with an interest, as defined in the Act and other Texas law. Shares standing in the name of another corporation may be voted by such officer, agent or proxy as the bylaws of such corporation may prescribe or, in the absence of such provision, as the board of directors of such corporation may determine. Shares held by an administrator, executor, guardian or conservator may be voted by him, either in person or by proxy, without a transfer of such shares into his name. Shares standing in the name of a trustee may be voted by him, either in person or by proxy, but no trustee shall be entitled to vote shares held by him without a transfer of such shares into his name as trustee. Shares standing in the name of a receiver may be voted by such receiver, and shares held by or under the control of a receiver may be voted by such receiver without being transferred into his name, if such authority is contained in an appropriate order of the court that appointed the receiver. A shareholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee, and thereafter the pledgee shall be entitled to vote the shares so transferred. 4 5 Treasury shares, shares of the Corporation's stock owned by another corporation the majority of the voting stock of which is owned or controlled by the Corporation, and shares of its own stock held by the Corporation in a fiduciary capacity shall not be voted, directly or indirectly, at any meeting, and shall not be counted in determining the total number of outstanding shares at any given time. SECTION 10. ACTION BY CONSENT. Any action required or permitted to be taken at a meeting of the shareholders may be taken without a meeting, without prior notice, and without a vote if a consent in writing, setting forth the action so taken, shall be signed by all of the shareholders entitled to vote with respect to the action that is the subject of the consent. In addition, if the Articles of Incorporation so provide, any action required or permitted to be taken at a meeting of the shareholders may be taken without a meeting, without prior notice, and without a vote if a consent or consents in writing, setting forth the action so taken, shall be signed by the holder or holders of shares having not less than the minimum number of votes that would be necessary to take such action at a meeting at which the holders of all shares entitled to vote on the action were present and voted. Prompt notice of the taking of any action by shareholders without a meeting by less than unanimous written consent shall be given to those shareholders who did not consent in writing to the action. Every written consent shall bear the date of signature of each shareholder who signs the consent. No written consent shall be effective to take the action that is the subject of the consent unless, within sixty (60) days after the date of the earliest dated consent delivered to the Corporation as set forth below in this SECTION 10, the consent or consents signed by the holders of shares having not less than the minimum number of votes that would be necessary to take the action that is the subject of the consent are delivered to the Corporation by delivery to its registered office, its principal place of business, or an officer or agent of the Corporation having custody of the records in which proceedings of meetings of shareholders are recorded. Delivery shall be by hand or certified or registered mail, return receipt requested. Delivery to the Corporation's principal place of business shall be addressed to the President or the Chief Executive Officer of the Corporation. A telegram, telex, cablegram, or similar transmission by a shareholder, or a photographic, photostatic, facsimile, or similar reproduction of a writing signed by a shareholder, shall be regarded as signed by the shareholder for the purposes of this SECTION 10. SECTION 11. PRESENCE AT MEETINGS BY MEANS OF COMMUNICATIONS EQUIPMENT. Shareholders may participate in and hold a meeting of the shareholders by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this SECTION 11 shall constitute presence in person at such meeting, except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. 5 6 ARTICLE III DIRECTORS SECTION 1. NUMBER OF DIRECTORS. The number of directors of the Corporation shall be fixed at twelve, but may be changed from time to time by resolution of the Board of Directors, but in no case shall the number of directors be less than one. No decrease in the number of directors shall have the effect of reducing the term of any incumbent director. Directors shall be elected at each annual meeting of the shareholders by the holders of shares entitled to vote in the election of directors, except as provided in SECTION 2 of this ARTICLE III, and each director shall hold office until the annual meeting of shareholders following his election or until his successor is elected and qualified. Directors need not be residents of the State of Texas or shareholders of the Corporation. SECTION 2. VACANCIES. Subject to other provisions of this SECTION 2, any vacancy occurring in the Board of Directors may be filled by election at an annual or special meeting of the shareholders called for that purpose or by the affirmative vote of a majority of the remaining directors, though the remaining directors may constitute less than a quorum of the Board of Directors as fixed by SECTION 9 of this ARTICLE III. A director elected to fill a vacancy shall be elected for the unexpired term of his predecessor in office. Any directorship to be filled by reason of an increase in the number of directors shall be filled by election at an annual meeting or at a special meeting of shareholders called for that purpose or may be filled by the Board of Directors for a term of office continuing only until the next election of one or more directors by the shareholders; provided that the Board of Directors may not fill more than two such directorships during the period between any two successive annual meetings of shareholders. Shareholders holding a majority of shares then entitled to vote at an election of directors may, at any time and with or without cause, terminate the term of office of all or any of the directors by a vote at any annual or special meeting called for that purpose. Such removal shall be effective immediately upon such shareholder action even if successors are not elected simultaneously, and the vacancies on the Board of Directors caused by such action shall be filled only by election by the shareholders. Notwithstanding the foregoing, whenever the holders of any class of series of shares are entitled to elect one or more directors by the provisions of the Articles of Incorporation, only the holders of shares of that class or series shall be entitled to vote for or against the removal of any director elected by the holders of shares of that class or series; and any vacancies in such directorships and any newly created directorships of such class or series to be filled by reason of an increase in the number of such directors may be filled by the affirmative vote of a majority of the directors elected by such class or series then in office or by a sole remaining director so elected, or by the vote of the holders of the outstanding shares of such class or series, and such directorships shall not in any case be filled by the vote of the remaining directors or the holders of the outstanding shares as a whole, unless otherwise provided in the Articles of Incorporation. 6 7 SECTION 3. GENERAL POWERS. The powers of the Corporation shall be exercised by or under the authority of, and the business and affairs of the Corporation shall be managed under the direction of, its Board of Directors, which may do or cause to be done all such lawful acts and things, as are not by the Act, the Articles of incorporation or these Bylaws directed or required to be exercised or done by the shareholders. SECTION 4. PLACE OF MEETINGS. The Board of Directors of the corporation may hold meetings, both regular and special, either within or without the State of Texas. SECTION 5. ANNUAL MEETINGS. The first meeting of each newly elected Board of Directors shall be held, without further notice, immediately following the annual meeting of shareholders at the same place, unless by the majority vote or unanimous consent of the directors then elected and serving, such time or place shall be changed. SECTION 6. REGULAR MEETINGS. Regular meetings of the Board of Directors may be held with or without notice at such time and place as the Board of Directors may determine by resolution. SECTION 7. SPECIAL MEETINGS. Special meetings of the Board of Directors may be called by or at the request of the Chief Executive Officer and shall be called by the Secretary on the written request of a majority of the incumbent directors. The person or persons authorized to call special meetings of the Board of Directors may fix the place for holding any special meeting of the Board of Directors called by such person or persons. Notice of any special meeting shall be given at least twenty-four (24) hours previous thereto if given either personally (including written notice delivered personally or telephone notice) or by telex, telecopy, telegram or other means of immediate communication, and at least seventy-two (72) hours previous thereto if given by written notice mailed or otherwise transmitted to each director at the address of his business or residence. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting. Any director may waive notice of any meeting, as provided in SECTION 2 of ARTICLE IV of these Bylaws. The attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. SECTION 8. QUORUM AND VOTING. At all meetings of the Board of Directors, the presence of a majority of the number of directors fixed in the manner provided in SECTION 1 of this ARTICLE III shall constitute a quorum for the transaction of business. At all meetings of committees of the Board of Directors (if one or more be designated in the manner described in SECTION 9 of this ARTICLE III), the presence of a majority of the number of directors fixed from time to time by resolution of the Board of Directors to serve as members of such committees shall constitute a quorum for the transaction of business. The affirmative vote of at least a majority of the directors present and entitled to vote at any 7 8 meeting of the Board of Directors or a committee of the Board of Directors at which there is a quorum shall be the act of the Board of Directors or the committee, except as may be otherwise specifically provided by the Act, the Articles of Incorporation or these Bylaws. Directors with an interest in a business transaction of the Corporation and directors who are directors or officers or have a financial interest in any other corporation, partnership, association or other organization with which the Corporation is transacting business may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee of the Board of Directors to authorize such business transaction. If a quorum shall not be present at any meeting of the Board of Directors or a committee thereof, a majority of the directors present thereat may adjourn the meeting, without notice other than announcement at the meeting, until such time and to such place as may be determined by such majority of directors, until a quorum shall be present. SECTION 9. COMMITTEES OF THE BOARD OF DIRECTORS. The Board of Directors may, by resolution passed by a majority of the whole Board of Directors, designate from among its members one or more committees, each of which shall be composed of one or more of its members, and may designate one or more of its members as alternate members of any committee, who may, subject to any limitations imposed by the Board of Directors, replace absent or disqualified members at any meeting of that committee. Any such committee, to the extent provided in the resolution of the Board of Directors designating the committee or in the Articles of Incorporation or these Bylaws, shall have and may exercise all of the authority of the Board of Directors of the Corporation, except where action of the Board of Directors is required by the Act or by the Articles of Incorporation. Any member of a committee of the Board of Directors may be removed, for or without cause, by the affirmative vote of a majority of the whole Board of Directors. If any vacancy or vacancies occur in a committee of the Board of Directors caused by death, resignation, retirement, disqualification, removal from office or otherwise, the vacancy or vacancies shall be filled by the affirmative vote of a majority of the whole Board of Directors. Such committee or committees shall have such name or names as may be designated by the Board of Directors and shall keep regular minutes of their proceedings and report the same to the Board of Directors when required. SECTION 10. COMPENSATION OF DIRECTORS. Unless otherwise provided by resolution of the Board of Directors, directors, as members of the Board of Directors or of any committee thereof, shall not be entitled to receive any stated salary for their services. Nothing herein contained, however, shall be construed to preclude any director from serving the Corporation in any other capacity and receiving compensation therefor or from receiving reimbursement for reasonable expenses incurred by a director in connection with the director's position as a director. SECTION 11. ACTION BY UNANIMOUS CONSENT. Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if a written consent, setting forth the action so taken, is signed by all the members of the Board of Directors or the committee, as the case may be, and such 8 9 written consent shall have the same force and effect as a unanimous vote at a meeting of the Board of Directors. SECTION 12. PRESENCE AT MEETINGS BY MEANS OF COMMUNICATIONS EQUIPMENT. Members of the Board of Directors of the Corporation or any committee designated by the Board of Directors, may participate in and hold a meeting of such board or committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this SECTION 12 shall constitute presence in person at such meeting, except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. ARTICLE IV NOTICES SECTION 1. FORM OF NOTICE. Whenever under the provisions of the Act, the Articles of Incorporation or these Bylaws, notice is required to be given to any director or shareholder, and no provision is made as to how such notice shall be given, it shall not be construed to mean personal notice exclusively, but any such notice may be given in writing, by mail, postage prepaid, or by telex, telecopy, telegram or other means of immediate communication, addressed or transmitted to such director or shareholder at such address as appears on the books of the Corporation. Any notice required or permitted to be given by mail shall be deemed to be given at the time when the same be thus deposited, postage prepaid, with the United States Postal Service as aforesaid. Any notice required or permitted to be given by telex, telecopy, telegram or other means of immediate communication shall be deemed to be given at the time of actual delivery. SECTION 2. WAIVER. Whenever the provisions of the Act, the Articles of Incorporation or these Bylaws, any notice is required to be given to any director or shareholder of the Corporation, a waiver thereof in writing signed by the person or persons entitled to such notice, whether before or after the time stated in such notice, shall be equivalent to the giving of such notice. SECTION 3. NOTICE UNNECESSARY. Whenever under the provisions of the Act, the Articles of Incorporation or these Bylaws, any notice is required to be given to any shareholder, such notice need not be given to the shareholder if (l) notice of two consecutive annual meetings and all notices of meetings held during the period between those annual meetings, if any, or (2) all (but in no event less than two) payments (if sent by first class mail) of distributions or interest on securities during a 12-month period have been mailed to that person, addressed at his address as shown on the records of the Corporation, and have been returned undeliverable. Any action or meeting taken or held without notice to such a person shall have the same force and effect as if the notice had been duly given. If such a person delivers to the Corporation a written notice setting forth 9 10 his then current address, the requirement that notice be given to that person shall be reinstated. ARTICLE V OFFICERS SECTION 1. GENERAL. The elected officers of the Corporation shall be a President and a Secretary. The Board of Directors may also elect or appoint a Chairman of the Board, one or more Vice Presidents, one or more Assistant Vice President, one or more Assistant Secretaries, a Treasurer and one or more Assistant Treasurers, all of whom shall also be officers. Two or more offices may be held by the same person. SECTION 2. ELECTION. The Board of Directors shall elect the officers of the Corporation at each annual meeting of the Board of Directors. The Board of Directors may appoint such other officers and agents as it shall deem necessary and shall determine the salaries of all officers and agents from time to time. The officers shall hold office until their successors are chosen and qualified. No officer need be a member of the Board of Directors. Any officer elected or appointed by the Board of Directors may be P removed, with or without cause, at any time by a majority vote of the whole Board. Election or appointment of an officer or agent shall not of itself create contract rights. SECTION 3. CHAIRMAN OF THE BOARD. The Chairman of the Board, if any, shall be the chief Executive Officer of the Corporation and, subject to the provisions of these Bylaws, shall have general supervision of the affairs of the Corporation and shall have general and active control of all its business. He shall preside, when present, at all meetings of shareholders and at all meetings of the Board of Directors. He shall have general authority to execute bonds, deeds and contracts in the name of the Corporation and affix the corporate seal thereto; to sign stock certificates; to cause the employment or appointment of such employees and agents of the Corporation as the proper conduct of operations may require, and to fix their compensation, subject to the provisions of these Bylaws; to remove or suspend any employee or agent who shall have been employed or appointed under his authority or under authority of an officer subordinate to him; to suspend for cause, pending final action by the authority which shall have elected or appointed him, any officer subordinate to the Chairman of the Board; and, in general, to exercise all the powers and authority usually appertaining to the chief executive officer of a corporation, except as otherwise provided in these Bylaws. SECTION 4. PRESIDENT. In the absence of a Chairman of the Board, the President shall be the ranking and Chief Executive Officer of the Corporation, and shall have the duties and responsibilities, and the authority and power, of the Chairman of the Board. The President shall be the Chief Operating Officer of the Corporation and as such shall have, subject to review and approval of the Chairman of the Board, if one be elected, the responsibility for the operation of the Corporation and the authority of the Chairman of the Board. 10 11 SECTION 5. VICE PRESIDENTS. In the absence of the President or in the event of his inability or refusal to act, the Vice president, if any (or in the event there be more than one, the Vice Presidents in the order designated or, in the absence of any designation, then in the order of their election), shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the President. The Vice President shall perform such other duties and have such other powers as the Operating Officer may from time to time prescribe. The Vice President in charge of finance, if any, shall also perform the duties and assume the responsibilities described in SECTION 9 of this Article for the Treasurer, and shall report directly to the Chief Executive Officer of the Corporation. SECTION 6. ASSISTANT VICE PRESIDENTS. In the absence of a Vice President or in the event of his inability or refusal to act, the Assistant Vice President, if any (or, if there be more than one, the Assistant Vice Presidents in the order designated or, in the absence of any designation, then in the order of their election), shall perform the duties and exercise the powers of that Vice President, and shall perform such other duties and have such other powers as the Board of Directors, the Chief Executive Officer, the Chief Operating Officer or the Vice President under whose supervision he is appointed may from time to time prescribe. SECTION 7. SECRETARY. The Secretary shall attend and record minutes of the proceedings of all meetings of the Board of Directors and any committees thereof and all meetings of the shareholders. He shall file the records of such meetings in one or more books to be kept by him for that purpose. The Secretary shall also keep at the Corporation's registered office or principal place of business a record of the original issuance of shares issued by the Corporation and a record of each transfer of those shares that have been presented to the Corporation for registration or transfer. He shall give, or cause to be given, notice of all meetings of the shareholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors or the Chief Executive Officer, under Whose supervision he shall be. He shall have custody of the corporate seal of the Corporation and he, or an Assistant Secretary, shall have authority to affix the same to any instrument requiring it, and when so affixed, it may be attested by his signature or by the signature of such Assistant Secretary. The Board of Directors may give general authority to any other officer to affix the seal of the Corporation and to attest the affixing by his signature. The Secretary shall keep and account for all books, documents, papers and records of the Corporation, except those for which some other office or agent is properly accountable. He shall have authority to sign stock certificates and shall generally perform all the duties usually appertaining to the office of the secretary of a corporation SECTION 8. ASSISTANT SECRETARIES. In the absence of the Secretary or in the event of his inability or refusal to act, the Assistant Secretary, if any (or, if there be more than one, the Assistant Secretaries in the order designated or, in the absence of any designation, then in the order of their election), shall perform the duties and exercise the powers of the 11 12 Secretary and shall perform such other duties and have such other powers as the Board of Directors, the Chief Executive Officer or the Secretary may from time to time prescribe. SECTION 9. TREASURER. The Treasurer, if any (or the Vice president in charge of finance, if one be elected), shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. He shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the Chief Executive Officer and the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all his transactions as Treasurer and of the financial condition of the Corporation. If required by the Board of Directors, he shall give the Corporation a bond (which shall be renewed every six years) in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of his office and for the restoration of the Corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the Corporation. The Treasurer shall be under the supervision of the Vice President in charge of finance, if any, and he shall perform such other duties as may be prescribed by the Board of Directors, the Chief Executive Officer or any such Vice President in charge of finance. SECTION 10. ASSISTANT TREASURERS. In the absence of the Treasurer or in the event of his inability or refusal to act, the Assistant Treasurer, if one be elected (or, if there shall be more than one, the Assistant Treasurer in the order designated or, in the absence of any designation, then in the order of their election), shall perform the duties and exercise the powers of the Treasurer and shall perform such other duties and have such other powers as the Board of Directors, the Chief Executive Officer or the Treasurer may from time to time prescribe. SECTION 11. BONDING. If required by the Board of Directors, all or certain of the officers shall give the Corporation a bond, in such form, in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors, for the faithful performance of the duties of their office and for the restoration to the Corporation, in case of their death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in their possession or under their control belonging to the Corporation. ARTICLE VI CERTIFICATES REPRESENTING SHARES SECTION 1. FORM OF CERTIFICATES. The Corporation shall deliver certificates representing all shares to which the shareholders are entitled. Certificates representing 12 13 shares of the Corporation shall be in such form as shall be approved and adopted by the Board of Directors and shall be approved and adopted by the Board of Directors and shall be numbered consecutively and entered in the share transfer records of the Corporation as they are issued. Each certificate shall state on the face thereof that the Corporation is organized under the laws of the State of Texas, the name of the registered holder, the number and class of shares, and the designation of the series, if any, which said certificate represents, and either the par value of the shares or a statement that the shares are without par value. Each certificate shall also set forth on the back thereof a full or summary statement of matters required by the Act or the Articles of Incorporation to be described on certificates representing shares, and shall contain a conspicuous statement on the face thereof referring to the matters set forth on the back thereof. Certificates shall be signed by the Chairman of the Board, President or any Vice President and the Secretary or any Assistant Secretary, and may be sealed with the seal of the Corporation. Either the seal of the Corporation or the signatures of the Corporation's officers or both may be facsimiles. In case any officer or officers who have signed, or whose facsimile signature or signatures have been used on such certificate or certificates, shall cease to be such officer or officers of the Corporation, whether because of death, resignation or otherwise, before such certificate or certificates have been delivered by the Corporation or its agents, such certificate or certificates may nevertheless be issued and delivered as though the person or persons who signed the certificate or certificates or whose facsimile signature or signatures have been used thereon had not ceased to be such officer or officers of the Corporation. SECTION 2. LOST CERTIFICATES. The corporation may direct that a new certificate be issued in place of any certificate theretofore issued by the Corporation alleged to have been lost or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate to be lost or destroyed. When authorizing the issue of a new certificate, the Board of Directors, in its discretion and as a condition precedent to the issuance thereof, may require the owner of the lost or destroyed certificate, or his legal representative, to advertise the same in such manner as it shall require and/or give the Corporation a bond in such form, in such sums, and with such surety or sureties as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen or destroyed. SECTION 3. TRANSFER OF SHARES. Shares of stock shall be transferable only on the share transfer records of the Corporation by the holder thereof in person or by his duly authorized attorney. Subject to any restrictions on transfer set forth in the Articles of Incorporation, these Bylaws or any agreement among shareholders to which this Corporation is a party or has notice, upon surrender to the Corporation or to the transfer agent of the Corporation of a certificate representing shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the Corporation or the transfer agent of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. 13 14 SECTION 4. REGISTERED SHAREHOLDERS. Except as otherwise provided in the Act or other Texas law, the Corporation shall be entitled to regard the person in whose name any shares issued by the corporation are registered in the share transfer records of the Corporation at any particular time (including, without limitation, as of the record date fixed pursuant to SECTION 5 or SECTION 6 of ARTICLE II hereof) as the owner of those shares and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof. ARTICLE VII INDEMNIFICATION OF OFFICERS AND DIRECTORS SECTION 1. GENERAL. The Corporation shall indemnify persons who are or were a director, officer, employee or agent of the Corporation, or persons who are not or were not directors, officers, employees or agents of the Corporation but who are or were serving at the request of the Corporation as a director, officer, trustee, employee, agent or similar functionary of another foreign or domestic corporation, trust, partnership, joint venture, sole proprietorship, employee benefit plan or other enterprise (such persons collectively referred herein as "Corporate Functionaries") against any and all liability and reasonable expense that may be incurred by them in connection with or resulting from (a) any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, arbitrative or investigative, (b) an appeal in such an action, suit or proceeding, or (c) any inquiry or investigation that could lead to such an action, suit or proceeding, all to the full extent permitted by Article 2.02-1 of the Act. The rights of indemnification provided for in this ARTICLE VII shall be in addition to all rights to which any Corporate Functionary may be entitled under any agreement or vote of shareholders or as a matter of law or otherwise. SECTION 2. INSURANCE. The Corporation may purchase or maintain insurance on behalf of any Corporate Functionary against any liability asserted against him and incurred by him in such a capacity `or arising out of his status as a Corporate Functionary, whether or not the Corporation would have the power to indemnify him or her against the liability under the Act' or these Bylaws; provided, however, that if the insurance or other arrangement is with a person or entity that is not regularly engaged in the business of providing insurance coverage, the insurance or arrangement may provide for payment of a liability with respect to which the Corporation would not have the power to indemnify the person only if including coverage for the additional liability has been approved by the shareholders of the Corporation. Without limiting the power of the Corporation to procure or maintain any kind of insurance or arrangement, the Corporation may, for the benefit of persons indemnified by the Corporation, (i) create a trust fund, (ii) establish any form of self-insurance, (iii) secure its indemnification obligations by grant of any security interest or other lien on the assets of the Corporation, or (iv) establish a letter of credit, guaranty or surety arrangement. Any such insurance or other arrangement may be procured, maintained or established within the Corporation or its affiliates or with any 14 15 insurer or other person deemed appropriate by the Board of Directors of the Corporation regardless of whether all or part of the stock or other securities thereof are owned in whole or in part by the corporation. In the absence of fraud, the judgment of the Board of Directors of the Corporation as to the terms and conditions of such insurance or other arrangement and the identity of the insurer or other person participating in an arrangement shall be conclusive, and the insurance or arrangement shall not be voidable and shall not subject the directors approving the insurance or arrangement to liability, on the ground, regardless of whether directors participating in approving such insurance or other arrangement shall be beneficiaries thereof. ARTICLE VIII GENERAL PROVISIONS SECTION 1. DISTRIBUTIONS AND SHARE DIVIDENDS. Distributions or share dividends to the shareholders of the Corporation, subject to the provisions of the Act and the Articles of Incorporation and any agreements or obligations of the Corporation, if any, may be declared by the Board of Directors at any regular or special meeting. Distributions may be declared and paid in cash or in property (other than shares or rights to acquire shares of the corporation), provided that all such declarations and payments of distributions, and all declarations and issuances of share dividends, shall be in strict compliance with all applicable laws and the Articles of Incorporation. SECTION 2. RESERVES. There may be created by resolution of the Board of Directors out of the surplus of the Corporation such reserve or reserves as the Board of Directors from time to time, in its discretion, deems proper to provide for contingencies, or to equalize distributions or share dividends, or to repair or maintain any property of the Corporation, or for such other proper purpose as the Board shall deem beneficial to the Corporation, and the Board may increase, decrease or abolish any reserve in the same manner in which it was created. SECTION 3. FISCAL YEAR. The fiscal year of the Corporation shall be determined by the Board of Directors. SECTION 4. SEAL. The Corporation shall have a seal which may be used by causing it or a facsimile thereof to be impressed or affixed or in any manner reproduced. Any officer of the Corporation shall have authority to affix the seal to any document requiring it. SECTION 5. RESIGNATION. Any director, officer or agent of the Corporation may resign or giving written notice to the President or the Secretary. The resignation shall take effect at the time specified therein, or immediately if no time is specified therein. Unless specified in such notice, the acceptance of such resignation shall not be necessary to make it effective. 15 16 ARTICLE IX AMENDMENTS TO BYLAWS Unless otherwise provided by the Articles of Incorporation or a bylaw adopted by the shareholders of the Corporation, these Bylaws may be amended or repealed, or new Bylaws may be adopted, at any meeting of the shareholders of the Corporation or of the Board of Directors at which a quorum is present, by the affirmative vote of the holders of a majority of the shares or the Directors, as the case may be, present at such meeting. 16 EX-3.3.1 6 CERTIFICATE OF INCORPORATION OF BONNEAU GENERAL 1 Exhibit 3.3.1 CERTIFICATE OF INCORPORATION OF BONNEAU GENERAL, INC. The undersigned, a natural person, for the purpose of organizing a corporation for conducting the business and promoting the purposes hereinafter stated, under the provisions and subject to the requirements of the laws of the State of Delaware (particularly Chapter 1, Title 8 of the Delaware Code and the acts amendatory thereof and supplemental thereto, and known, identified and referred to as the "General Corporation Law of the State of Delaware" or the "General Corporation Law"), hereby certifies that: FIRST: The name of the corporation (hereinafter referred to as the "Corporation") is: Bonneau General, Inc. SECOND: The address, including street, number, city and county, of the registered office of the Corporation in the State of Delaware is 32 Loockerman Square, Suite L-100, City of Dover, 19904, County of Kent; and the name of the registered agent of the Corporation in the State of Delaware is The Prentice-Hall Corporation System, Inc. THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which Corporations may be organized under the General Corporation Law of the State of Delaware. FOURTH: The total number of shares of stock which the Corporation shall have authority to issue is One Thousand Five Hundred (1,500) shares, par value $.001 per share. All such shares are of one class and are shares of Common Stock. FIFTH: The name and the mailing address of the incorporator is as follows: NAME MAILING ADDRESS ---- --------------- Robert L. Lawrence c/o Kane Kessler, P.C. 1350 Avenue of the Americas, 26th Fl. New York, New York 10019 SIXTH: The Corporation is to have perpetual existence. SEVENTH: Whenever a compromise or arrangement is proposed between this Corporation and its creditors or any class of them and/or between this Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware 2 may, on the application in a summary way of this Corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for this Corporation under the provisions of Section 291 of Title 8 of the Delaware Code or on the application of any receiver or receivers appointed for this Corporation under Section 279 of Title 8 of the Delaware Code order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or the stockholders or class of stockholders of this Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this Corporation as a consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders of this Corporation, as the case may be, and also on this Corporation. EIGHTH: For the management of the business and for the conduct of the affairs of the Corporation, and in further definition, limitation and regulation of the powers of the Corporation and of its directors and of its stockholders or any class thereof, as the case may be, it is further provided: 1. The management of the business and the conduct of the affairs of the Corporation shall be vested in its Board of Directors. The number of directors which shall constitute the whole Board of Directors shall be fixed by, or in the manner provided in, the By-Laws. The phrase "whole Board" and the phrase "total number of directors" shall be deemed to have the same meaning to wit, the total number of directors which the Corporation would have if there were no vacancies. No election of directors need be by written ballot. 2. After the original or other By-laws of the Corporation have been adopted, amended, or repealed, as the case may be, in accordance with the provisions of Section 109 of the General Corporation Law of the State of Delaware, and, after the Corporation has received any payment for any of its stock, the power to adopt, amend, or repeal the By-laws of the Corporation may be exercised by the Board of Directors of the Corporation; provided, however, that any provision for the classification of Directors of the Corporation for staggered terms pursuant to the provisions of subsection (d) of Section 141 of the General Corporation Law of the State of Delaware shall be set forth in an initial By-laws or in a By-law adopted by the stockholders entitled to vote of the Corporation unless provisions for such classification shall be set forth in this Certificate of Incorporation. 3. Whenever the Corporation shall be authorized to issue only one class of stock, each outstanding share shall entitle the holder thereof to notice of, and the right to vote at, any meeting of stockholders. Whenever the Corporation shall be authorized to issue more than one class of stock, no outstanding share of any class of stock which is denied voting power under the provisions of the 2 3 certificate of incorporation shall entitle the holder thereof to the right to vote at any meeting of stockholders except as the provisions of paragraph (2) of subsection (b) of Section 242 of the General Corporation Law of the State of Delaware shall otherwise require; provided, that no share of any such class which is otherwise denied voting power shall entitle the holder thereof to vote upon the increase or decrease in the number of authorized shares of said class. NINTH: The personal liability of the directors of the Corporation is hereby eliminated to the fullest extent permitted by paragraph (7) of subsection (b) of Section 102 of the General Corporation Law of the State of Delaware, as the same may be amended and supplemented. TENTH: The Corporation shall, to the fullest extent permitted by the General Corporation Law, as the same may be amended and supplemented, indemnify any and all persons whom it shall have the power to indemnify under the General Corporation Law from and against any and all of the expenses, liabilities or other matters referred to in or covered by the General Corporation Law, and the indemnification provided for herein shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any By-Law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. ELEVENTH: From time to time any of the provisions of this Certificate of Incorporation may be amended, altered or repealed, and other provisions authorized by the laws of the State of Delaware at the time in force may be added or inserted in the manner and at the time prescribed by said laws, and all rights at any time conferred upon the stockholders of the Corporation by this Certificate of Incorporation are granted subject to the provisions of this Article ELEVENTH. Signed on December 21, 1994. /s/ Robert L. Lawrence ------------------------------------- ROBERT L. LAWRENCE, Incorporator 3 EX-3.3.2 7 BY-LAWS OF BONNEAU GENERAL, INC. 1 Exhibit 3.3.2 BYLAWS OF BONNEAU GENERAL, INC. (a Delaware corporation) -------------- ARTICLE I STOCKHOLDERS 1. CERTIFICATES REPRESENTING STOCK. Certificates representing stock in the corporation shall be signed by, or in the name of, the corporation by the Chairman or Vice-Chairman of the Board of Directors, if any, or by the President or a Vice-President and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary of the corporation. Any or all the signatures on any such certificate may be a facsimile. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent, or registrar at the date of issue. Whenever the corporation shall be authorized to issue more than one class of stock or more than one series of any class of stock, and whenever the corporation shall issue any shares of its stock as partly paid stock, the certificates representing shares of any such class or series or of any such partly paid stock shall set forth thereon the statements prescribed by the General Corporation Law. Any restrictions on the transfer or registration of transfer of any shares of stock of any class or series shall be noted conspicuously on the certificate representing such shares. The corporation may issue a new certificate of stock or uncertificated shares in place of any certificate theretofore issued by it, alleged to have been lost, stolen, or destroyed, and the Board of Directors may require the owner of the lost, stolen, or destroyed certificate, or his legal representative, to give the corporation a bond sufficient to indemnify the corporation against any claim that may be made against it on account of the alleged loss, theft, or destruction of any such certificate or the issuance of any such new certificate or uncertificated shares. 2 2. UNCERTIFICATED SHARES. Subject to any conditions imposed by the General Corporation Law, the Board of Directors of the corporation may provide by resolution or resolutions that some or all of any or all classes or series of the stock of the corporation shall be uncertificated shares. Within a reasonable time after the issuance or transfer of any uncertificate shares, the corporation shall send to the registered owner thereof any written notice prescribed by the General Corporation Law. 3. FRACTIONAL SHARE INTERESTS. The corporation may, but shall not be required to, issue fractions of a share. If the corporation does not issue fractions of a share, it shall (1) arrange for the disposition of fractional interests by those entitled thereto, (2) pay in cash the fair value of fractions of a share as of the time when those entitled to receive such fractions are determined, or (3) issue scrip or warrants in registered form (either represented by a certificate or uncertificated) or bearer form (represented by a certificate) which shall entitle the holder to receive a full share upon the surrender of such scrip or warrants aggregating a full share. A certificate for a fractional share or an uncertificated fractional share shall, but script or warrants shall not unless otherwise provided therein, entitle the holder to exercise voting rights, to receive dividends thereon, and to participate in any of the assets of the corporation in the event of liquidation. The Board of Directors may cause scrip or warrants to be issued subject to the conditions that they shall become void if not exchanged for certificates representing the full shares or uncertificated full shares before a specified date, or subject to the conditions that the shares for which scrip or warrants are exchangeable may be sold by the corporation and the proceeds thereof distributed to the holders of scrip or warrants, or subject to any other conditions which the Board of Directors may impose. 4. STOCK TRANSFERS. Upon compliance with provisions restricting the transfer or registration of transfer of shares of stock, if any, transfers or registration of transfers of shares of stock of the corporation shall be made only on the stock ledger of the corporation by the registered holder thereof, or by his attorney thereunto authorized by power of attorney duly executed and filed with the Secretary of the corporation or with a transfer agent or a registrar, if any, and, in the case of shares represented by certificates, on surrender of the certificate or certificates for such shares of stock properly endorsed and the payment of all taxes due thereon. 5. RECORD DATE FOR STOCKHOLDERS. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than sixty nor less than ten days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the 2 3 close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. In order that the corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than ten days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. If no record date has been fixed by the Board of Directors, the record date for determining the stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by the General Corporation Law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation by delivery to its registered office in the State of Delaware, its principal place of business, or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by the General Corporation Law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action. In order that the corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion, or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than sixty days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. 6. MEANING OF CERTAIN TERMS. As used herein in respect of the right to notice of a meeting of stockholders or a waiver thereof or to participate or vote thereat or to consent or dissent in writing in lieu of a meeting, as the case may be, the term "share" or "shares" or "share of stock" or "shares of stock" or "stockholder" or "stockholders" refers to an outstanding share or shares of stock and to a holder or holders of record of outstanding shares of stock when the corporation is authorized to issue only one class of shares of stock, and said reference is also intended to include any outstanding share or shares of stock and any holder or holders of record of outstanding shares of stock of any class upon which or upon whom the certificate of 3 4 incorporation confers such rights where there are two or more classes or series of shares of stock or upon which or upon whom the General Corporation Law confers such rights notwithstanding that the certificate of incorporation may provide for more than one class or series of shares of stock, one or more of which are limited or denied such rights thereunder; provided, however, that no such right shall vest in the event of an increase or a decrease in the authorized number of shares of stock of any class or series which is otherwise denied voting rights under the provisions of the certificate of incorporation, except as any provision of law may otherwise require. 7. STOCKHOLDER MEETINGS. - TIME. The annual meeting shall be held on the date and at the time fixed, from time to time, by the directors, provided, that the first annual meeting shall be held on a date within thirteen months after the organization of the corporation, and each successive annual meeting shall be held on a date within thirteen months after the date of the preceding annual meeting. A special meeting shall be held on the date and at the time fixed by the directors. - PLACE. Annual meetings and special meetings shall be held at such place, within or without the State of Delaware, as the directors may, from time to time, fix. Whenever the directors shall fail to fix such place, the meeting shall be held at the registered office of the corporation in the State of Delaware. - CALL. Annual meetings and special meetings may be called by the directors or by an officer instructed by the directors to call the meeting. - NOTICE OR WAIVER OF NOTICE. Written notice of all meetings shall be given, stating the place, date, and hour of the meeting and stating the place within the city or other municipality or community at which the list of stockholders of the corporation may be examined. The notice of an annual meeting shall state that the meeting is called for the election of directors and for the transaction of other business which may properly come before the meeting, and shall (if any other action which could be taken at a special meeting is to be taken at such annual meeting) state the purpose or purposes. The notice of a special meeting shall in all instances state the purpose or purposes for which the meeting is called. The notice of any meeting shall also include, or be accompanied by, any additional statements, information, or documents prescribed by the General Corporation Law. Except as otherwise provided by the General Corporation Law, a copy of the notice of any meeting shall be given, personally or by mail, not less than ten days nor more than sixty days before the date of the meeting, unless the lapse of the prescribed period of time shall have been waived, and directed to each stockholder at his record address or at such other address which he may have furnished by request in writing to the Secretary of the corporation. Notice by mail shall be deemed to be given when deposited, with postage thereon prepaid, in 4 5 the United States Mail. If a meeting is adjourned to another time, not more than thirty days hence, and/or to another place, and if an announcement of the adjourned time and/or place is made at the meeting, it shall not be necessary to give notice of the adjourned meeting unless the directors, after adjournment, fix a new record date for the adjourned meeting. Notice need not be given to any stockholder who submits a written waiver of notice signed by him before or after the time stated therein. Attendance of a stockholder at a meeting of stockholders shall constitute a waiver of notice of such meeting, except when the stockholder attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice. - STOCKHOLDER LIST. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city or other municipality or community where the meeting is to be held, which place shall be specified in the notice of the meeting, or if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. The stock ledger shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, the list required by this section or the books of the corporation, or to vote any any meeting of stockholders. - CONDUCT OF MEETING. Meetings of the stockholders shall be presided over by one of the following officers in the order of seniority and if present and acting - the Chairman of the Board, if any, the Vice-Chairman of the Board, if any, the President, a Vice-President, or, if none of the foregoing is in office and present and acting, by a chairman to be chosen by the stockholders. The Secretary of the corporation, or in his absence, an Assistant Secretary, shall act as secretary of every meeting, but if neither the Secretary nor an Assistant Secretary is present the Chairman of the meeting shall appoint a secretary of the meeting. - PROXY REPRESENTATION. Every stockholder may authorize another person or persons to act for him by proxy in all matters in which a stockholder is entitled to participate, whether by waiving notice of any meeting, voting or participating at a meeting, or expressing consent or dissent without a meeting. Every proxy must be signed by the stockholder or by his attorney-in fact. No proxy shall be voted or acted upon after three years from its date unless such proxy provides for a longer period. A 5 6 duly executed proxy shall be irrevocable if it states that it is irrevocable and, if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A proxy may be made irrevocable regardless of whether the interest with which it is coupled is an interest in the stock itself or an interest in the corporation generally. - INSPECTORS. The directors, in advance of any meeting, may, but need not, appoint one or more inspectors of election to act at the meeting or any adjournment thereof. If an inspector or inspectors are not appointed, the person presiding at the meeting may, but need not, appoint one or more inspectors. In case any person who may be appointed as an inspector fails to appear or act, the vacancy may be filled by appointment made by the directors in advance of the meeting or at the meeting by the person presiding thereat. Each inspector, if any, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspectors at such meeting with strict impartiality and according to the best of his ability. The inspectors, if any, shall determine the number of shares of stock outstanding and the voting power of each, the shares of stock represented at the meeting, the existence of a quorum, the validity and effect of proxies, and shall receive votes, ballots, or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots, or consents, determine the result, and do such acts as are proper to conduct the election or vote with fairness to all stockholders. On request of the person presiding at the meeting, the inspector or inspectors, if any, shall make a report in writing of any challenge, question, or matter determined by him or them and execute a certificate of any fact found by him or them. - QUORUM. The holders of a majority of the outstanding shares of stock shall constitute a quorum at a meeting of stockholders for the transaction of any business. The stockholders present may adjourn the meeting despite the absence of a quorum. - VOTING. Each share of stock shall entitle the holders thereof to one vote. Directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors. Any other action shall be authorized by a majority of the votes cast except where the General Corporation Law prescribes a different percentage of votes and/or a different exercise of voting power, and except as may be otherwise prescribed by the provisions of the certificate of incorporation and these Bylaws. In the election of directors, and for any other action, voting need not be by ballot. 8. STOCKHOLDER ACTION WITHOUT MEETINGS. Any action required by the General Corporation Law to be taken at any annual or special meeting of stockholders, or any action which may be taken at any annual or special meeting of stockholders, may be taken without a meeting, without prior notice and without a vote, if 6 7 a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. Action taken pursuant to this paragraph shall be subject to the provisions of Section 228 of the General Corporation Law. ARTICLE II DIRECTORS 1. FUNCTIONS AND DEFINITION. The business and affairs of the corporation shall be managed by or under the director of the Board of Directors of the corporation. The Board of Directors shall have the authority to fix the compensation of the members thereof. The use of the phrase "whole board" herein refers to the total number of directors which the corporation would have if there were no vacancies. 2. QUALIFICATIONS AND NUMBER. A director need not be a stockholder, a citizen of the United States, or a resident of the State of Delaware. The initial Board of Directors shall consist of 2 persons. Thereafter the number of directors constituting the whole board shall be at least one. Subject to the foregoing limitation and except for the first Board of Directors, such number may be fixed from time to time by action of the stockholders or of the directors, or, if the number is not fixed, the number shall be 2. The number of directors may be increased or decreased by action of the stockholders or of the directors. 3. ELECTION AND TERM. The first Board of Directors, unless the members thereof shall have been named in the certificate of incorporation, shall be elected by the incorporator or incorporators and shall hold office until the first annual meeting of stockholders and until their successors are elected and qualified or until their earlier resignation or removal. Any director may resign at any time upon written notice to the corporation. Thereafter, directors who are elected at an annual meeting of stockholders, and directors who are elected in the interim to fill vacancies and newly created directorships, shall hold office until the next annual meeting of stockholders and until their successors are elected and qualified or until their earlier resignation or removal. Except as the General Corporation Law may otherwise require, in the interim between annual meetings of stockholders or of special meetings of stockholders called for the election of directors and/or for the removal of one or more directors and for the filling of any vacancy in that connection, newly created directorships and any vacancies in the Board of Directors, including unfilled vacancies resulting from the removal of directors for cause or without cause, may be filled by the vote of a majority of the 7 8 remaining directors then in office, although less than a quorum, or by the sole remaining director. 4. MEETINGS. - TIME. Meetings shall be held at such time as the Board shall fix, except that the first meeting of a newly elected Board shall be held as soon after its election as the directors may conveniently assemble. - PLACE. Meetings shall be held at such place within or without the State of Delaware as shall be fixed by the Board. - CALL. No call shall be required for regular meetings for which the time and place have been fixed. Special meetings may be called by or at the direction of Chairman of the Board, if any, the Vice-Chairman of the Board, if any, of the President, or of a majority of the directors in office. - NOTICE OR ACTUAL OR CONSTRUCTIVE WAIVER. No notice shall be required for regular meetings for which the time and place have been fixed. Written, oral, or any other mode of notice of the time and place shall be given for special meetings in sufficient time for the convenient assembly of the directors thereat. Notice need not be given to any director or to any member of a committee of directors who submits as written waiver of notice signed by him before or after the time stated therein. Attendance of any such person at a meeting shall constitute a waiver of notice of such meeting, except when he attends a meeting for the express purpose of objection, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the directors need be specified in any written waiver of notice. - QUORUM AND ACTION. A majority of the whole Board shall constitute a quorum except when a vacancy or vacancies prevents such majority, whereupon a majority of the directors in office shall constitute a quorum, provided, that such majority shall constitute at least one-third of the whole Board. A majority of the directors present, whether or not a quorum is present, may adjourn a meeting to another time and place. Except as herein otherwise provided, and except as otherwise provided by the General Corporation Law, the vote of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board. The quorum and voting provisions herein stated shall not be construed as conflicting with any provisions of the General Corporation Law and these Bylaws which govern a meeting of directors held to fill vacancies and newly created directorships in the Board or action of disinterested directors. 8 9 Any member or members of the Board of Directors or of any committee designated by the Board, may participate in a meeting of the Board, or any such committee, as the case may be, by means of conference telephone or similar communications equipment by means of which all person participating in the meeting can hear each other. - CHAIRMAN OF THE MEETING. The Chairman of the Board, if any and if present and acting, shall preside at all meetings. Otherwise, the Vice-Chairman of the Board, if any and if present and acting, or the President, if present and acting, or any other director chosen by the Board, shall preside. 5. REMOVAL OF DIRECTORS. Except as may otherwise by provided by the General Corporation Law, any director or the entire Board of Directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors. 6. COMMITTEES. The Board of Directors may, by resolution passed by a majority of the whole Board, designate one or more committees, each committee to consist of one or more of the directors of the corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of any member of any such committee or committees, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board, shall have and may exercise the powers and authority of the Board of Directors in the management of the business and affairs of the corporation with the exception of any authority the delegation of which is prohibited by Section 141 of the General Corporation Law, and may authorize the seal of the corporation to be affixed to all papers which may require it. 7. WRITTEN ACTION. Any action required or permitted to be taken at any meeting of the Board of Directors or any committee thereof may be taken without a meeting if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. ARTICLE III OFFICERS 9 10 The officers of the corporation shall consist of a President, a Secretary, a Treasurer, and, if deemed necessary, expedient, or desirable by the Board of Directors, a Chairman of the Board, a Vice-Chairman of the Board, an Executive Vice-President, one or more other Vice-Presidents, one or more Assistant Secretaries, one or more Assistant Treasurers, and such other officers with such titles as the resolution of the Board of Directors choosing them shall designate. Except as may otherwise be provided in the resolution of the Board of Directors choosing him, no officer other than the Chairman or Vice-Chairman of the Board, if any, need be a director. Any number of offices may be held by the same person, as the directors may determine. Unless otherwise provided in the resolution choosing him, each officer shall be chosen for a term which shall continue until the meeting of the Board of Directors following the next annual meeting of stockholders and until his successor shall have been chosen and qualified. All officers of the corporation shall have such authority and perform such duties in the management and operation of the corporation as shall be prescribed in the resolutions of the Board of Directors designating and choosing such officers and prescribing their authority and duties, and shall have such additional authority and duties as are incident to their office except to the extent that such resolutions may be inconsistent therewith. The Secretary or an Assistant Secretary of the corporation shall record all of the proceedings of all meetings and actions in writing of stockholders, directors, and committees of directors, and shall exercise such additional authority and perform such additional duties as the Board shall assign to him. Any officer may be removed, with or without cause, by the Board of Directors. Any vacancy in any office may be filled by the Board of Directors. ARTICLE IV CORPORATE SEAL The corporate seal shall be in such form as the Board of Directors shall prescribe. ARTICLE V FISCAL YEAR The fiscal year of the corporation shall be fixed, and shall be subject to change, by the Board of Directors. ARTICLE VI 10 11 CONTROL OVER BYLAWS Subject to the provisions of the certificate of incorporation and the provisions of the General Corporation Laws, the power to amend, alter, or repeal these Bylaws and to adopt new Bylaws may be exercised by the Board of Directors or by the stockholders. 11 EX-3.4.1 8 CERTIFICATE OF INCORPORATION OF BONNEAU HOLDINGS 1 Exhibit 3.4.1 CERTIFICATE OF INCORPORATION OF BONNEAU HOLDINGS, INC. The undersigned, a natural person, for the purpose of organizing a corporation for conducting the business and promoting the purposes hereinafter stated, under the provisions and subject to the requirements of the laws of the State of Delaware (particularly Chapter 1, Title 8 of the Delaware Code and the acts amendatory thereof and supplemental thereto, and known, identified and referred to as the "General Corporation Law of the State of Delaware" or the "General Corporation Law"), hereby certifies that: FIRST: The name of the corporation (hereinafter referred to as the "Corporation") is: Bonneau Holdings, Inc. SECOND: The address, including street, number, city and county, of the registered office of the Corporation in the State of Delaware is 1105 North Market Street, Suite 1300, Wilmington, Delaware 19899, County of New Castle; and the name of the registered agent of the Corporation in the State of Delaware is Delaware Corporate Management, Inc. THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which Corporations may be organized under the General Corporation Law of the State of Delaware. FOURTH: The total number of shares of stock which the Corporation shall have authority to issue is One Thousand Five Hundred (1,500) shares, par value $.001 per share. All such shares are of one class and are shares of Common Stock. FIFTH: The name and the mailing address of the incorporator is as follows: NAME MAILING ADDRESS Robert L. Lawrence c/o Kane Kessler, P.C. 1350 Avenue of the Americas, 26th Fl. New York, New York 10019 SIXTH: The Corporation is to have perpetual existence. SEVENTH: Whenever a compromise or arrangement is proposed between this Corporation and its creditors or any class of them and/or between this Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware 2 may, on the application in a summary way of this Corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for this Corporation under the provisions of Section 291 of Title 8 of the Delaware Code or on the application of any receiver or receivers appointed for this Corporation under Section 279 of Title 8 of the Delaware Code order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or the stockholders or class of stockholders of this Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this Corporation as a consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders of this Corporation, as the case may be, and also on this Corporation. EIGHTH: For the management of the business and for the conduct of the affairs of the Corporation, and in further definition, limitation and regulation of the powers of the Corporation and of its directors and of its stockholders or any class thereof, as the case may be, it is further provided: 1. The management of the business and the conduct of the affairs of the Corporation shall be vested in its Board of Directors. The number of directors which shall constitute the whole Board of Directors shall be fixed by, or in the manner provided in, the By-Laws. The phrase "whole Board" and the phrase "total number of directors" shall be deemed to have the same meaning to wit, the total number of directors which the Corporation would have if there were no vacancies. No election of directors need be by written ballot. 2. After the original or other By-laws of the Corporation have been adopted, amended, or repealed, as the case may be, in accordance with the provisions of Section 109 of the General Corporation Law of the State of Delaware, and, after the Corporation has received any payment for any of its stock, the power to adopt, amend, or repeal the By-laws of the Corporation may be exercised by the Board of Directors of the Corporation; provided, however, that any provision for the classification of Directors of the Corporation for staggered terms pursuant to the provisions of subsection (d) of Section 141 of the General Corporation Law of the State of Delaware shall be set forth in an initial By-laws or in a By-law adopted by the stockholders entitled to vote of the Corporation unless provisions for such classification shall be set forth in this Certificate of Incorporation. 3. Whenever the Corporation shall be authorized to issue only one class of stock, each outstanding share shall entitle the holder thereof to notice of, and the right to vote at, any meeting of stockholders. Whenever the Corporation shall be authorized to issue more than one class of stock, no outstanding share of any class of stock which is denied voting power under the provisions of the 2 3 certificate of incorporation shall entitle the holder thereof to the right to vote at any meeting of stockholders except as the provisions of paragraph (2) of subsection (b) of Section 242 of the General Corporation Law of the State of Delaware shall otherwise require; provided, that no share of any such class which is otherwise denied voting power shall entitle the holder thereof to vote upon the increase or decrease in the number of authorized shares of said class. NINTH: The personal liability of the directors of the Corporation is hereby eliminated to the fullest extent permitted by paragraph (7) of subsection (b) of Section 102 of the General Corporation Law of the State of Delaware, as the same may be amended and supplemented. TENTH: The Corporation shall, to the fullest extent permitted by the General Corporation Law, as the same may be amended and supplemented, indemnify any and all persons whom it shall have the power to indemnify under the General Corporation Law from and against any and all of the expenses, liabilities or other matters referred to in or covered by the General Corporation Law, and the indemnification provided for herein shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any By-Law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. ELEVENTH: From time to time any of the provisions of this Certificate of Incorporation may be amended, altered or repealed, and other provisions authorized by the laws of the State of Delaware at the time in force may be added or inserted in the manner and at the time prescribed by said laws, and all rights at any time conferred upon the stockholders of the Corporation by this Certificate of Incorporation are granted subject to the provisions of this Article ELEVENTH. Signed on December 21, 1994. /s/ Robert L. Lawrence --------------------------------------- ROBERT L. LAWRENCE, Incorporator 3 EX-3.4.2 9 BY-LAWS OF BONNEAU HOLDINGS, INC. 1 Exhibit 3.4.2 BYLAWS OF BONNEAU HOLDINGS, INC. (a Delaware corporation) -------------------- ARTICLE I STOCKHOLDERS 1. CERTIFICATES REPRESENTING STOCK. Certificates representing stock in the corporation shall be signed by, or in the name of, the corporation by the Chairman or Vice-Chairman of the Board of Directors, if any, or by the President or a Vice-President and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary of the corporation. Any or all the signatures on any such certificate may be a facsimile. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent, or registrar at the date of issue. Whenever the corporation shall be authorized to issue more than one class of stock or more than one series of any class of stock, and whenever the corporation shall issue any shares of its stock as partly paid stock, the certificates representing shares of any class or series or any of any such partly paid stock shall be set forth thereon the statements prescribed by the General Corporation Law. Any restrictions on the transfer or registration of transfer of any shares of stock of any class or series shall be noted conspicuously on the certificate representing such shares. The corporation may issue a new certificate of stock or uncertified shares in place of any certificate therefore issued by it, alleged to have been lost, stolen, or destroyed, and the Board of Directors may require the owner of the lost, stolen, or destroyed certificate, or his legal representative, to give the corporation a bond sufficient to indemnify the corporation against any claim that may be made against it on account of the alleged loss, theft, or destruction of any such certificate or the issuance of any such new certificate or uncertificated shares. 2. UNCERTIFICATED SHARES. Subject to any conditions imposed by the General Corporation Law, the Board of Directors of the corporation may provide by resolution or resolutions that some or all of any or all classes or series of the stock of the corporation shall be uncertificated shares. Within a reasonable time after the issuance or 2 transfer of any uncertificated shares, the corporation shall send to the registered owner thereof any written notice prescribed by the General Corporation Law. 3. FRACTIONAL SHARE INTERESTS. The corporation may, but shall not be required to, issue fractions of a share. If the corporation does not issue fractions of a share, it shall (1) arrange for the disposition of fractional interests by those entitled thereto, (2) pay in cash the fair value of fractions of a share as of the time when those entitled to receive such fractions are determined, or (3) issue scrip or warrants in registered form (either represented by a certificate or uncertificated) or bearer form (represented by a certificate) which shall entitle the holder to receive a full share upon the surrender of such scrip or warrants aggregating a full share. A certificate for a fractional share or an uncertificated fractional share shall, but script or warrants shall not unless otherwise provided therein, entitle the holder to exercise voting rights, to receive dividends thereon, and to participate in any of the assets of the corporation in the event of liquidation. The Board of Directors may cause scrip or warrants to be issued subject to the conditions that they shall become void if not exchanged for certificates representing the full shares or uncertificated full shares before a specified date, or subject to the conditions that the shares for which scrip or warrants are exchangeable may be sold by the corporation and the proceeds thereof distributed to the holders of scrip or warrants, or subject to any other conditions which the Board of Directors may impose. 4. STOCK TRANSFERS. Upon compliance with provisions restricting the transfer or registration of transfer of shares of stock, if any, transfers or registration of transfers of shares of stock of the corporation shall be made only on the stock ledger of the corporation by the registered holder thereof, or any his attorney thereunto authorized by power of attorney duly executed and filed with the Secretary of the corporation or with a transfer agent or a registrar, if any, and, in the case of shares represented by certificates, on surrender of the certificate or certificates for such shares of stock properly endorsed and the payment of all taxes due thereon. 5. RECORD DATE FOR STOCKHOLDERS. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than sixty nor less than ten days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. In order that the corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record 3 date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than ten days after the date upon which the resolution fixing the said record date is adopted by the Board of Directors. If no record date has been fixed by the Board of Directors, the record date for determining the stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by the General Corporation Law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation by delivery to its registered office in the State of Delaware, its principal place of business, or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by the General Corporation Law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action. In order that the corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion, or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than sixty days prior to such action, If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. 6. MEANING OF CERTAIN TERMS. As used herein in respect of the right to notice of a meeting of stockholders or a waiver thereof or to participate or vote thereat or to consent or dissent in writing in lieu of a meeting, as the case may be, the term "share" or "shares" or "share of stock" or "shares of stock" or "stockholder" or "stockholders" refers to an outstanding share or shares of stock and to a holder or holders of record of outstanding shares of stock when the corporation is authorized to issue only one class of shares of stock, and said reference is also intended to include any outstanding share or shares of stock and any holder or holders of record of outstanding shares of stock of any class upon which or upon whom the certificate of incorporation confers such rights where there are two or more classes or series of shares of stock or upon which or upon whom the General Corporation Law confers such rights notwithstanding that the certificate of incorporation may provide for more than one class or series of shares of stock, one or more of which are limited or denied such rights thereunder; provided, however, that no such right shall vest in the event of an increase or decrease in the authorized number of shares of stock of any class or series which is otherwise denied voting rights under the provisions of the certificate of incorporation, except as any provision of law may otherwise require. 7. STOCKHOLDER MEETINGS. 4 - TIME. The annual meeting shall be held on the date and at the time fixed, from time to time, by the directors, provided, that the first annual meeting shall be held on a date within thirteen months after the organization of the corporation, and each successive annual meeting shall held on a date within thirteen months after the date of the preceding annual meeting. A special meeting shall be held on the date and at the time fixed by the directors. - PLACE. Annual meetings and special meetings shall be held at such place, within or without the State of Delaware, as the directors may, from time to time, fix. Whenever the directors shall fail to fix such place, the meeting shall be held at the registered office of the corporation in the State of Delaware. - CALL. Annual meetings and special meetings may be called by the directors or by any officer instructed by the directors to call the meeting. - NOTICE OR WAIVER OF NOTICE. Written notice of all meetings shall be given, stating the place, date, and hour of the meeting and stating the place within the city or other municipality or community at which the list of stockholders of the corporation may be examined. The notice of an annual meeting shall state that the meeting is called for the election of directors and for the transaction of other business which may properly come before the meeting, and shall (if any other action which could be taken at a special meeting is to be taken at such annual meeting) state the purpose or purposes. The notice of a special meeting shall in all instances state the purpose or purposes for which the meeting is called. The notice of any meeting shall also include, or be accompanied by, any additional statements, information, or documents prescribed by the General Corporation Law. Except as otherwise provided by the General Corporation Law, a copy of the notice of any meeting shall be given, personally or by mail, not less than ten days nor more than sixty days before the date of the meeting, unless the lapse of the prescribed period of time shall have been waived, and directed to each stockholder at his record address or at such other address which he may have furnished by request in writing to the Secretary of the corporation. Notice by mail shall be deemed to be given when deposited, with postage thereon prepaid, in the United States Mail. If a meeting is adjourned to another time, not more than thirty days hence, and/or to another place, and if an announcement of the adjourned time and/or place is made at the meeting, it shall not be necessary to give notice of the adjourned meeting unless the directors, after adjournment, fix a new record date for the adjourned meeting. Notice need not be given to any stockholder who submits a written waiver of notice signed by him before or after the time stated therein. Attendance of a stockholder at a meeting of stockholders shall constitute a waiver of notice of such meeting, except when the stockholder attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transaction at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice. 5 - STOCKHOLDER LIST. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city or other municipality or community where the meeting is to be held, which place shall be specified in the notice of the meeting, or if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, any may be inspected by any stockholder who is present. The stock ledger shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, the list required by this section or the books of the corporation, or to vote at any meeting of stockholders. - CONDUCT OF MEETING. Meetings of the stockholders shall be presided over by any one of the following officers in the order of seniority and if present and acting -the Chairman of the Board, if any, the Vice-Chairman of the Board, if any, the President, a Vice-President, or, if none of the foregoing is in office and present and acting, by a chairman to be chosen by the stockholders. The Secretary of the corporation, or in his absence, an Assistant Secretary, shall act as secretary of every meeting, but if neither the Secretary nor an Assistant Secretary is present the Chairman of the meeting shall appoint a secretary of the meeting. - PROXY REPRESENTATION. Every stockholder may authorize another person or persons to act for him by proxy in all matters in which a stockholder is entitled to participate, whether by waiving notice of any meeting, voting or participating at a meeting, or expressing consent or dissent without a meeting. Every proxy must be signed by the stockholder or by his attorney-in-fact. No proxy shall be voted or acted upon after three years from its date unless such proxy provides for a longer period. A duly executed proxy shall be irrevocable if it states that its is irrevocable and, if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A proxy may be made irrevocable regardless of whether the interest with which it is coupled is an interest in the stock itself or an interest in the corporation generally. - INSPECTORS. The directors, in advance of any meeting, may, but need not, appoint one or more inspectors of election to act at the meeting or any adjournment thereof. If an inspector or inspectors are not appointed, the person presiding at the meeting may, but need not, appoint one or more inspectors. In case any person who may be appointed as an inspector fails to appear or act, the vacancy may be filled by appointment made by the directors in advance of the meeting or at the meeting by the person presiding thereat. Each inspector, if any, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspectors at such meeting with strict impartiality and according to the best of his ability. The inspectors, if 6 any, shall determine the number of shares of stock outstanding and the voting power of each, the shares of stock represented at the meeting, the existence of a quorum, the validity and effect of proxies, and shall receive votes, ballots, or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots, or consents, determine the result, and do such acts as are proper to conduct the election or vote with fairness to all stockholders. On request of the person presiding at the meeting, the inspector or inspectors, if any, shall make a report in writing of any challenge, question, or matter determined by him or them and execute a certificate of any fact found by him or them. - QUORUM. The holders of a majority of the outstanding shares of stock shall constitute a quorum at a meeting of stockholders for the transaction of any business. The stockholders present may adjourn the meeting despite the absence of a quorum. - VOTING. Each share of stock shall entitle the holders thereof to one vote. Directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors. Any other action shall be authorized by a majority of the votes cast except where the General Corporation Law prescribes a different percentage of votes and/or a different exercise of voting power, and except as may be otherwise prescribed by the provisions of the certificate of incorporation and these Bylaws. In the election of directors, and for any other action, voting need not be by ballot. 8. STOCKHOLDER ACTION WITHOUT MEETING. Any action required by the General Corporation Law to be taken at any annual or special meeting of stockholders, or any action which may be taken at any annual or special meeting of stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and votes. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. Action taken pursuant to this paragraph shall be subject to the provisions of Section 228 of the General Corporation Law. ARTICLE II DIRECTORS 1. FUNCTIONS AND DEFINITION. The business and affairs of the corporation shall be managed by or under the direction of the Board of Directors of the corporation. The Board of Directors shall have the authority to fix the compensation of the members thereof. The use of the phrase "whole board" herein refers to the total number of directors which the corporation would have if there were no vacancies. 7 2. QUALIFICATIONS AND NUMBER. A director need not be a stockholder, a citizen of the United States, or a resident of the State of Delaware. The initial Board of Directors shall consist of 3 persons. Thereafter the number of directors constituting the whole board shall be at least one. Subject to the foregoing limitation and except for the first Board of Directors, such number may be fixed from time to time by action of the stockholders or of the directors, of, if the number is not fixed, the number shall be 3. The number of directors may be increased or decreased by action of the stockholders or of the director. 3. ELECTION AND TERM. The first Board of Directors, unless the members thereof shall have been named in the certificate of incorporation, shall be elected by the incorporator or incorporators and shall hold office until the first annual meeting of stockholders and until their successors are elected and qualified or until their earlier resignation or removal. Any director may resign at any time upon written notice to the corporation. Thereafter, directors who are elected at an annual meeting of stockholders, and directors who are elected in the interim to fill vacancies and newly created directorships, shall hold office until the next annual meeting of stockholders and until their successors are elected and qualified or until their earlier resignation or removal. Except as the General Corporation Law may otherwise require, in the interim between annual meetings of stockholders or of special meetings of stockholders called for the election of directors and/or for the removal of one or more directors and for the filling of any vacancy in that connection, newly created directorships and any vacancies in the Board of Directors, including unfilled vacancies resulting from the removal of directors for cause or without cause, may be filled by the vote of a majority of the remaining directors then in office, although less than a quorum, or by the sole remaining director. 4. MEETINGS. - TIME. Meetings shall be held at such time as the Board shall fix, except that the first meeting of a newly elected Board shall be held as soon after its election as the directors may conveniently assemble. - PLACE. Meetings shall be held at such place within or without the State of Delaware as shall be fixed by the Board. - CALL. No call shall be required for regular meetings for which the time and place have been fixed. Special meetings may be called by or at the direction of the Chairman of the Board, if any, the Vice-Chairman of the Board, if any, of the President, or of a majority of the directors in office. - NOTICE OR ACTUAL OR CONSTRUCTIVE WAIVER. No notice shall be required for regular meetings for which the time and place have been fixed. Written, oral, or any other mode of notice of the time and place shall be given for special meetings in sufficient time for the convenient assembly of the directors thereat. Notice 8 need not be given to any director or to any member of a committee of directors who submits a written waiver of notice signed by him before or after the time stated therein. Attendance of any such person at a meeting shall constitute a waiver of notice of such meeting, except when he attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the directors need be specified in any written waiver of notice. - QUORUM AND ACTION. A majority of the whole Board shall constitute a quorum except when a vacancy or vacancies prevents such majority, whereupon a majority of the directors in office shall constitute a quorum, provided, that such majority shall constitute at least one-third of the whole Board. A majority of the directors present, whether or not a quorum is present, may adjourn a meeting to another time and place. Except as herein otherwise provided, and except as otherwise provided by the General Corporation Law, the vote of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board. The quorum and voting provisions herein stated shall not be construed as conflicting with any provisions of the General Corporation Law and these Bylaws which govern a meeting of directors held to fill vacancies and newly created directorships in the Board or action of disinterested directors. Any member or members of the Board of Directors or of any committee designated by the Board, may participate in a meeting of the Board, or any such committee, as the case may be, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. - CHAIRMAN OF THE MEETING. The Chairman of the Board, if any and if present and acting, shall preside at all meetings. Otherwise, the Vice-Chairman of the Board, if any and if present and acting, or the President, if present and acting, or any other director chosen by the Board, shall preside. 5. REMOVAL OF DIRECTORS. Except as may otherwise be provided by the General Corporation Law, any director or the entire Board of Directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors. 6. COMMITTEES. The Board of Directors may, by resolution passed by majority of the whole Board, designate one or more committees, each committee to consists of one or more of the directors of the corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of any member of any such committee or committees, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they 9 constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board, shall have and may exercise the powers and authority of the Board of Directors in the management of the business and affairs of the corporation with the exception of any authority the delegation of which is prohibited by Section 141 of the General Corporation Law, and may authorize the seal of the corporation to be affixed to all papers which may require it. 7. WRITTEN ACTION. Any action required or permitted to be taken at any meeting of the Board of Directors or any committee thereof may be taken without a meeting if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. ARTICLE III OFFICERS The officers of the corporation shall consist of a President, a Secretary, a Treasurer, and, if deemed necessary, expedient, or desirable by the Board of Directors, a Chairman of the Board, a Vice-Chairman of the Board, an Executive Vice-President, one or more other Vice-Presidents, one or more Assistant Secretaries, one or more Assistant Treasurers, and such other officers with such titles as the resolution of the Board of Directors choosing them shall designate. Except as may otherwise be provided in the resolution of the Board of Directors choosing him, no officer other than the Chairman or Vice-Chairman of the Board, if any, need be a director. Any number of offices may be held by the same person, as the directors may determine. Unless otherwise provided in the resolution choosing him, each officer shall be chosen for a term which shall continue until the meeting of the Board of Directors following the next annual meeting of stockholders and until his successor shall have been chosen and qualified. All officers of the corporation shall have such authority and perform such duties in the management and operation of the corporation as shall be prescribed in the resolutions of the Board of Directors designating and choosing such officers and prescribing their authority and duties, and shall have such additional authority and duties as are incident to their office except to the extent that such resolutions may be inconsistent therewith. The Secretary or an Assistant Secretary of the corporation shall record all of the proceedings of all meetings and actions in writing of stockholders, directors, and committees of directors, and shall exercise such additional authority and perform such additional duties as the Board shall assign him. Any officer may be removed, with or without cause, by the Board of Directors. Any vacancy in any office may be filled by the Board of Directors. 10 ARTICLE IV CORPORATION SEAL The corporate seal shall be in such form as the Board of Directors shall prescribe. ARTICLE V FISCAL YEAR The fiscal year of the corporation shall be fixed, and shall be subject to change, by the Board of Directors. ARTICLE VI CONTROL OVER BYLAWS Subject to the provisions of the certificate of incorporation and the provisions of the General Corporation Law, the power to amend, alter, or repeal these Bylaws and to adopt new Bylaws may be exercised by the Board of Directors or by the stockholders. EX-3.5.1 10 RESTATED CERT. OF INCORP OF FGG INVESTMENTS 1 Exhibit 3.5.1 RESTATED CERTIFICATE OF INCORPORATION OF F.G.G. INVESTMENTS, INC. F.G.G. Investments, Inc., a corporation organized and existing under the laws of the State of Delaware, hereby certifies as follows: 1. The name of the corporation is F.G.G. Investments, Inc. and the name under which the corporation was originally incorporated is Foster Grant Trademark Inc. The date of filing of its original Certificate of Incorporation with the Secretary of State was December 14, 1993. 2. This Restated Certificate of Incorporation only restates and integrates and does not further amend the provision of the Certificate of Incorporation of this corporation as heretofore amended or supplemented and there is not discrepancy between those provisions and the provisions of this Restated Certificate of Incorporation. 3. The text of the Certificate of Incorporation as amended or supplemented heretofore is hereby restated without further amendments or changes to read as herein set forth in full: I ARTICLE FIRST: The name of the Corporation is F.G.G. Investments, Inc. (hereinafter called the "Corporation"). II ARTICLE SECOND: The address of the registered office of the Corporation in the State of Delaware is 1105 N. Market St., Suite 1300, Wilmington, Delaware 19899, County of New Castle, and the name of its registered agent at such address is Delaware Corporate Management, Inc. III ARTICLE THIRD: The nature of the business or purposes to be conducted or promoted by the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. 2 IV ARTICLE FOURTH: The Corporation is authorized to issue one class of capital stock to be designated "Common Stock". The number of shares of Common Stock which the Corporation shall have authority to issue is 3,000 shares, $1.00 par value per share. Each share of Common Stock of the Corporation shall have identical rights and privileges in every respect. V ARTICLE FIFTH: The period of duration of the Corporation is perpetual. VI ARTICLE SIXTH: In furtherance and not in limitation of the powers conferred by statute, the Board of Directors of the Corporation is expressly authorized to adopt, alter, amend or repeal the Bylaws of the Corporation except as otherwise provided in the Bylaws. VII ARTICLE SEVENTH: Elections of directors need not be by written ballot. VIII ARTICLE EIGHTH: To the fullest extent permitted by Delaware law, no director of the Corporation shall be liable to the Corporation or its stockholders for monetary damages for an act or omission in such director's capacity as a director of the Corporation. Specifically, a director of the Corporation shall not be personally liable to the Corporation of its stockholder for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts of omissions not in good faith or which involve intentional misconduct or knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, of (iv) for any transaction from which the director derived an improper personal benefit. The foregoing elimination of liability to the Corporation or its stockholders for monetary damages is not exclusive of any other rights or limitations of liability or indemnity to which a director may be entitled under any other provision of the Certificate of Incorporation or Bylaws of the Corporation, contract or agreement, vote of stockholder and/or disinterested directors, or otherwise. IX ARTICLE NINTH: Meetings of the stockholders of the Corporation may be held within or without the State of Delaware, as the Bylaws may provide. Unless otherwise required by applicable law, the books and records of the Corporation may be kept either within or outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the Bylaws of the Corporation. X ARTICLE TENTH: The Corporation reserves the right to amend, alter, change, or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholder herein are granted subject to such reservation. 3 4. This Restated Certificate of Incorporation was duly adopted by unanimous written consent of the Board of Directors of the Corporation in accordance with the applicable provisions of Section 141 and 245 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, said F.G.G. Investments, Inc. has caused this Certificate to be signed by Duane M. DeSisto, its Vice President, this 4th day of August, 1998. F.G.G. Investments, Inc. By: /s/ Duane M. DeSisto --------------------- Title: Vice President ----------------- EX-3.5.2 11 BY-LAWS OF FGG INVESTMENTS, INC. 1 Exhibit 3.5.2 BYLAWS OF F.G.G. INVESTMENTS, INC. TABLE OF CONTENTS ************* I. OFFICES 1.01 Registered Office 1.02 Other Offices II. SHAREHOLDERS 2.01 Place and Manner of Meetings 2.02 Annual Meeting 2.03 Voting List 2.04 Special Meetings 2.05 Notice 2.06 Quorum 2.07 Majority Vote; Withdrawal of Quorum 2.08 Method of Voting 2.09 Fixing Record Dates for Matters Other than Consents to Action; Closing Transfer Books 2.10 Fixing Record Dates for Consents to Action 2.11 Action Without Meeting III. DIRECTIONS 3.01 Management 3.02 Number; Qualification; Election; Term 3.03 Change in Number 3.04 Removal 3.05 Vacancies 3.06 Election of Directors 3.07 Place and Manner of Meetings 3.08 First Meetings 3.09 Regular Meetings 3.10 Special Meetings 3.11 Action Without Meeting 2 3.12 Quorum; Majority Vote 3.13 Compensation 3.14 Procedure 3.15 Interested Directors, Officers and Shareholders IV. COMMITTEES OF THE BOARD OF DIRECTORS 4.01 Designation 4.02 Authority 4.03 Procedure 4.04 Removal 4.05 Responsibility V. OFFICERS 5.01 Number 5.02 Election 5.03 Other Officers 5.04 Term 5.05 Removal 5.06 Vacancies 5.07 Compensation 5.08 President 5.09 Vice President 5.10 Secretary 5.11 Assistant Secretary 5.12 Treasurer 5.13 Assistant Treasurer 5.14 Filling of Offices VI. INDEMNIFICATION 6.01 Policy of Indemnification and Advancement of Expenses 6.02 Definitions 6.03 Non-Exclusive; Continuation 6.04 Indemnification of Employees or Agents 6.05 Insurance or Other Arrangement VII. CERTIFICATES AND SHAREHOLDERS 7.01 Certificates 7.02 Replacement of Lost or Destroyed Certificates 7.03 Transfer of Shares 7.04 Registered Shareholders 2 3 7.05 Preemptive Rights 7.06 Restriction on Transfer of Shares VIII. NOTICE 8.01 Method 8.02 Waiver IX. GENERAL PROVISIONS 9.01 Distributions, Share Dividends and Reserves 9.02 Books and Records 9.03 Checks and Notes 9.04 Fiscal Year 9.05 Seal 9.06 Resignation 9.07 Amendment of Bylaws 9.08 Table of Contents; Headings 9.09 Construction 3 4 BYLAWS OF F.G.G. INVESTMENTS, INC. ARTICLE I OFFICES 1.01 REGISTERED OFFICE AND AGENT. The registered office and registered agent of the corporation shall be as designated with the Secretary of State of the State of Delaware and the office of the Recorder of the County of such county, as they may be changed from time to time. 1.02 OTHER OFFICES. The corporation may also have offices at such other places both within and without the State of Delaware, as the board of directors may from time to time determine, or as the business of the corporation may require. ARTICLE II SHAREHOLDERS 2.01 PLACE AND MANNER OF MEETINGS. All meetings of the shareholders shall be held at such time and place, within or without the State of Delaware, as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof. Shareholders may participate in such meetings by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting as provided herein shall constitute presence in person at such meeting, except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. 2.02 ANNUAL MEETING. An annual meeting of the shareholders, commencing with the year following the adoption of these Bylaws, shall be held on the first Tuesday during the month of April, if not a legal holiday, and if a legal holiday, then on the next secular day following, at 10:00 a.m., or at such other date and time as shall be designated from time to time by the board of directors and stated in the notice of the meeting, at which time the shareholders shall elect a board of directors, and transact such other business as may properly be brought before the meeting. 5 2.03 VOTING LIST. At least ten days before each meeting of shareholders a complete list of the shareholders entitled to vote at the meeting, arranged in alphabetical order, with the residence of each and the number of voting shares held by each, shall be prepared by the officer or agent having charge of the stock transfer books. Such list, for a period of ten days prior to the meeting, shall be kept on file at a place within the city where the meeting is to be held and shall be subject to the inspection by any shareholder for any purpose germane to the meeting, at any time during usual business hours. Such list shall also be produced and kept open at the time and place of the meeting during the whole time thereof, and shall be subject to the inspection of any shareholder who may be present. 2.04 SPECIAL MEETINGS. Special meetings of the shareholders, for any purpose or purposes, unless otherwise prescribed by statute or by the certificate of incorporation, or by these Bylaws, may be called by the president, the board of directors, or the holders of not less than one-tenth of all the shares entitled to vote at the meetings. Business transacted at all special meetings shall be confined to the objects stated in the notice of the meeting. 2.05 NOTICE. Written or printed notice stating the place, day and hour of the meeting and, in case of a special meeting, the purpose or purposes for which, the meeting is called, shall be delivered not less than ten nor more than sixty days before the date of the meeting either personally or by mail, by or at the direction of the president, the secretary or the officer or person calling the meeting, to each shareholder of record entitled to vote at the meeting, provide that such notice may be waived as provided in Section 6.02 of these Bylaws. If mailed, such notice shall be deemed to be delivered when deposited in the mail addressed to the shareholder at his address as it appears on the stock transfer books of the corporation. With postage thereon prepaid. Any notice required to be given to any shareholder hereunder or under the Certificate of Incorporation need not be given to the shareholder if (A) notice of two consecutive annual meetings of the corporation and all notices of meetings held during the period between those annual meetings, if any, or (B) all (but in no event less than two) payments (if sent by first class mail) of distributions or interest on securities during a twelve-month period have been mailed to that person, addressed at his address as shown on the share transfer records of the corporation, and have been returned undeliverable. Any action or meeting taken or held without notice to such person shall have the same force and effect as if the notice had been duly given. 2.06 QUORUM. The holders of a majority of the shares issued and outstanding and entitled to vote thereat, present in person or represented by proxy shall be requisite and shall constitute a quorum at all meetings of the shareholders for the transaction of business except as otherwise provided by statute, _____ the Certificate of Incorporation or by these Bylaws. If a quorum is 2 6 not present or represented at a meeting of the shareholders, the shareholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, until a quorum is present or represented. At such adjourned meeting, at which a quorum is present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. 2.07. MAJORITY VOTE; WITHDRAWAL OF QUORUM. When a quorum is present at any meeting, the vote of the holders of a majority of the shares having voting power, present in person or represented by proxy, shall decide any matter brought before such meeting, unless the matter is one upon which, by express provision of the statutes or of the Certificate of Incorporation, or of these Bylaws, a different vote is required, in which case such express provision shall govern and control the decision of such matter. The shareholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum. 2.08 METHOD OF VOTING. Each outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote at a meeting of shareholders, except to the extent that the voting rights of the shares of any class or classes are limited or denied by the Certificate of Incorporation. At any meeting of the shareholders each shareholder having the right to vote may vote either in person or by proxy executed in writing by the shareholder or by his duly authorized attorney-in-fact, and being dated not more than eleven months prior to said meeting, unless said proxy shall provide for a longer period. A telegram, telex, cablegram, or similar transmission by the shareholder, or a photographic, photostatic, facsimile, or similar reproduction of a writing executed by the shareholder, shall be treated as an execution in writing for purposes of the immediately preceding sentence. Each proxy shall be filed with the secretary of the corporation prior to or at the time of the meeting. Voting for directors shall be in accordance with Section 3.06 of these Bylaws. Any vote may be taken VIVA VOCE or by show of hands unless someone entitled to vote objects, in which case written ballots be used. 2.09 FIXING RECORD DATES FOR MATTERS OTHER THAN CONSENTS TO ACTION; CLOSING TRANSFER BOOKS. The board of directors may fix in advance a record date for the purpose of determining shareholders entitled to notice of or to vote at a meeting of the shareholders, the record date to be not less than ten nor more than sixty days prior to said meeting; or the board of directors may close the stock transfer books for such purpose for a period of not less than ten nor more than sixty days prior to such meeting. In the absence of any action by the board of directors, the date upon which the notice of the meeting is mailed shall be the record date. 3 7 2.10 FIXING RECORD DATES FOR CONSENTS TO ACTION. Unless a record date shall have previously been fixed or determined pursuant to Section 2.09 hereof, whenever action by shareholders is proposed to be taken by consent in writing without a meeting of shareholders, if provided for by the Certificate of Incorporation, the board of directors may fix a record date for purposes of determining shareholders entitled to consent to that action, which record date shall not precede, and shall not be more than ten days after, the date upon which the resolution fixing the record date is adopted by the board of directors. If no record date has been fixed by the board of directors and the prior action of the board of directors is not required by the statutes, the record date for determining shareholders entitled to consent to Acton in writing without a meeting shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation by delivery to its registered office, its principal place of business, or an officer of the corporation having custody of the books in which proceedings of meetings of shareholders are recorded. Delivery shall be by hand or by certified or registered mail, return receipt requested. Delivery to the corporation's principal place of business shall be addressed tot he president or the principal executive officer of the corporation. If no record date has been fixed by the board of directors and prior action of the board of directors is required by statute, the record date for determine shareholders entitled to consent to action in writing without a meeting shall be at the close of business on the date on which the board of directors adopts a resolution taking such prior action. 2.11 ACTION WITHOUT MEETING. Any action required by statute to be taken at a meeting of the shareholders, or any action which may be taken at a meeting of the shareholders, may be taken without a meeting if a consent in writing setting forth the action so taken, shall be signed by all of the shareholders entitled to vote with respect to the subject matter thereof, and such consent shall have the same force and effect as a unanimous vote of the shareholders. If the Certificate of Incorporation of the corporation so provides, any action required by statute to be taken at any annual or special meeting of shareholders, or any action which may be taken at any annual or special meeting of shareholders, may be taken without a meeting, without prior notice, and without a vote, if a consent or consents in writing setting forth the action so taken, shall be signed by the holder or holders of shares having note less than the minimum number of votes that would be necessary to take such action at a meeting at which the holders of all shares entitled to vote on the action were present and votes. Every written consent pursuant to this Section shall be signed dated and delivered in the manner required by, and shall be effective at the time and remain effective for the period specified by the statues. A telegram, telex, cablegram, or similar transmission by a shareholder, or a photographic, photostatic, facsimile, or similar reproduction of a writing signed by a shareholder, shall be regarded as signed by the shareholder for purposes of this Section. Prompt notice of the taking of any action by shareholders without a 4 8 meeting by less than unanimous written consent shall be given to those shareholders who did not consent in writing to the action. ARTICLE III DIRECTORS 3.01 MANAGEMENT. The powers of the corporation shall be exercised by or under authority of, and the business and affairs of the corporation shall be managed by the board of directors who may exercise all such powers of the corporation and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these Bylaws directed or required to be exercised or done by the shareholders. 3.02 NUMBER; QUALIFICATION; ELECTION; TERM. The number of directors which shall constitute the whole board shall be not less than one (1) nor more than seven (7). The number of directors which shall constitute the initial board of directors shall be the number fixed by the Certificate of Incorporation. Thereafter, within the limits above specified, the number of directors shall be determined by resolution of the board of directors. 3.03 CHANGE IN NUMBER. The number of directors provided for in Section 3.02 may be increased or decreased from time to time by amendment to these Bylaws, but no decrease shall have the effect of shortening the term of any incumbent director. Any directorship to be filled by reason of an increase in the number of directors shall be filled (A) by election at an annual meeting or at a special meeting of shareholders called for that purpose, or (B) by the board of directors for a term of office continuing only until the next election of one or more directors by the shareholders; provided, however, that the board of directors may not fill more than two such directorships during the period between any two successive annual meetings of shareholders. 3.04 REMOVAL. Any director may be removed either for or without cause at any special or annual meeting of shareholders, by the affirmative vote of a majority in number of shares of the shareholders present in person or by proxy at such meeting and entitled to vote for the election of such director if notice of intention to act upon such matter shall have been given in the notice calling such meeting. 3.05 VACANCIES. Any vacancy occurring in the board of directors (by death, resignation, retirement, removal or otherwise) may be filled (A) by election at an annual or special meeting of shareholders called for that purpose, or (B) by an affirmative vote of a majority of the remaining directors, though less than a quorum of the board of directors. A director elected to fill a vacancy shall be elected for the unexpired term of his predecessor in office. 5 9 3.06 ELECTION OF DIRECTORS. Unless otherwise provided by the Certificate of Incorporation, directors shall be elected by plurality of the votes cast by the holders of shares entitled to vote in the election of directors at a meeting of shareholders at which a quorum is present. Cumulative voting shall not be permitted. 3.07 PLACE AND MANNER OF MEETINGS. Meetings of the board of directors, regular or special, may be held either within or without the State of Delaware. Members of the board of directors may participate in such meetings by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other and participation in a meeting as provided herein shall constitute present in person at such meeting, except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. 3.08 FIRST MEETING. The first meeting of each newly elected board s hall be held without further notice immediately following the annual meeting of shareholders, and at the same place, unless by unanimous consent of the directors then elected and serving such time or place shall be changed. 3.09 REGULAR MEETINGS. Regular meetings of the board of directors may be held without notice at such time and place as shall from time to time be determined by the board. 3.10 SPECIAL MEETINGS. Special meetings of the board of directors may be called by the president on three days' notice to each director, either personally or by mail or by telegram. Special meetings shall be called by the president or secretary in like manner and on like notice on the written request of two directors. Except as otherwise expressly provided by statute, or by the Certificate of Incorporation, of by these Bylaws, neither the business to be transacted at, nor the purpose of, any special meeting need be specified in a notice or waiver of notice. 3.11 ACTION WITHOUT MEETING. Any action required by statute to be taken at a meeting of the board of directors, or any action which may be taken at a meeting of the board of directors, may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all the members of the board of directors. Such consent shall have the same force and effect as an unanimous vote at a meeting. 3.12 QUORUM; MAJORITY VOTE. At all meetings of the board of directors a majority of the number of directors fixed by these Bylaws shall constitute a quorum for the transaction of business unless a greater number is required by 6 10 law or by the Certificate of Incorporation. The act of a majority of the directors present at any meeting at which a quorum is present shall be the act of the board of directors unless the act of a greater number is required by statute, by the certificate of Incorporation or by these Bylaws. If a quorum shall not be present at any meeting of the board of directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present. 3.13 COMPENSATION. By resolution of the board of directors, the directors may be paid their expenses, if any, of attendance at each meeting of the board of directors and may be paid a fixed sum for attendance at each meeting of the board of directors or a stated salary as director. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Members of the executive committee or of special or standing committees may, by resolution to he board of directors, be allowed like compensation for attending committee meetings. 3.14 PROCEDURE. The board of directors shall keep regular minutes of its proceedings. The minutes shall be placed in the minute book of the corporation. 3.15 INTERESTED DIRECTORS, OFFICERS AND SHAREHOLDERS. (A) VALIDITY. Any contract or other transaction between the corporation and any of its directors, officers or shareholders (or any corporation or firm in which any of them are directly or indirectly interested) shall be valid for all purposes notwithstanding the presence of such director, officer or shareholder at the meeting authorizing such contract or transaction or his participation in such meeting or authorization. (B) DISCLOSURE, APPROVAL. The foregoing shall, however, apply only if the interest of each such director, officer o shareholder is known or disclosed: 1. To the board of directors and it nevertheless authorizes or ratifies the contract or transaction by a majority of the directors present, each such interested director to be counted in determining whether a quorum is present but not in calculating the majority necessary to carry the vote; or 2. To the shareholders and they nevertheless authorize or ratify the contract or transaction by a majority of the shares present, each such interested person to be counted for quorum and voting purposes. (C) NON-EXCLUSIVE. This provision shall not be construed __ invalidate any contract or transaction which would be valid in the absence of this provision. 7 11 ARTICLE IV COMMITTEES OF THE BOARD OF DIRECTORS 4.01 DESIGNATION. The board of directors may, by resolution adopted by a majority of the whole board, designate from its members one or more committees, each of which shall be comprised of one or more of its members, and may designate one or more of its members as alternate members of any committee, who may, subject to any limitations imposed by the board of directors, replaced absent or disqualified members at any meeting of that committee. 4.02 AUTHORITY. Any such committee, to the extent provided in such resolution or the Certificate of Incorporation, shall have and may exercise all of the authority of the board of directors in the management of the business and affairs of the corporation, subject to the limitations set forth in the Delaware General Corporation Law, and shall have power to authorize the seal of the corporation to be affixed to all papers which may require it. 4.03 PROCEDURE. Each such committee shall keep regular minutes of its proceedings and report the same to the board of directors when required. 4.04 REMOVAL. Any member of any such committee may be removed by the board of directors by the affirmative vote of a majority of the whole board, whenever in its judgment the best interests of the corporation will be served thereby. 4.05 RESPONSIBILITY. The designation of on or more committees and the delegation of authority to any such committee shall no operate to relieve the board of directors, or any member thereof, of any responsibility imposed upon it or him by law. ARTICLE V OFFICERS 5.01 NUMBER. The officers of the corporation shall consist of a president and a secretary, each of whom shall be elected by the board of directors. Such offices may be held by the same person. 5.02 ELECTION. The board of directors, at its first meeting after each annual meeting of shareholders, shall elect officers for the ensuing year or until their successors are elected, none of whom need be a member of the board, a shareholder or a resident of Delaware. 8 12 5.03 OTHER OFFICERS. The board of directors may elect or appoint such other officers and agents as it shall deem necessary, who shall be appointed for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the board. Any two or more offices may be held by the same person. 5.04 TERM. Each officers of the corporation shall hold office until his successor is chosen and qualified in his stead or until his death or until his resignation or removal from office. 5.05 REMOVAL. Any officer or agent or member of a committee elected or appointed by the board of directors may be removed by the board of directors whenever in its judgment the best interests of the corporation will be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Election or appointment of an officer or agent or member of a committee shall not of itself create contract rights. 5.06 VACANCIES. Any vacancy in any office because of death, resignation, removal or otherwise, may be filled by the board of directors for the unexpired portion of the term. 5.07 COMPENSATION. The compensation of all officers and agents shall be fixed by the board of directors. 5.08 PRESIDENT. The president shall be the chief executive officer of the corporation, and subject to the control of the board of directors, shall in general supervise and control all of the business and affairs of the corporation and shall see that all orders and resolutions of the board are carried into effect. He shall, when present, preside at all meetings of the shareholders and of the board of directors. The president may execute, with the secretary or any other proper officer of the corporation thereunto authorized by the board of directors, certificates for shares of the corporation, any deeds, mortgages, bonds, contracts or other instruments which the board of directors has authorized to be executed, except in cases where the signing and execution thereof shall be expressly delegated by the board of directors or by these Bylaws to some other officer or agent of the corporation, or shall be required by law to be otherwise signed or executed, and in general shall perform all duties incident to the office of president, and such other duties as maybe prescribed by the board of directors from time to time. 5.09 VICE-PRESIDENT. The vice-presidents in the order of their seniority, unless otherwise determined by the board of directors shall, in the absence or disability of the president perform the duties and have the authority and exercise the powers of the president. They shall perform such other duties and have 9 13 such other authority and powers as the board of directors may from time to time prescribe or as the president may from time to time delegate. 5.10 SECRETARY. The secretary shall attend all sessions of the board of directors and all meetings of the shareholders and record all votes and the minutes of all proceedings in a book to be kept for that purpose and shall perform like duties for the executive committee when required, or any other committee, if requested. He shall give, or cause to be given, notice of the meetings of the board of directors and shareholders where such notices are required by these Bylaws to be given. He shall keep in safe custody the seal of the corporation, and when authorized by the board or the executive committee, affix the same to any instrument requiring it and, when so affixed, it shall be attested by his signature or by the signature of the treasurer or an assistant secretary. The secretary shall be under the supervision of the president. He shall perform such other duties and have such other authority and powers as the board of directors may from time to time prescribe or as the president may from time to time delegate. 5.11 ASSISTANT SECRETARY. The assistant secretaries in the order of their seniority unless otherwise determined by the board of directors, shall, in the absence or disability of the secretary, perform the duties and have the authority and exercise the powers of the secretary. They shall perform such other duties and have such other powers as the board of directors may from time to time prescribe, or as the president may from time to time delegate. 5.12 TREASURER. (A) The treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements of the corporation, and shall deposit all moneys and other valuable effects in the name and to the credit of the corporation in such depositories as may be designated by the board of directors. (B) He shall disburse the funds of the corporation as may be ordered by the board of directors, taking proper vouchers for such disbursements, and shall render to the president and directors, at the regular meetings of the board, or whenever they may require it, an account of all his transactions as treasurer and of the financial condition of the corporation. (C) If required by the board of directors, he shall give the corporation a bond in such form, in such sum and with such surety or sureties as shall be satisfactory to the board for the faithful performance of the duties of his office and for the restoration to the corporation, in case of his death, resignation, 10 14 retirement or removal from office, of all books, reports, vouchers, money, or other property of whatever kind in the his possession or under his control belonging to the corporation. (D) He shall perform such other duties and have such other authority and powers as the board of directors may from time to time prescribe, or as the president may from time to time delegate. 5.13 ASSISTANT TREASURER. The assistant treasurer in the order of their seniority, unless otherwise determined by the board of directors, shall, in the absence or disability of the treasurer, perform the duties and have the authority and exercise the powers of the treasurer. They shall perform such other duties and have such other powers a the board of directors may from time to time prescribe or other president may from time to time delegate. 5.14. FILLING OF OFFICES. The board of directors of the corporation shall not be required to fill the offices of vice-president, assistant secretary, and assistant treasurer, or to name an executive committee or any other committee until, in the opinion of the board, there is a need for such offices, committees, or any of them, to be filled. ARTICLE VI INDEMNIFICATION 6.01 POLICY OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES. To the full ex tent permitted by Delaware law, the corporation shall indemnify any director or officer of the corporation against judgments, penalties (including excise and similar taxes), fines, settlements and reasonable expenses (including court costs and attorneys' fees) actually incurred by any such person who was, is or is threatened to be made a named defendant or respondent in a proceeding because the person is or was a director or officer of the corporation and shall advance to such person such reasonable expenses as are incurred by such person in connection therewith. 6.02 DEFINITIONS. For purposes of this Article VI: (i) "Director" means any person who is or was a director of the corporation and any person who, while a director of the corporation, is or was serving at the request of the corporation as a director, officer, partner, venture, proprietor, trustee, employee, agent, or similar functionary of the corporation or of another foreign or domestic corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan, or other enterprise. 11 15 (ii) "Officer" means any person who is or was an officer of the corporation and any person who, while an officer of the corporation, is or was serving at the request of the corporation as a director, officer, partner, venture, proprietor, trustee, employee, agent or similar functionary of the corporation or of another foreign or domestic corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise. (iii) "Proceeding" means any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, arbitrative, or investigative, any appeal in such an action, suit, or proceeding, and any inquiry or investigation that cold lead to such an action, suit, or proceeding. 6.03 NON-EXCLUSIVE; CONTINUATION. The indemnification provided by this Article VI shall not be deemed exclusive of any other rights to which the person claiming indemnification may be entitled under any agreement, any vote of shareholders or disinterested directors of the corporation or otherwise both as disinterested directors of the corporation or otherwise both as to any action in his or her official capacity and as to any action in another capacity while holding such office, and shall continue as to a person who shall have ceased to be a director, officer or employee of the corporation engaged in any other enterprise at the request of the corporation and shall inure to the benefit of the heirs, executors and administrators of such person. 6.04 INDEMNIFICATION OF EMPLOYEES OR AGENTS. The corporation may indemnify and advance expenses to an employee or agent who is not a director or officer to such further extent, consistent with law and upon the satisfaction of any requirements imposed by such law, as may be provided by general or specific action of the board of directors, or contract or as permitted or required by common law. 6.05 INSURANCE OR OTHER ARRANGEMENT. The corporation shall have the power to purchase and maintain insurance or another arrangement on behalf of any person who is or was a director, officer, employee or agent of the corporation, or who is or was serving at the request of the corporation as a director, officer, employee or agent or any other capacity in another corporation, or a partnership, joint venture, trust or other enterprise against any liability asserted against such person and incurred by such person in such capacity, arising out of such person's acting as such, whether or not such person is indemnified against such liability by the provisions of this Article VI. 12 16 ARTICLE VII CERTIFICATES AND SHAREHOLDERS 7.01 CERTIFICATES. Certificates in the form determined by the board of directors shall be delivered representing all shares in which shareholders are entitled. Such certificates shall be consecutively numbered, and shall be entered in the books of the corporation as they are issued. Each certificate shall state on the face thereof the holder's name, the number and class of shares, the par value of shares or a statement that such shares are without par value, and such other matters as may be required by the laws of the State of Delaware. They shall be signed by the president or a vice-president and the secretary or assistant secretary, and may be sealed with the seal of the corporation or a facsimile thereof. If any certificate is countersigned by a transfer agent or registered by a registrar other than the corporation or an employee of the corporation, the signature of such officer may be a facsimile. In the event any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar be fore such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. 7.02 REPLACEMENT OF LOST OR DESTROYED CERTIFICATES. The board of directors may direct a new certificate representing shares to be issued in place of any certificate theretofore issued by the corporation alleged to have been lost or destroyed upon the making of an affidavit of that fact by the person claiming the certificate to be lost or destroyed. When authorizing such issue of a new certificate, the board of directors, in its discretion and as a condition precedent to the issuance thereof, may prescribe such terms and conditions a it deems expedient, and may require such indemnities as it deems adequate, to protect the corporation from any claim that may be made against it with respect to any such certificate alleged to have been lost or destroyed. 7.03 TRANSFER OF SHARES. Shares of stock shall be transferable only on the books of the corporation by the holder thereof in person or by his duly authorized attorney, Upon surrender, to the corporation or its transfer agent, of a certificate re presenting shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, the corporation or its transfer agent shall issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. 7.04 REGISTERED SHAREHOLDERS. The corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof, and accordingly shall not be required to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it has express or other notice thereof, except as otherwise provided by law. 7.05 PREEMPTIVE RIGHTS. No shareholder or any other person shall have any preemptive right whatsoever. 13 17 7.06 RESTRICTION ON TRANSFER OF SHARES. No shareholder including the heirs, assigns, executors, or administrators of a deceased shareholder shall voluntarily or involuntarily sell or assign shares of the corporation to any person or persons, firms, or other corporations not a shareholder, or pledge the same or any part thereof by endorsement resulting i delivery to a transferee who is not a shareholder, without first offering such stock for sale to the corporation and the other shareholders in the following manner. (A) Such shareholder shall give written notice by registered or certified mail to the secretary of the corporation of his intention to sell such shares. Said notice shall specify his intention to sell such shares. Said notice shall specify the number of shares to be sold, the price per share, and the terms upon which the sale is to be made. The corporation shall have thirty (30) day from the receipt of such notice within which to exercise its option to purchase all or any full number of the shares so offered. Such purchase may be authorized by the board of directors without any action by the shareholders of the corporation. (B) In the event that the corporation shall fail to purchase all of such shares within the said thirty (30) day period, the secretary of the corporation shall within ten (10) days thereafter, give written notice to each of the shareholders of record, stating the number of shares offered for sale but not purchased by the corporation, and the price per share, and the terms upon which the sale is being made. Such notice shall be sent by mail addressed to each shareholder at his last address as it appears on the books of the corporation. Within thirty (30) day after the mailing of said notices any shareholder desiring to purchase part or all of such shares shall deliver by mail or otherwise to the secretary of the corporation a written offer for the number of shares desired by him, accompanied by the purchase price therefor with authorization to pay such purchase price against delivery of such shares. (C) If the shareholders offer to purchase more than the total number of shares available for purchase by them, then the shareholders offering to purchase shall be entitled to purchase any proportion of said shares as the number of shares of the corporation which he holds bears to the total number of shares held by all shareholders offering to purchase. In the event that the proportion of said shares to which any shareholder should be entitled to purchase is more than the number of shares he desires to purchase, each remaining shareholder desiring to purchase additional shares shall be entitled to purchase such proportion of the overplus as the number of shares which he holds bears to the total number of shares held by all shareholders desiring to participate. (D) If none or only a part of the shares offered for sale is purchased by the corporation or shareholders, or both, then its shareholder who offered the 14 18 same for sale shall have thereafter the right, at any time during the period of six (6) months after the expiration of the thirty (30) day period referred to in paragraph (B) above, to sell said shares not so purchased to such person or persons as he desire; PROVIDED, HOWEVER, that he shall not sell such shares at a lower price or on terms more favorable to the purchaser than those specified in the written notice he gave to the corporation nor shall he sell such shares after the expiration of the six month period without first giving written notice as hereinabove required. (E) No shares of stock shall be sold or transferred on the boos of the corporation until these provisions have been complied with, but the board of directors may, in any particular instance, waive the requirements. ARTICLE VIII NOTICE 8.01 METHOD. Whenever by statute or the Certificate of Incorporation or these Bylaws, notice is required to be given to any shareholder or director, and no provision is made as to how the notice shall be given, it shall not be construed to mean personal notice, but any such notice may be given in writing, postage prepaid, addressed to the director or shareholder at the address appearing on the books of the corporation, or by any other method permitted by law. Any notice required or permitted to be given by mail shall be deemed given at the time when the same is thus deposited in the United States mails. Notice to directors may also be given by telegram, with such notice being deemed to have been given when the telegram is delivered to the telegraph company. 8.02 WAIVER. Whenever, by statute or the Certificate of Incorporation or these Bylaws, notice is required to be given to any shareholder or director, a waiver thereof in writing signed by the person or persons entitled to such notice, whether before or after the time stated in such notice, shall be equivalent to the giving of such notice. Attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends for the express purpose of objecting to the transaction of any business on the rounds that the meeting is not lawfully called or convened. ARTICLE IX GENERAL PROVISIONS 9.01 DISTRIBUTION, SHARE DIVIDENDS AND RESERVES. (A) DECLARATION AND PAYMENT. Subject to statute and the Certificate of Incorporation, distributions and share dividends may be authorized 15 19 by the board of directors at any regular or special meeting and made by the corporation. Distributions may be paid in cash or in property of the corporation, and share dividends may be paid in authorized but unissued shares or in treasury shares of the corporation. The authorization and payment of distributions and share dividends shall be at the discretion of the board of directors. (B) RECORD DATE. The board of directors may fix in advance a record date for the purpose of determining shareholders entitled to receive any distribution or share dividend by the corporation, such record date to be not more than sixty days prior to the payment of such distribution or share dividend. In the absence of any action by the board of directors, the date upon which the board of directors adopts the resolution authorizing the distribution or share dividend shall be the record date. (C) RESERVES. By resolution the board of directors may create such reserve or reserves out of the surplus of the corporation or designate or allocate any part or all of the surplus of the corporation in any manner for any proper purpose or purposes, and may increase, decrease or abolish any such reserve, designation or allocation in the same manner. 9.02 BOOKS AND RECORDS. The corporation shall keep correct and complete books and records of account and shall keep minutes of the proceedings of its shareholders, its board of directors, and each committee of its board of directors, and shall keep at its registered office or principal place of business, or at the office of its transfer agent or registrar, a record of the original issuance of shares issued by the corporation and a record of each transfer of those shares that have been presented to the corporation for registration of transfer. Such records shall contain the names and addresses of all past and current shareholders and the number and class of the shares issued by the corporation held by each of them. 9.03. CHECKS AND NOTES. All checks or demands for money and notes of the corporation shall be signed by such officer or officers or such other person or persons as the board of directors may from time to time designate. 9.04 FISCAL YEAR. The fiscal year of the corporation shall be fixed by resolution of the board of directors. 9.05 SEAL. The corporate seal shall have inscribed thereon the name of the corporation and shall be in such form as the board of directors may prescribe. Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced otherwise. 16 20 9.06 RESIGNATION. Any director, officer or agent may resign by giving written notice to the president or the secretary. The resignation shall take effect at the time specified therein. Unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. 9.07 AMENDMENT OF BYLAWS. These Bylaws may be repealed, altered or amended at any meeting of the board of directors at which a quorum is present, by the affirmative vote of a majority of the directors present at such meeting, provided notice of the proposed repeal, alteration or amendment is contained in the notice of such meeting, unless (A) the power to repeal, alter or amend the Bylaws is exclusively reserved to the shareholders in whole or part by the Certificate of Incorporation or by statute, or (B) the shareholders in amending, repealing or adopting a particular bylaw expressly provide that the board of directors may not amend or repeal that by law. 9.08 TABLE OF CONTENTS; HEADINGS. The table of contents and headings used in these Bylaws have been inserted for convenience only and do not constitute matter to be construed in interpretation. 9.09 CONSTRUCTION. Whenever the context so requires, the masculine shall include the feminine and neuter, and the singular shall include the plural, and conversely. If any portion of these Bylaws shall be invalid or inoperative, then, so far as is reasonable and possible: (A) The remainder of these Bylaws shall be considered valid and operative; and (B) Effect shall be given to the intent manifested by the portion held invalid or inoperative. 17 EX-3.6.1 12 CERTIFICATE OF FORMATION OF FANTASMA LLC 1 Exhibit 3.6.1 CERTIFICATE OF FORMATION OF FANTASMA, LLC The undersigned, an authorized natural person, for the purpose of forming a limited liability company, under the provisions and subject to the requirements of the State of Delaware (particularly Chapter 18, Title 6 of the Delaware Code and the acts amendatory thereof and supplemental thereto, and known, identified, and referred to as the "Delaware Limited Liability Company Act"), hereby certifies that: FIRST: The name of the limited liability company (hereinafter called the "limited liability company") is Fantasma, LLC. SECOND: The address of the registered office and the name and the address of the registered agent of the limited liability company required to be maintained by Section 18-104 of the Limited Liability Company Act of the State of Delaware are Corporation Service Company, 1013 Centre Road, Wilmington, Delaware 19805. THIRD: The nature of the business to be conducted by, and the purposes of, the limited liability company are to engage in any lawful act or activity for which a limited liability company may be organized under the Limited Liability Company Act of the State of Delaware. FOURTH: No member of the limited liability company may bind the limited liability company except in accordance with the limited liability company agreement of the limited liability company as in effect from time to time. 2 FIFTH: The limited liability company shall indemnify and hold harmless each member, each manager and each officer of the limited liability company, to the fullest extent permitted by law. Executed on August 22, 1996. /S/ Samantha Kimm -------------------------------- Samantha Kimm, Authorized Person 2 EX-3.7.1 13 CERTIFICATE OF LTD. PARTNERSHIP OF FOSTER GRNT GRP 1 Exhibit 3.7.1 CERTIFICATE OF LIMITED PARTNERSHIP OF FOSTER GRANT GROUP, L.P. This Certificate of Limited Partnership of FOSTER GRANT GROUP, L.P. (the "Limited Partnership") is being executed by the undersigned for the purpose of forming a limited partnership pursuant to the Delaware Revised Uniform Limited Partnership Act. 1. The name of the limited partnership is: Foster Grant Group, L.P. 2. The address of the registered office of the limited partnership in Delaware is 32 Loockerman Square, Suite L-100, Dover, Delaware 19904. The limited partnership's registered agent at that address is The Prentice-Hall Corporation System, Inc. 3. The names and addresses of the general partner is: NAME ADDRESS ---- ------- Bonneau General, Inc. 32 Loockerman Square, Suite L-100 Dover, Delaware 19904 IN WITNESS WHEREOF, the undersigned, constituting all of the general partners of the Partnership, have caused this Certificate of Limited Partnership to be duly executed as of the 23rd day of December, 1994. BONNEAU GENERAL, INC. By: /S/ Peter H. Trembath ------------------------ Name: Peter H. Trembath Title: Secretary EX-3.7.2 14 AGMT LTD PARTNERSHIP OF FOSTER GRANT GROUP 1 Exhibit 3.7.2 AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF FOSTER GRANT GROUP, L.P. THIS AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP of Foster Grant Group, L.P. is made as of the 30th day of December, 1994, by and among Bonneau General, Inc., a Delaware corporation, as General Partner, Bonneau Holdings, Inc., a Delaware corporation, and O-Ray Holdings, Inc., a Delaware corporation, as the Limited Partners, and the Persons who become limited partners of the Partnership in accordance with the provisions hereof and whose names are set forth as Limited Partners on Schedule A attached hereto. WITNESSETH: WHEREAS, the General Partner has heretofore formed the Partnership by filing a Certificate of Limited Partnership with the Office of the Secretary of State of the State of Delaware on December 23, 1994 and entered into an Agreement of Limited Partnership of the Partnership, dated as of December 23, 1994 (the "Original Partnership Agreement") with the Initial Limited Partner; and WHEREAS, the parties hereto desire to continue the Partnership as a limited partnership under the Act and this Agreement and to admit O-Ray Holdings, Inc. as a limited partner of the Partnership; and WHEREAS, the parties hereto desire to provide for the governance of the Partnership and to set forth in detail their respective rights and duties relating to the Partnership and to amend and restate the Original Partnership Agreement in its entirety. NOW, THEREFORE, in consideration of the mutual promises and obligations contained herein, the parties, intending to he legally bound, hereby amend and restate the Original Partnership Agreement in its entirety and hereby agree as follows: 2 ARTICLE I DEFINED TERMS Section 1.01. DEFINITIONS. Unless the context otherwise requires, the terms defined in this Article I shall, for the purposes of this Agreement, have the meanings herein specified. "Act" means the Delaware Revised Uniform Limited Partnership Act, 6 DEL.C. ss.17-l0l, ET SEQ., as amended from time to time. "Additional Units" has the meaning set forth in Section 4.03 (a). "Adjusted Capital Account Deficit" means, with respect to any Partner, the deficit balance, if any, in such Partner's Capital Account as of the end of the relevant Partnership Fiscal Year, after giving effect to the following adjustments: (i) Credit to such Capital Account any amounts which such Partner is obligated to restore or is deemed to be obligated to restore pursuant to the penultimate sentences of Sections 1.704-2 (g) (i) and 1.704-2 (i) (5) of the Regulations; and (ii) Debit to such Capital Account the items described in Sections 1.704-1 (b) (2) (ii) (d) (4), 1.704-1 (b) (2) (ii) (d) (5) and 1.704-1 (b) (2) (ii) (d) (6) of the Regulations. "Affiliate" means any Person that directly or indirectly controls, is controlled by, or is under common control with, the Person in question. As used in this definition, the term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of voting securities, by contract or otherwise. "Agreement" means this Amended and Restated Agreement of Limited Partnership of the Partnership, as amended, modified, supplemented or restated from time to time. "Bankruptcy" means, with respect to any Partner, (i) the filing by a Partner of a voluntary petition seeking liquidation, reorganization, arrangement or readjustment, in any form, of its debts under Title 11 of the United States Code (or corresponding provisions of future laws) or any other federal or state insolvency law, or the filing by a Partner of an answer consenting to or acquiescing in any such petition, (ii) the making by a Partner of any assignment for the benefit of its creditors or the admission by a Partner in writing of its inability to pay its debts as they mature, (iii) the filing of an involuntary petition under Title 11 of the United States Code (or corresponding provisions of future laws), an application for the appointment of a receiver for the assets of a Partner, or an involuntary petition seeking liquidation, reorganization, arrangement or readjustment of its debts under any other federal or state insolvency law, provided that the same shall not have been vacated, set aside or stayed within a 60-day period after the occurrence of 2 3 such event or (iv) the entry against it of a final and nonappealable order for relief under any bankruptcy, insolvency or similar law now or hereafter in effect. "Capital Account" means, with respect to any Partner, the account maintained for such Partner in accordance with the provisions of Section 4.05. "Capital Contribution" means, with respect to any Partner, the assets, liabilities, properties and business contributed to the Partnership by such Partner pursuant to Sections 4.01, 4.02, 4.03 and 4.04. "Certificate of Limited Partnership" means the Certificate of Limited Partnership and any and all amendments thereto and certificates of correction or restatements thereof filed on behalf of the Partnership with the Off ice of the Secretary of State of the State of Delaware. "Code" means the Internal Revenue Code of 1986, as amended from time to time, or any corresponding federal tax statute enacted after the date of this Agreement. A reference to a specific section (ss) of the Code refers not only to such specific section but also to any corresponding provision of any federal tax statute enacted after the date of this Agreement, as such specific section or such corresponding provision is in effect on the date of application of the provisions of this Agreement containing such reference. "Covered Person" has the meaning set forth in Section 12.01 (a). "Disabling Conduct" shall mean conduct that constitutes fraud, willful misconduct, bad faith or gross negligence. "General Partner" means Bonneau General, Inc. and includes any Person who becomes an additional or successor general partner of the Partnership pursuant to the provisions of this Agreement. "Guaranty" means the Subsidiary Guaranty Agreement, among BEC Distribution, Inc., Bonneau General, Inc., Bonneau Holdings, Inc., Foster Grant Group, L.P., Omega Optical Co., Inc., Omega Optical Co., L.P., Omega Optical General, Inc., Omega Optical Holdings, Inc., Optical Radiation Corporation, O-Ray Holdings, Inc., The Bonneau Company, ORC Caribe and NationsBank, National Association (Carolinas), as agent (the "Agent"). "Indemnified Person" has the meaning set forth in Section 12.02 (a). "Initial Limited Partner" means Bonneau Holdings, Inc. in its capacity as a limited partner of the Partnership. "Limited Partner" means the Initial Limited Partner, O-Ray Holdings, Inc. and any other Person named as a limited partner of the Partnership on Schedule A hereto and includes any Person admitted as an additional limited partner of the Partnership or a substituted limited partner 3 4 of the Partnership pursuant to the provisions of this Agreement, and "Limited Partners" means two or more of such Persons when acting in their capacities as limited partners of the Partnership. "Liquidating Trustee" means the General Partner, or if there is no General Partner, a Person or Persons who may be approved by a Majority Vote. "Majority Vote" means the written approval of, or the affirmative vote by, the holders of a majority of the Outstanding Units. "Management Fee" has the meaning set forth in Section 7.01 (a). "Net Cash Flow" means, for each Partnership Fiscal Year or other period of the partnership, the gross cash receipts of the Partnership from all sources, but excluding all Capital Contributions and any amounts that are held by the Partnership as a collection agent or in trust for others or that are otherwise not unconditionally available to the partnership, less all amounts paid by or for the account of the Partnership during the same Partnership Fiscal Year or period (including, without limitation, payments of principal and interest on any Partnership indebtedness and payments of the Management Fee, and less any amounts determined by the General Partner to be necessary to provide a reasonable reserve for working-capital needs or to provide funds for any other contingencies of the Partnership. Net Cash Flow shall be determined in accordance with the cash receipts and disbursements method of accounting and otherwise in accordance with generally accepted accounting principles. "Net Profits and Net Losses" mean the annual income and loss, respectively, of the Partnership for a Partnership Fiscal Year as determined in accordance with principles applied in determining income, gains, expenses, deductions, or losses, as the case may be, reported by the Partnership for federal income tax purposes on its partnership tax return and computed with the following adjustments: (i) Any income of the Partnership that is exempt from federal income tax and not otherwise taken into account in computing Net Profits or Net Losses shall be added to such taxable income or loss; (ii) Any expenditures of the Partnership described in Code Section 705 (a) (2) (B) or treated as Code Section 705 (a) (2) (B) expenditures pursuant to Regulations Section 1.704-1 (b) (2) (iv) (i), and not otherwise taken into account in computing Net Profits or Net Losses shall be subtracted from such taxable income or loss; (iii) In the event the book value of any Partnership asset is adjusted pursuant to the terms of this Agreement for purposes of determining the Partners' Capital Accounts, the amount of such adjustment shall be taken into account as gain or loss from the disposition of such asset for purposes of computing Net Profits or Net Losses. (iv) Gain or loss resulting from any disposition of property with respect to which gain or loss is recognized for federal income tax purposes shall be computed by 4 5 reference to the book value (utilized for purposes of maintaining the Partners' Capital Accounts) of the property disposed of, notwithstanding that the adjusted tax basis of such property differs from such book value; and (v) In lieu of the depreciation, amortization and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account the book depreciation for such Partnership Fiscal Year or other period utilized for purposes of maintaining the Partners' Capital Accounts. "Nonrecourse Deductions" has the meaning set forth in Section 1.704-2 (b) (1) of the Regulations. "Nonrecourse Liability" has the meaning set forth in Section 1.704-2 (b) (3) of the Regulations. "Outstanding Units" means the number of Units shown on the books and records of the Partnership to be outstanding other than Units held by the Partnership. "Partner" means any General Partner or Limited Partner, and "Partners" means two or more such Persons. "Partner Minimum Gain" means an amount, with respect to each Partner Nonrecourse Debt, equal to the Partnership Minimum Gain that would result if such Partner Nonrecourse Debt were treated as a Nonrecourse Liability, determined in accordance with Section 1.704-2 (i) (3) of the Regulations. "Partner Nonrecourse Debt" has the meaning set forth in Section 1.704-2 (b) (4) of the Regulations. "Partner Nonrecourse Deductions" has the meaning set forth in Sections 1.704-2 (i) (l) and 1.704-2 (i) (2) of the Regulations. "Partnership" means Foster Grant Group, L.P., the limited partnership heretofore formed and continued under and pursuant to the Act and this Agreement. "Partnership Fiscal Year" shall mean the fiscal year ending each December 31st. "Partnership Minimum Gain" has the meaning set forth in Regulations Section 1.704-2 (b) (2) and 1.704-2 (d). "Person" includes any individual, corporation, association, partnership (general or limited), joint venture, trust, estate, limited liability company or other legal entity or organization. "Record Date" means the date established by the General Partner as the record date for purposes of any entitlement hereunder. 5 6 "Record Holder" means the Limited Partner or assignee in whose name a Unit is registered on the books and records of the Partnership or on Schedule A hereto and, as applied to the General Partner's interest in the Partnership, the owner thereof, in each case as of the close of business on any Record Date. "Security Agreement" means the Subsidiary Security Agreement, among BEC Distribution, Inc., Bonneau General, Inc., Bonneau Holdings, Inc., Foster Grant Group, L.P., Omega Optical Co., Inc., Omega Optical Co., L.P., Omega Optical General, Inc., Omega Optical Holdings, Inc., Optical Radiation Corporation, O-Ray Holdings, Inc., The Bonneau Company, Opti-Ray, Inc. and the Agent. "Substituted Limited Partner" means a Person who is admitted to the Partnership as a Limited Partner pursuant to this Agreement in place of a Limited Partner or an assignee, and who is a Record Holder or named as a Limited Partner on Schedule A to this Agreement. "Successor" means any Person who becomes (i) an assignee of a General Partner's interest in the Partnership, or part thereof (whether or not such assignee becomes an additional or successor General Partner pursuant to this Agreement), (ii) an assignee of a Limited Partner's interest in the Partnership, or part thereof (whether or not such assignee becomes a Limited Partner pursuant to this Agreement) and (iii) an assignee of a Successor, in each case upon approval of the General Partner, as provided in Section 11.02. "Tax Matters Partner" has the meaning set forth in Section 10.06 (a). "Term" has the meaning set forth in Section 2.08. "Treasury Regulations" means the income-tax regulations promulgated under the Code, as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations): "Unit" means an interest of a Limited Partner or an assignee in the Partnership representing such fractional part of the interests of all Limited Partners or assignees pursuant to this Agreement as is equal to the quotient of one divided by the number of Outstanding Units. ARTICLE II CONTINUATION AND PURPOSES Section 2.01. CONTINUATION. The parties hereto hereby continue the Partnership as a limited partnership under and pursuant to the provisions of the Act and agree that the rights, duties and liabilities of the Partners shall be as provided in the Act, except as otherwise provided herein. 6 7 Section 2.02. NAME. The name of the Partnership heretofore formed and continued hereby is "Foster Grant Group, L.P.," unless and until the name of the Partnership is changed by the General Partner, in its sole discretion, and an appropriate amendment to the Certificate of Limited Partnership is filed as required by the Act. The Partnership's business may be conducted under the name of the Partnership or any other name or names deemed advisable by the General Partner, including the name of the General Partner or any Affiliate thereof. The words "Limited Partnership," "L.P." or similar words or letters shall be included in the Partnership's name where necessary for the purposes of complying with the laws of any jurisdiction that so requires. Section 2.03. PRINCIPAL PLACE OF BUSINESS. The principal place of business of the Partnership shall be located at 1601 Valley View Lane, Dallas, Texas 75234. The General Partner may hereafter change the principal place of business of the Partnership to such other place or places as the General Partner may determine from time to time in its sole discretion. The General Partner shall give notice of any such change to the Limited Partners. The Partnership may maintain such other offices at such other places as the General Partner deems advisable. Section 2.04. REGISTERED OFFICE; REGISTERED AGENT. The address of the registered office of the Partnership in the State of Delaware is c/o The Prentice-Hall Corporation System, Inc., 32 Loockerman Square, Suite L-l00, Dover, Delaware 19904. The registered agent of the Partnership at that address shall be The Prentice Hall Corporation System, Inc. At any time, the General Partner may designate another registered agent and/or registered office and amend the Certificate of Limited Partnership accordingly. Section 2.06. PURPOSES. The purpose and business of the Partnership shall be any business which may lawfully be conducted by a limited partnership formed pursuant to the Act, including primarily, but without limitation, the manufacture, purchase, distribution, marketing and sale of optical and optical-related products; the carrying on of any business relating thereto or arising therefrom; and anything incidental or necessary to the foregoing. Section 2.07. POWERS. The Partnership shall have the power to do any and all acts necessary, appropriate, proper, advisable, incidental or convenient to or for the furtherance of the purposes and business described herein and for the protection and benefit of the Partnership, and shall have, without limitation, any and all of the powers that may be exercised on behalf of the Partnership by the General Partner pursuant to Article VIII. The Partnership, and the General Partner on behalf of the Partnership, may enter into, deliver and perform (i) the Third Amended and Restated Loan and Security Agreement among Benson Eyecare Corporation ("Borrower"), BEC Distribution, Inc., Bonneau Holdings, Inc., Bonneau General, Inc., Foster Grant Group, L.P., Omega Optical Co., Inc., Omega Optical Co., L.P., Omega Optical Holdings, Inc., Omega Optical General, Inc., Optical Radiation Corporation, Opti-Ray, Inc., O-Ray Holdings, Inc., ORC Caribe, The Bonneau Company (collectively, the "Guarantors") and NationsBank, National Association (Carolinas) and each other lender executing and delivering a signature page thereto (the "Lenders"), and the other financial institutions from time to time parties thereto, and NationsBank, National Association (Carolinas) (the "Agent") (the "Facility A Credit Agreement"), (ii) the Third Amended and Restated Loan and Security Agreement (Facility B), among the 7 8 Borrower, the Guarantors, the Lenders and the Agent, (iii) the Security Agreement, (iv) the Guaranty, (v) the Intellectual Property Security Agreement (as defined in the Facility A Credit Agreement) and (vi) all such further instruments, certificates and documents to which the Partnership is a party or is required to deliver in connection with the foregoing documents (with such changes thereto as the persons executing the above-mentioned documents shall deem necessary, desirable or appropriate, as evidenced by his or their execution thereof) without any further act, vote or approval of any Partner notwithstanding any other provision of this Agreement, the Act or other applicable law, rule or regulation. The General Partner is hereby authorized to enter into the agreements described in the preceding sentence on behalf of the Partnership, but such authorization shall not be deemed a restriction on the power of the General Partner to enter into other Agreements on behalf of the Partnership. Section 2.08. TERM. The term of the Partnership ("Term") commenced on the date the Certificate of Limited Partnership was filed in the Office of the Secretary of State of the State of Delaware and shall continue until the 31st day of December, 2025, unless dissolved before such date in accordance with the provisions of this Agreement. ARTICLE III NAMES AND ADDRESSES OF PARTNERS Section 3.01. GENERAL PARTNER. The name and mailing address of the General Partner are set forth on Schedule A attached hereto and made a part hereof. Section 3.02. LIMITED PARTNERS. The names and addresses of the Limited Partners are set forth on Schedule A attached hereto and made a part hereof. A Person shall be deemed admitted as a Limited Partner at the time such Person (i) executes this Agreement or a counterpart of this Agreement and (ii) is named as a Limited Partner on Schedule A hereto. Any reference in this Agreement to Schedule A shall he deemed to be a reference to Schedule A as amended and in effect from time to time. ARTICLE IV CAPITAL CONTRIBUTIONS, SALE OF UNITS AND CAPITAL ACCOUNTS Section 4.01. GENERAL PARTNER INITIAL CAPITAL CONTRIBUTION. The General Partner has made a contribution to the capital of the Partnership of the assets, properties and business, subject to the liabilities, referred to opposite such General Partner's name on Schedule A hereto. The agreed value of such General Partner's Capital Contribution is set forth in the books and records of the Partnership. The agreed percentage to which such General Partner's Capital Contribution represents to all Capital Contributions made to the Partnership is set forth opposite such General Partner's name on Schedule A hereto. 8 9 Section 4.02. LIMITED PARTNER INITIAL CAPITAL CONTRIBUTIONS. The Limited Partners have made Capital Contributions of the assets, properties and business, subject to the liabilities referred to opposite such Limited Partner's name on Schedule A hereto. The agreed value of each of the Limited Partners Capital Contribution is set forth in the books and records of the Partnership. The agreed percentage to which each of the Limited Partners Capital Contribution represents to all Capital Contributions made to the Partnership is set forth opposite such Limited Partner's name on Schedule A hereto. Section 4.03. SALE OF ADDITIONAL LIMITED PARTNER INTERESTS. (a) The General Partner and the Partnership are hereby authorized to raise additional Partnership capital by offering and selling, or causing to be offered and sold, additional limited partner interests in the Partnership ("Additional Units") in such amounts and on such terms as the General Partner in its sole discretion may determine. Each Person who subscribes for any of the Additional Units shall be admitted as a Limited Partner at the time such Person (i) executes this Agreement or a counterpart of this Agreement and (ii) is named as a Limited Partner on Schedule A hereto or the books and records of the Partnership. Each such Person shall pay in cash to the Partnership, as its Capital Contribution, the purchase price for such Additional Units upon its subscription therefor. (b) The General Partner, in its individual capacity, may purchase for cash such number of Additional Units as the General Partner, in its sole discretion, may desire to purchase, provided, however, if the price of such Additional Units is less than the book value of such Units, as determined from the financial statements of the Partnership as of the end of its last fiscal year, such purchase shall require a Majority Vote of the Limited Partners. Each Additional Unit held by the General Partner shall represent an interest in the Partnership as a Limited Partner that shall include all rights and obligations of a Limited Partner. As the holder of Additional Units, the General Partner shall be admitted to the Partnership as a Limited Partner of the Partnership. Section 4.04. ADDITIONAL CAPITAL CONTRIBUTIONS. (a) If the General Partner determines, in its sole discretion, that the Partnership requires additional capital contributions from the Partners, then written notice thereof shall promptly be given to all Partners. Upon the date specified in such notice, which date shall not be less than thirty (30) days after the date such notice is delivered or mailed, as the case may be, in accordance with Section 16.01, the Partners shall contribute to the Partnership in their PRO RATA share, based on their respective Capital Contributions, of the total amount of additional capital required by the Partnership. The General Partner shall cause all such Capital Contributions to be reflected on Schedule A to this Agreement. Section 4.05. CAPITAL ACCOUNTS. An individual Capital Account shall be established and maintained for each Partner and each Successor who hereafter owns an interest in the Partnership. The original Capital Account established for any Successor shall be in the same amount as, and shall replace, the Capital Account of the Person whom such Successor succeeds, 9 10 and, for purposes of this Agreement, such Successor shall be deemed to have made the Capital Contribution of the Person whom such Successor succeeds. To the extent a Successor acquires less than the entire interest in the Partnership of the Person it succeeds, the original Capital Account of such Successor and its capital Contribution shall be in proportion to the interest it acquires, and the Capital Account of the Person who retains a partial interest in the Partnership, and the amount of its Capital contribution, shall be reduced in proportion to the interest it retains. The Capital Account of each Partner or Successor shall be maintained in accordance with the following provisions: Each Partner's Capital Account shall be: (i) Increased by (A) Capital Contributions actually made by the Partner to the Partnership upon formation of the Partnership; (B) Additional Capital Contributions actually made by the Partner to the Partnership subsequent to the formation of the Partnership; (C) Allocations to the Partner of the Net Profits of the Partnership; and (D) Other items properly added to Capital Accounts pursuant to the Code and the Regulations thereunder: and (ii) Decreased by (A) The amount of money and the fair market value of property distributed to the Partner by the Partnership; (B) Allocations to the Partner of expenditures of the Partnership which are not deductible in computing taxable income and not chargeable to capital account; (C) Allocations to the Partner of Net Losses of the Partnership; and (D) Other items properly deducted from Capital Accounts pursuant to the Code and the Regulations thereunder. 10 11 The foregoing provisions and the other provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Regulations Section 1.704-1 (b), and shall be interpreted and applied in a manner consistent with such Regulations. In the event the General Partner shall determine that it is prudent to modify the manner in which the Capital Accounts, or any debits or credits thereto (including, without limitation, debits or credits relating to liabilities that are secured by contributed or distributed property or that are assumed by the Partnership or the Partners) are computed in order to comply with such Regulations, the General Partner may make such modification, provided that it is not likely to have a material effect on the amounts distributable to any Partner pursuant to Section 13.04 hereof upon the dissolution and liquidation of the Partnership. The General Partner also shall (x) make any adjustments that are necessary or appropriate to maintain equality between the Capital Accounts of the Partners and the amount of Partnership capital reflected on the Partnership's balance sheet, as computed for book purposes, in accordance with Regulations Section 1.704-1 (b) (2) (iv) (1) and (y) make any appropriate modifications in the event unanticipated events might otherwise cause this Agreement not to comply with Section 1.704-1 (b) of the Regulations. Section 4.06. STATUS OF CAPITAL CONTRIBUTIONS. (a) Except as otherwise provided in this Agreement, the amount of a Partner's or a Successor's Capital Contribution may be returned to it, in whole or in part, at any time, but only upon (i) the consent of the General Partner (which consent the General Partner may withhold in its sole discretion) and (ii) the approval of a majority in interest in the capital of the Partnership among all Partners. Any such return of Capital Contribution shall be PRO RATA to all Partners and Successors in accordance with their then proportionate interests in Partnership capital. Notwithstanding the foregoing, no return of a Partner's or a Successor's Capital Contribution shall be made hereunder if such distribution would not comply with the requirements of ss.17-607 of the Act or other applicable law. Under circumstances requiring a return of any Capital Contribution, no Partner or Successor shall have the right to demand or receive property other than cash except as may be specifically provided in this Agreement. (b) No Partner or Successor shall receive any interest, salary, or drawing with respect to its Capital Contribution or its Capital Account or for services rendered on behalf of the Partnership or otherwise in its capacity as a Partner or Successor, except as otherwise specifically provided in this Agreement. (c) Except as provided in the Act or in this Agreement, no Limited Partner shall be liable for the debts, liabilities, contracts or any other obligations of the Partnership. Except as provided in the Act or this Agreement, a Limited Partner shall be liable only to make its Capital Contribution pursuant to Section 4.02, Section 4.03 and Section 4.04 (a), to make any additional Capital Contribution to the Partnership. No General Partner shall have any personal liability for the repayment of any Capital Contribution of any Limited Partner. Section 4.07. ADVANCES. If any Partner or Successor shall advance any funds to the Partnership in excess of its Capital Contribution, the amount of such advance shall neither increase its Capital Account nor entitle it to any increase in its share of the distributions of the 11 12 Partnership. The amount of any such advance shall be a debt obligation of the Partnership to such Partner or Successor and shall be repaid to it by the Partnership with such interest and upon such other terms and conditions as shall be mutually determined by such Partner or Successor and the General Partner. Any such advance shall be payable and collectible only out of the Partnership assets, and the Partners shall not be personally obligated to repay any part thereof. No Person who makes any nonrecourse loan to the Partnership shall have or acquire, as a result of making such loan, any direct or indirect interest in the profits, capital, or property of the Partnership, other than as a secured creditor. ARTICLE V ALLOCATIONS Section 5.01. (a) NET PROFITS AND NET LOSSES. After giving effect to the special allocations set forth in this Section 5.0l, all Net Profits and Net Losses of the Partnership for each calendar or fiscal year (as the case may be) shall be allocated among the General Partner and the Limited Partners in shares proportionate to their respective Capital Contributions, as set forth in Article IV and Schedule A hereof. Notwithstanding anything to the contrary above, the General Partner must be allocated not less than one percent (1%) of each material item of income, gain, loss, deduction or credit throughout the term of the Partnership. (b) SPECIAL ALLOCATIONS. The following special allocations shall be made in the following order: (i) MINIMUM GAIN CHARGEBACK. Except as otherwise provided in Section 1.704-2 (f) of the Regulations, notwithstanding any other provision of this Section 5.0l, if there is a net decrease in Partnership Minimum Gain during any Partnership Fiscal Year, each Partner shall be specifically allocated items of Partnership income and gain for such Partnership Fiscal Year (and, if necessary, subsequent Partnership Fiscal Years) in an amount equal to such Partners' share of the net decrease in Partnership Minimum Gain, determined in accordance with Regulations Section l.704-2 (g). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Partner pursuant thereto. The items to be so allocated shall be determined in accordance with Sections 1.704-2 (f) (6) and 1.704-2 (j) (2) of the Regulations. This Section 5.01 (b) (i) is intended to comply with the minimum gain chargeback requirement in Section 1.704-2 (f) of the Regulations and shall be interpreted consistently therewith. (ii) PARTNER MINIMUM GAIN CHARGEBACK. Except as otherwise provided in Section 1.704-2 (i) (4) of the Regulations, notwithstanding any other provisions of this Section 5.01, if there is a net decrease in Partner Minimum Gain attributable to a Partner Nonrecourse Debt during any Partnership Accounting Year, each Partner who has a share of the Partner Nonrecourse Debt Minimum Gain attributable to such Partner Nonrecourse Debt, 12 13 determined in accordance with Section 1.704-2 (i) (5) of the Regulations, shall be specifically allocated items of Partnership income and gain for such Partnership Fiscal Year (and, if necessary, subsequent partnership Fiscal Years) in an amount equal to such Partner's share of the net decrease in Partner Minimum Gain attributable to such partner Nonrecourse Debt, determined in accordance with Regulations Section 1.704-2 (i) (4). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be so allocated to each Partner pursuant thereto. The items to be so allocated shall be determined in accordance with Sections 1.704-2 (i) (4) and 1.704-2 (j) (2) of the Regulations. This Section 5.01 (b) (ii) is intended to comply with the minimum gain chargeback requirement in Section 1.704-2 (i) (4) of the Regulations and shall be interpreted consistently therewith. (iii) NONRECOURSE DEDUCTIONS. Nonrecourse Deductions for any Partnership Fiscal Year shall be specifically allocated among the Partners in proportion to their respective Capital Contributions, as set forth in Article IV and Schedule A hereof. (iv) PARTNER NONRECOURSE DEDUCTIONS. Any Partner Nonrecourse Deductions for any Partnership Fiscal Year shall be specifically allocated to the Partner who bears the economic risk of loss with respect to the Partner Nonrecourse Debt to which such Partner Nonrecourse Deductions are attributable in accordance with Section 1.704-2 (i) (1) of the Regulations. (v) QUALIFIED INCOME OFFSET. In the event any Partner unexpectedly receives any adjustments, allocations, or distributions described in Regulations Section 1.704-1 (b) (2) (ii) (d) (4), l.470-1 (b) (2) (ii) (d) (5) or 1.704-1 (b) (2) (ii) (d) (6) of the Regulations, items of Partnership income and gain shall be specifically allocated to each such Partner in an amount and manner sufficient to eliminate, to the extent required by the Regulations, the Adjusted Capital Account Deficit of such Partner as quickly as possible, provided that an allocation Pursuant to this Section 5.0l (b) (v) shall be made if and only to the extent that such Partner would have an Adjusted Capital Account Deficit after all other allocations provided for in Section 5.01 of this Agreement have been tentatively made as if this Section were not in the Agreement. (vi) GROSS INCOME ALLOCATION. In the event any Partner has a deficit Capital Account at the end of any Partnership Fiscal Year that is in excess of the sum of (A) the amount, if any, such Partner is obligated to restore, and (B) the amount such Partner is deemed to be obligated to restore pursuant to the penultimate sentences of Sections l.704-2 (g) (i) and 1.704-2 (i) (5) of the Regulations, each such Partner shall be specifically allocated items of Partnership income and gain in the amount of such excess as quickly as possible, provided that an allocation pursuant to this Section 5.0l (b) (vi) shall made if and only to the extent that such Partner would have a deficit Capital Account in excess of such sum after all other allocations provided for in Section 5.01 of this Agreement have been tentatively made as if Section 5.01 (b) (v) hereof and this Section 5.01 (b) (vi) were not in this Agreement. (vii) CURATIVE ALLOCATIONS. Notwithstanding any other provision of this Agreement, the allocations pursuant to Sections 5.01 (b) (i) through 5.0l (b) (vi) (the 13 14 "Regulatory Allocations") shall be taken into account in allocating items of income, gain, loss and deduction among the Partners so that, to the extent possible, the net amount of such allocations of other items and the Regulatory Allocations to each Partner shall be equal to the net amount that would have been allocated to each Partner if the Regulatory Allocations have not occurred. (c) CODE SECTION 704 (C). Income, gain, loss and deduction with respect to any property contributed to the capital of the Partnership shall, solely for tax purposes, be allocated among the Partners in accordance with Section 704 (c) of the Code and the Regulations thereunder. ARTICLE VI DISTRIBUTIONS Section 6.01. NET CASH FLOW. Except as otherwise provided in Article XIII (relating to the dissolution of the Partnership), any distribution of the Net Cash Flow of the Partnership during any fiscal year of the Partnership shall be made to the Partners in shares proportionate to their respective Capital Contributions, as set forth in Article IV and Schedule A hereof. Section 6.02. DISTRIBUTION RULES. All distributions Pursuant to Section 6.01 shall be at such times and in such amounts as shall be determined by the General Partner, in its sole discretion. Section 6.03. RESTRICTED DISTRIBUTIONS. Notwithstanding any provision to the contrary contained in this Agreement, the Partnership, and the General Partner on behalf of the Partnership, shall not make a distribution to any Partner on account of its interest in the Partnership if such distribution would violate Section 17-607 of the Act or other applicable law. ARTICLE VII FEES PAYABLE TO GENERAL PARTNER Section 7.01. GENERAL PARTNER'S FEES. (a) The Partnership shall pay annually to the General Partner, as compensation for its services in the management and administration of the Partnership, a fee (the "Management Fee") until such time as the General Partner ceases to be a general partner of the Partnership or the Partnership is dissolved; provided, however, that so long as the General Partner does not withdraw from the Partnership or otherwise cease to fulfill its duties under this Agreement, the annual Management Fee may be increased or decreased by Majority Vote of the Limited Partners but shall not be less than $1,000 per month plus reimbursement of expenses incurred in connection with rendering services to the Partnership. 14 15 (b) The Management Fee shall be payable by the Partnership within thirty (30) days after demand therefor by the General Partner, which demand shall be submitted by the General Partner to the Partnership and each Partner annually within sixty (60) days following December 1 of each year during the Term of the Partnership. Section 7.02. REIMBURSEMENT OF EXPENSES. In addition to the fees payable to the General Partner pursuant to Section 7.0l, the Partnership shall reimburse the General Partner for all ordinary and reasonably necessary out-of-pocket expenses incurred by the General Partner on behalf of the Partnership. ARTICLE VIII MANAGEMENT Section 8.01. MANAGEMENT AND CONTROL OF THE PARTNERSHIP. The General Partner shall have full, exclusive and complete discretion to manage and control the business and affairs of the Partnership, to make all decisions affecting the business and affairs of the Partnership and to take all such actions as it deems necessary or appropriate to accomplish the purpose of the Partnership as set forth herein. No Limited Partner or assignee, as such, shall have any authority, right or power to bind the Partnership, to manage or control, or to participate in the management or control of, the business and affairs of the Partnership in any manner whatsoever. Section 8.02. POWERS OF GENERAL PARTNER. (a) Except as otherwise expressly provided herein, the General Partner (acting on behalf of the Partnership), shall have the right, power and authority, in the management of the business and affairs of the Partnership, to do or cause to be done any and all acts, at the expense of the Partnership, as the case may be, deemed by the General Partner to be necessary or appropriate to effectuate the business, purposes and objectives of the Partnership. The power and authority of the General Partner shall include, without limitation, the power and authority. (1) To acquire, own, lease, sublease, manage, finance, hold, deal in, request, re-zoning of, control or dispose of any interest or rights in personal property or real property; (2) To negotiate, enter into, renegotiate, extend, renew, terminate, modify, amend, waive, execute, acknowledge or take any other action with respect to any lease, contract or security agreement in respect of any assets of the Partnership; 15 16 (3) To pay, collect, compromise, litigate, arbitrate, or otherwise adjust or settle any and all other claims or demands of or against the Partnership or to hold such proceeds against the payment of contingent liabilities; (4) To borrow money or to obtain credit in such amounts, at such rate of interest and upon such other terms and conditions as the General partner deems appropriate, recourse or nonrecourse, from banks, other lending institutions or any other Person, including the Partners, and pursuant to indentures, loan agreements or any other type of instrument, for any purpose of the Partnership and to secure payment of the principal of any such indebtedness and the interest thereon by mortgage, pledge, conveyance or assignment in trust of or grant security interest in the whole or any part of any or all of the property and assets of the Partnership; (5) To make, execute, assign, acknowledge and file on behalf of the Partnership any and all documents or instruments of any kind which the General Partner may deem necessary or appropriate in carrying out the purposes and business of the Partnership; and any Person dealing with the General Partner shall not be required to determine or inquire into its authority or power to bind the Partnership or to execute, acknowledge or deliver any and all documents in connection therewith; (6) To assume obligations, enter into contracts, including contracts of guaranty or suretyship, incur liabilities, lend money and otherwise use the credit of the Partnership, and to secure any and all obligations, contracts or liabilities of the partnership by mortgage, pledge or other encumbrances of all or any part of the property and income of the Partnership; (7) To invest funds of the Partnership; (8) To employ and engage suitable agents, employees, advisors, consultants and counsel (including any custodian, investment advisor, accountant, attorney, corporate fiduciary, bank or other reputable financial institution, or any other agents, employees or Persons who may serve in such capacity for the General Partner or any Affiliate of the General Partner) to carry out any activities that the General Partner is authorized or required to carry out under this Agreement (subject to the supervision and control of the General partner), including, without limitation, a Person who may be engaged to undertake some or all of the general management, property management, financial accounting and record-keeping or other duties of the General Partner and to indemnify such Persons against liabilities incurred by them in acting in such capacity as on behalf of the Partnership; (9) To employ and retain Persons as may be necessary or appropriate for the conduct of the Partnership's business (subject to the supervision 16 17 and control of the General Partner), including employees and agents who may be designated as officers with titles including but not limited to "chairman," "chief executive officer," "president," "vice president," "treasurer," "secretary," "assistant secretary," "general manager," "director" and "chief financial officer," as and to the extent authorized by the General Partner. (10) To register, qualify, list or report, or cause to be registered, qualified, listed or reported, this Agreement, the Units issued in connection herewith or the Partnership pursuant to the Securities Act of 1933, the Exchange Act, any other securities laws of the United States, the securities laws of any State of the United States, the laws of any other jurisdiction, the laws of any securities exchange or pursuant to an automated quotation system of a registered securities association as the General Partner deems appropriate. (11) To qualify the Partnership to do business in any state, territory, dependency or foreign country; (12) To sell or dispose of all or a portion of the Partnership's assets for the benefit of the partners at the times and on terms determined by the General Partner, in its sole discretion; (13) To form or cause to be formed, and to own the stock of one or more corporations, and to form or cause to be formed and to participate in partnerships, joint ventures, limited liability companies, trusts and other entities; and (14) To possess and exercise any additional rights and powers of a General Partner under the partnership laws of the State of Delaware, including, without limitation, the Act and the Delaware Uniform Partnership Law (and any other applicable laws, to the extent not expressly prohibited by this Agreement). The expression of any power or authority of the General Partner in this Agreement shall not in any way limit or exclude any other power or authority which is not specifically or expressly set forth in this Agreement. Notwithstanding any of the foregoing, the Partnership shall be operated in such a manner as the General Partner deems reasonable and necessary or appropriate to preserve the limited liability of the Limited Partners. Section 8.03. OUTSIDE BUSINESS. Any Partner or Affiliate thereof may engage in or possess an interest in other business ventures of any nature or description, independently or with others, similar or dissimilar to the business of the Partnership and neither the Partnership nor any of the Partners shall have any rights by virtue of this Agreement in and to such independent ventures or the income or profits derived therefrom, and the pursuit of any such venture, even if competitive with the business of the Partnership, shall not be deemed wrongful or improper. No Partner or Affiliate thereof shall be obligated to present any particular investment opportunity to the Partnership even if such opportunity is of a character which, if presented to the Partnership, 17 18 could be taken by the Partnership, and any Partner or Affiliate shall have the right to take for its own account (individually or as a partner or fiduciary) or to recommend to others any such particular investment opportunity. Section 8.04. RELATIONSHIPS WITH AFFILIATES. The Partnership may enter into any agreement or contract with the General Partner, any Person who is an Affiliate of the General Partner, any Limited Partner, any Affiliate of a Limited Partner, or any agent of the General Partner or the Partnership without the prior approval of any other Partners. Section 8.05. TITLE TO ASSETS OF THE PARTNERSHIP. Title to assets of the Partnership, whether real, personal or mixed, tangible or intangible, shall be deemed to be owned by the Partnership as an entity, and no Partner, individually or collectively, shall have any ownership interest in such assets of the Partnership or any portion thereof. Title to any or all of the assets of the Partnership may be held in the name of the Partnership, the General Partner or in the name of one or more nominees, as the General Partner may determine. The General Partner declares and warrants that any assets of the Partnership for which legal title is held in the name of the General Partner shall be held in trust by the General Partner for the use and benefit of the Partnership in accordance with the terms and provisions of this Agreement. All assets of the Partnership shall be recorded as the property of the Partnership on its books and records, irrespective of the name in which legal title to such assets of the Partnership is held. Section 8.06. PURCHASE OR SALE OF UNITS. The General Partner may, on behalf of and for the account of the Partnership, purchase or otherwise acquire Units and, following any such purchase or acquisition, may sell or otherwise dispose of any such Units in accordance with applicable law. Section 8.07. RESOLUTION OF CONFLICTS OF INTEREST. (a) Unless otherwise expressly provided herein, (i) whenever a conflict of interest exists or arises between the General Partner or any of its Affiliates, on the one hand, and the Partnership or a Limited Partner, on the other, or (ii) whenever this Agreement or any other agreement contemplated herein or therein provides that the General Partner shall act in a manner which is, or provides terms which are, fair and reasonable to the partnership, or any Limited Partner, the General Partner shall resolve such conflict of interest, taking such action or provide such terms, considering in each case the relative interest of each party (including its own interest) to such conflict, agreement, transaction or situation and the benefits and burdens relating to such interests, any customary or accepted industry practices, and any applicable generally accepted accounting practices or principles. In the absence of bad faith by the General Partner, the resolution, action or terms so made, taken or provided by the General Partner shall not constitute a breach of this Agreement or any other agreement contemplated herein or of any duty or obligation of the General Partner at law or in equity or otherwise. (b) Whenever in this Agreement the General Partner is permitted or required to make a decision (i) in its "sole discretion" or "discretion" or under a grant of similar authority or latitude, the General Partner shall be entitled to consider only such interests and 18 19 factors as it desires, including its own interests, and shall have no duty or obligation to give any consideration to any interest of or factors affecting the Partnership or the Limited Partners, or (ii) in its "good faith" or under another expressed standard, the General Partner shall act under such express standard and shall not be subject to any other or different standards imposed by this Agreement or any other agreement contemplated herein or by the relevant provisions of law or in equity or otherwise. Section 8.08 MERGER. The Partnership may merge with, or consolidate into, another business entity (as defined in Section 17-211 (a) of the Act) upon the approval by the General Partner and a Majority Vote of the Limited Partners. In accordance with Section 17-211 of the Act (including Section 17-211 (g)), notwithstanding anything to the contrary contained in this Agreement, an agreement of merger or consolidation approved by the General Partner and a Majority Vote of the Limited Partners, may (A) effect any amendment to this Agreement, or (B) effect the adoption of a new partnership agreement for the Partnership if it is the surviving or resulting limited partnership of the merger or consolidation. Any amendment to this Agreement or adoption of a new partnership agreement made pursuant to the foregoing sentence shall be effective at the effective time or date of the merger or consolidation. The provisions of Section 8.08 shall not be construed to limit the accomplishment of a merger or of any of the matters referred to herein by any other means otherwise permitted by law. ARTICLE IX LIMITED PARTNERS Section 9.01. LIABILITY OF LIMITED PARTNERS. Except as otherwise expressly required by law, a Limited Partner, in its capacity as such, shall have no liability in excess of (i) the amount of its Capital Contribution, (ii) its share of any undistributed profits and assets of the Partnership, (iii) its obligation to make other payments expressly provided for in this Agreement and (iv) the amount of any distributions wrongfully distributed to it. It is the intent of the parties hereto that no distribution to any Limited Partner shall be deemed a return of any money or other property in violation of the Act. The payment of any such money or distribution of any such property to a Limited Partner shall be deemed to be a compromise within the meaning of Section 17-502 (b) of the Act, and the Limited Partner receiving any such money or property shall not be required to return any such money or property to any Person, the Partnership or any creditor of the Partnership. However, if any court of competent jurisdiction holds that, notwithstanding the provisions of this Agreement, any Limited Partner is obligated to return such money or property, such obligation shall be the obligation of such Limited Partner and not of the General Partner. Section 9.02. NO MANAGEMENT BY LIMITED PARTNERS. No Limited Partner, in its capacity as such, shall take part in the day-to-day management, operation or control of the business and affairs at the Partnership. The Limited Partner shall not have any right, power, or authority to transact any business in the name of the Partnership or to act for or on behalf of or to 19 20 bind the Partnership. A Limited Partner shall have no rights other than those specifically provided herein or granted by law. Section 9.03. EMPLOYEES, AGENTS OR OFFICERS OF THE PARTNERSHIP OR A GENERAL PARTNER. A Limited Partner or an employee, agent, director or officer of a Limited Partner may also be an employee, agent, director or officer of the Partnership or a General Partner. The existence of these relationships and acting in such capacities will not result in a Limited Partner being deemed to be participating in the control of the business of the Partnership or otherwise affect the liability of the Limited Partner or the Person so acting. ARTICLE X BOOKS, RECORDS AND FINANCIAL STATEMENTS Section 10.01. RECORDS AND ACCESS TO RECORDS. At all times during the continuation of the Partnership, the General Partner shall keep or cause to be kept full and true books of account maintained in accordance with generally accepted accounting principles consistently applied in which shall be entered fully and accurately each transaction of the Partnership. Such books of account, together with a copy of this Agreement and of the Certificate of Limited Partnership, and any amendments thereto, shall at all times be maintained at the principal place of business of the Partnership and shall be open to inspection and examination at reasonable times by all Partners and their duly authorized representatives for any purpose reasonably related to such Partner's interest as a partner in the Partnership. Section 10.02. CONFIDENTIALITY PROVISIONS AND LIMITATIONS ON ACCESS. Notwithstanding any other provision of this Agreement, the General Partner may, to the maximum extent permitted by applicable law, keep confidential from the Limited Partners any information the disclosure of which the General Partner reasonably believes is not in the best interest of the Partnership or is adverse to the interests of the Partnership or which the Partnership or the General Partner is required by law or by an agreement with any Person to keep confidential. Section 10.03. BANK OR BROKERAGE ACCOUNT. All funds of the Partnership shall be deposited in the Partnership name in such bank or brokerage account or accounts as shall be designated by the General Partner. Withdrawals from any such bank or brokerage account or accounts shall be made upon such signature or signatures as the General Partner may designate. Section 10.04. RIGHT TO MAKE SECTION 754 ELECTION. The General Partner may, in its sole discretion, make or revoke, on behalf of the Partnership, an election in accordance with ss.754 of the Code, so as to adjust the basis of Partnership property in the case of a distribution of property within the meaning of ss.734 of the Code, and in the case of a transfer of a Partnership interest within the meaning of ss.743 of the Code. Each of the Partners shall, upon request of the General Partner, supply the information necessary to give effect to such an election. 20 21 Section 10.05. TAX MATTERS PARTNER. (a) The General Partner is hereby designated as the "Tax Matters Partner" of the Partnership within the meaning of ss.6231 (a) (7) of the Code and shall have the power to manage and control, on behalf of the Partnership, any administrative proceeding at the Partnership level with the Internal Revenue Service relating to the determination of any item of Partnership income, gain, loss, deduction, or credit for federal income tax purposes. (b) The Tax Matters Partner shall comply with all statutory provisions of the Code applicable to a "tax matters partner" and shall, without limitation, within thirty (30) days of the receipt of any notice from the Internal Revenue Service in any administrative proceeding at the Partnership level relating to the determination of any Partnership item of income, gain, loss, deduction, or credit, mail a copy of such notice to each Partner. ARTICLE XI ASSIGNABILITY, ADMISSION AND WITHDRAWAL OF PARTNERS Section 11.01. ASSIGNABILITY OF A GENERAL PARTNER'S INTEREST IN THE PARTNERSHIP. A General Partner may not sell, transfer, assign, pledge, encumber, mortgage, or otherwise hypothecate (hereinafter in this Article XI collectively referred to as "assign" or "assignment") the whole or any part of its interest as a General Partner in the Partnership without the prior Majority Vote of the Limited Partners. An assignee of all or part of the interest of a General Partner in the Partnership shall be admitted to the Partnership as a general partner of the Partnership only if a Majority Vote of the Limited Partners approves in writing the admission of such assignee as an additional or successor General Partner. If such vote is obtained, the admission shall be effective upon the filing of an amendment to the Certificate of Limited Partnership with the Secretary of State of the State of Delaware which indicates that such Person has been admitted to the Partnership as a general partner of the Partnership, and shall occur, and for all purposes shall be deemed to have occurred, immediately prior to the time the assignor ceases to be a general partner of the Partnership. Upon the filing of an amendment to the Certificate of Limited Partnership with the Secretary of State of the State of Delaware which indicates that a General Partner is no longer a general partner of the Partnership, such General Partner shall at that time cease to be a general partner of the Partnership. Section 11.02. ASSIGNABILITY OF A LIMITED PARTNER'S INTEREST IN THE PARTNERSHIP. No Limited Partner may assign the whole or any part of its interest in the Partnership without the prior written consent of the General Partner, which consent shall not be unreasonably withheld (taking into account the best interests of the Partnership). If the prior written consent of the General Partner is obtained for any such assignment, such assignment shall, nevertheless, not entitle the assignee to become a Substituted Limited Partner or to be entitled to exercise or receive any of the rights, powers or benefits of a Limited Partner other than the right to receive distributions to which the assigning Limited Partner would be entitled, unless the assigning Limited Partner designates, in a written instrument delivered to the General Partner, its assignee 21 22 to become a Substituted Limited partner and the General Partner, in its sole discretion, consents to the admission of such assignee as a Limited Partner; and provided further, that such assignee shall not become a Substituted Limited Partner without having first executed an instrument reasonably satisfactory to the General Partner accepting and adopting the terms and provisions of this Agreement, including a counterpart signature page to this Agreement, and without having paid to the Partnership a fee sufficient to cover all reasonable expenses of the Partnership in connection with its admission as a Substituted Limited Partner. Upon the occurrence of all of such events, the General Partner shall cause the Partnership's books and records and Schedule A hereto to reflect such assignment or substitution, as the case may be. Section 11.03. RECOGNITION OF ASSIGNMENT BY PARTNERSHIP. No assignment, or any part thereof, that is in violation of Article XI shall be valid or effective, and neither the Partnership nor the General Partner shall recognize the same for the purpose of allocating profits and losses pursuant to Section 5.01 or making distributions of Partnership Net Cash Flow pursuant to Section 6.01 with respect to such Partnership interest, or part thereof. Neither the Partnership nor the General Partner shall incur any liability as a result of refusing to make any such distributions to the transferee of any such invalid assignment. Section 11.04. EFFECTIVE DATE OF ASSIGNMENT. Any valid assignment of a Limited Partner's interest in the Partnership, or part thereof, pursuant to the foregoing provisions of Section 11.02 shall be effective as of the close of business on the day on which the General Partner gives its written consent to such assignment whether or not the name of the assignee shall have been reflected on the Partnership books and records as of such date. The Partnership shall, from the effective date of such assignment, thereafter pay all further distributions of Net Cash Flow, on account of the Partnership interest (or part thereof) so assigned, to the assignee of such interest, or part thereof. As between any partner and its assignee, profits and losses for the fiscal year of the Partnership in which such assignment occurs shall be apportioned for federal income tax purposes in accordance with any manner permitted under ss.706 (d) of the Code as such Partner and its assignee may agree to. Section 11.05. DEATH, INCOMPETENCY, BANKRUPTCY OR DISSOLUTION OF A LIMITED PARTNER. The death, incompetency, bankruptcy, dissolution or other cessation to exist as a legal entity of a Limited Partner shall not, in and of itself, dissolve the Partnership. In any such event, the legal representative or successor of such Limited Partner may exercise all of the rights of such Limited Partner for the purpose of settling its estate or administering its property, subject to the terms and conditions of this Agreement, including any power of an assignee to become a Limited Partner. Section 11.06. WITHDRAWAL FROM THE PARTNERSHIP. Except as provided in this Agreement, a General Partner or a Limited Partner may not withdraw as a general partner of the Partnership or as a limited partner of the Partnership, as the case may be. (a) A General Partner may elect to withdraw from the Partnership upon giving at least sixty (60) day's prior written notice of its intention to do so to all other Partners (General and Limited). Such withdrawal shall be effective on the date specified in such notice 22 23 ("Withdrawal Date"). The Partnership shall be dissolved effective on the Withdrawal Date unless the Limited Partners by Majority Vote elect a successor General Partner prior to such Withdrawal Date. Such successor General Partner shall be deemed admitted to the Partnership immediately prior to the Withdrawal Date and shall continue the Partnership without dissolution. A successor General Partner shall be admitted as a general partner of the Partnership upon the filing of an amendment to the Certificate of Limited Partnership with the Secretary of State of the State of Delaware which indicates that the successor General Partner has been admitted as a general partner of the Partnership and that the withdrawn General Partner is no longer a general partner of the Partnership. (b) The withdrawal of a General Partner shall not in any way relieve the General Partner of any Partnership liabilities incurred or accrued prior to the Withdrawal Date. Section 11.07. REMOVAL OF GENERAL PARTNER. A General Partner may be removed as a general partner of the Partnership with or without cause upon (i) the approval of Limited Partners having, in the aggregate, not less than eighty per cent (80%) of the Outstanding Units, and (ii) the election by such Limited Partners having not less than eighty percent (80%) of the Outstanding Units of a successor General Partner. Upon any such election, all Partners shall be bound thereby and shall be deemed to have approved thereof. Such successor General Partner shall be deemed admitted to the Partnership immediately prior to the removal of the predecessor General Partner and shall continue the Partnership without dissolution. A successor General Partner shall be admitted as a general partner of the Partnership upon the filing of an amendment to the Certificate of Limited Partnership with the Secretary of State of the State of Delaware which indicates that the successor General Partner has been admitted as a general partner of the Partnership and that the removed General Partner is no longer a general partner of the Partnership. Section 11.08. PLEDGE OF A GENERAL AND LIMITED PARTNERS' INTEREST IN THE PARTNERSHIP. The General Partner may assign and pledge its entire interest in the Partnership or any lesser percentage of its interest in the Partnership pursuant to an assignment of partnership interests, to be entered into by and between the Limited Partner and NationsBank, National Association (Carolinas), as Agent, and otherwise perform its obligations thereunder, without any further act, vote or approval of any Partner, notwithstanding any other provision of this Agreement, the Act or other applicable law. A Limited Partner may assign and pledge its entire interest in the Partnership or any lesser percentage of its interest in the Partnership pursuant to an assignment of partnership interests, to be entered into by and between the General Partner and NationsBank, National Association (Carolinas), as Agent, and otherwise perform its obligations thereunder, if prior written consent of the General Partner is obtained for any such assignment and pledge, notwithstanding any other provision of this Agreement, the Act or other applicable law. None of the Partners shall cease to be a partner of the Partnership or to have the power to exercise any rights or powers of a partner of the Partnership upon the assignment or pledge of all of its partnership interest in the Partnership in accordance with this Section 11.08. The pledge of, or granting of a security interest, lien or other encumbrance in accordance with this Section 11.08 in or against, any or all of the partnership interest of a Partner in the Partnership shall not cause 23 24 such Partner to cease to be a partner of the Partnership or to have the power to exercise any rights or powers of a partner of the Partnership. ARTICLE XII EXCULPATION AND INDEMNIFICATION OF THE GENERAL PARTNER AND OTHER INDEMNIFIED PERSONS Section 12.01. EXCULPATORY PROVISIONS. (a) Notwithstanding any other terms of this Agreement, whether express or implied, or obligation or duty at law or in equity, neither the General Partner, the Limited Partner, nor any of their respective officers and directors of the Partnership (individually, a "Covered Person" and collectively, the "Covered Persons") shall be liable to the Partnership or any Partner for any act or omission (in relation to the Partnership, this Agreement, any related document or any transaction or investment contemplated hereby or thereby) taken or omitted in good faith by a Covered person and in the reasonable belief that such act or omission is in or is not contrary to the best interests of the Partnership and is within the scope of authority granted to such Covered Person by this Agreement, provided that such act or omission does not constitute Disabling Conduct. (b) A Covered Person may rely and shall incur no liability in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, debenture, paper, document, signature or writing reasonably believed by it to be genuine, and may rely on a certificate signed by an officer of any Person in order to ascertain any fact with respect to such Person or within such Person's knowledge and may rely on an opinion of counsel selected by such Covered Person with respect to legal matters unless such Covered Person acts in bad faith. Section 12.02. INDEMNIFICATION OF GENERAL PARTNER AND OTHER INDEMNIFIED PERSONS. (a) To the fullest extent permitted by law, the Partnership shall indemnify and hold harmless the General Partner, the Limited Partner and all directors, officers and shareholders of the General Partner and all officers of the Partnership (individually, an "Indemnified Person" and collectively, the "Indemnified Persons") from and against any and all losses, claims, demands, liabilities, expenses (including all fees and expenses), judgments, fines, settlements and other amounts arising from any and all claims, demands, actions, suits or proceedings, civil, criminal, administrative or investigative, in which the Indemnified Person may be involved, or threatened to be involved, as a party or otherwise, by reason of its management or the affairs of the Partnership, or the General Partner or its status as a General Partner, director, officer or shareholder thereof or its status as an officer of the Partnership or a Person serving at the request of the Partnership, the General Partner in another entity in a similar capacity, which relates to or arises out of the Partnership, its property, its business or affairs, and regardless of whether the liability or expense accrued at or relates to, in whole or in part, any time before, on or 24 25 after the date hereof. The negative disposition of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of NOLO CONTENDERE, or its equivalent, shall not, of itself, create a presumption that the Indemnified Person acted in a manner contrary to the standard set forth in Section 12.02 (b) below. Any indemnification pursuant to Section 12.02 shall be made only out of the assets of the Partnership. (b) An Indemnified Person shall not be entitled to Indemnification under Section 12.02 with respect to any claim, issue or matter in which it has engaged in Disabling Conduct. (c) To the fullest extent permitted by law, expenses (including legal fees) incurred by an Indemnified Person in defending any claim, demand, action, suit or proceeding may, from time to time, be advanced by the Partnership prior to the final disposition of such claim, demand, action, suit or proceeding upon receipt by the Partnership of an undertaking by or on behalf of the Indemnified Person to repay such amount if it shall be determined that the Indemnified Person is not entitled to be indemnified as authorized in Section 12.02. (d) The indemnification provided by Section 12.02 shall be in addition to any other rights to which the Indemnified Person may be entitled under any agreement, by law or vote of the Partners as a matter of law or otherwise, both as to action in the Indemnified Person's capacity as the General Partner, director, officer or shareholder thereof, or as an officer of the Partnership and, as to action in any other capacity, shall continue as to an Indemnified Person who has ceased to serve in such capacity and shall inure to the benefit of the heirs, successors, assigns and administrators of an Indemnified Person. (e) The General Partner and the Partnership may purchase and maintain insurance, to the extent and in such amounts as the General Partner shall, in its sole discretion, deem reasonable, on behalf of Indemnified Persons and such other Persons as the General Partner shall determine, against any liability that may be asserted against or expenses that may be incurred by such Person in connection with activities of the Partnership or such indemnitees, regardless of whether the Partnership would have the power to indemnify such Person against such liability under the provisions of this Agreement. The General Partner and the Partnership may enter into indemnity contracts with Indemnified Persons and adopt written procedures pursuant to which arrangements are made for the advancement of expenses and the funding of obligations under Section 12.02 and containing such other Procedures regarding indemnification as are appropriate. (f) In no event may any Indemnified Person subject the Limited Partners to personal liability by reason of any indemnification of an Indemnified Person under this Agreement or otherwise. (g) An Indemnified Person shall not be denied indemnification in whole or in part under Section 12.02 because the Indemnified Person had an interest in the transaction with respect to which the indemnification applies if the transaction is otherwise permitted by the terms of this Agreement. 25 26 (h) The provisions of Section 12.02 are for the benefit of the Indemnified Persons and their heirs, successors, assigns, administrators and personal representatives and shall not be deemed to be for the benefit of any other Persons. The provisions of Section 12.02 shall not be amended in any way that would adversely affect the Indemnified Person without the consent of the Indemnified Person. Section 12.03. DUTIES OF A GENERAL PARTNER AND OTHERS CONTROLLING A GENERAL PARTNER. To the extent that, at law or in equity, an Indemnified Person has duties (including fiduciary duties) and liabilities relating thereto to the Partnership or to the Partners, the General Partner and any other Indemnified Person acting in connection with the Partnership's business or affairs, shall not be liable to the Partnership or to any Partner for its good faith reliance on the provisions of this Agreement. The provisions of this Agreement, to the extent that they restrict the duties and liabilities of an Indemnified Person otherwise existing at law or in equity, are agreed by the Partners to replace such other duties and liabilities of such Indemnified Person. ARTICLE XIII DISSOLUTION AND TERMINATION Section 13.01. NO DISSOLUTION. The Partnership shall not be dissolved by the admission of additional Limited Partners or Substituted Limited Partners or by the admission of additional General Partners or successor General Partners in accordance with the terms of this Agreement. Section 13.02. EVENTS CAUSING DISSOLUTION. The Partnership shall be dissolved and its affairs shall be wound up upon the occurrence of any of the following events: (a) The expiration of the term of the Partnership, as provided in Section 2.08; (b) The withdrawal, removal or bankruptcy of the General Partner or assignment by the General Partner of its entire interest in the Partnership when the assignee is not admitted to the Partnership as an additional or successor General Partner in accordance with Section ll.0l, or the occurrence of any other event that results in the General Partner ceasing to be a general partner of the Partnership under the Act, provided, the Partnership shall not be dissolved and required to be wound up in connection with any of the events specified in this clause (b) if (i) at the time of the occurrence of such event there is at least one remaining general partner of the Partnership who is hereby authorized to and does carry on the business of the Partnership, or (ii) within ninety (90) days after the occurrence of such event, all remaining Partners agree in writing to continue the business of the Partnership and to the appointment, effective as of the date of such event, if required, of one or more additional general partners of the Partnership. (c) A written determination by the General Partner to dissolve the Partnership; 26 27 (d) The affirmative vote of holders of seventy-five percent (75%) or more of the Outstanding Units to dissolve the Partnership; (e) The sale by the Partnership of all or substantially all of the Partnership's assets; or (f) The entry of a decree of judicial dissolution under Section 17-802 of the Act. Section 13.03. NOTICE OF DISSOLUTION. Upon the dissolution of the Partnership, the General Partner or the Liquidating Trustee, as the case may be, shall promptly notify the Partners of such dissolution. Section 13.04. LIQUIDATION. Upon dissolution of the Partnership, the General Partner, or, in the event that the dissolution is caused by an event described in Section 13.02 (b) and there is no other General Partner, a Person or Persons who may be approved by a Majority Vote as the Liquidating Trustee, shall immediately commence to wind up the Partnership's affairs; provided, however, that a reasonable time shall be allowed for the orderly liquidation of the assets of the Partnership and the discharge of liabilities to creditors so as to enable the partners to minimize the normal losses attendant upon a liquidation. The Partners shall continue to share profits and losses during liquidation in the same proportions as specified in Article V as before liquidation. Each Partner shall be furnished with a statement prepared by the Partnership's certified public accountant that shall set forth the assets and liabilities of the Partnership as of the date of dissolution. The proceeds of liquidation shall be distributed, as realized, in the following order and priority: (a) To creditors of the Partnership, including Partners who are creditors, to the extent otherwise permitted by law, in satisfaction of the liabilities of the Partnership (whether by payment or the making of reasonable provision for payment thereof); and (b) To distribute to the Partners the remaining proceeds of liquidation in accordance with the Capital Account balances of the Partners unless otherwise agreed pursuant to a Majority Vote and the consent of the General Partner. Section 13.05. METHODS OF LIQUIDATION. The Partnership may be liquidated by either: (a) Selling the Partnership assets and distributing the net proceeds therefrom in the manner provided in Section l3.04. Any net gain or loss realized by the Partnership on the sale or other disposition of Partnership assets in the process of liquidation of the Partnership shall be allocated to the Partners in the ratios specified for allocating Net Profits or Net Losses in Article V; or (b) If any property is distributed in kind, immediately prior to such distribution, the Capital Accounts of the Partners shall be adjusted to reflect the manner in which 27 28 the unrealized income, gain, loss and deduction inherent in such property (that has not been reflected in the Capital Accounts previously) would have been allocated among the Partners as provided in Article V if there had been a taxable disposition of such property for the fair market value of such property. Section 13.06. TERMINATION OF PARTNERSHIP. The Partnership shall terminate when all of the assets of the Partnership, after payment of or due provision for all debts, liabilities and obligations of the Partnership, shall have been distributed to the partners in the manner provided for in Article XIII and the Certificate of Limited Partnership shall have been canceled in the manner required by the Act. ARTICLE XIV ARBITRATION Section 14.01. DISPUTE RESOLUTION. To the fullest extent permitted by the Act and other applicable law, any controversy or claim arising out of or relating to this Agreement, or any breach thereof, shall be settled by arbitration pursuant to the commercial Arbitration Rules of the American Arbitration Association ("AAA"), as amended and in effect on the date that demand for arbitration is filed with the AAA. The parties hereto agree that any such controversy shall be submitted to three (3) arbitrators. Each party shall select one arbitrator. The two arbitrators selected shall then choose a third arbitrator. The arbitrator's ruling shall be binding and conclusive upon the parties hereto to the fullest extent permitted by law. Any arbitration shall occur at the offices of the AAA, New York City, or in Wilmington, Delaware, and judgment upon the award rendered may be entered in any court having jurisdiction thereof. The arbitrators shall be governed by and shall apply the substantive law of the State of Delaware in making their award and their ruling shall be binding and conclusive upon the parties hereto. The expenses of the arbitration shall be borne equally by the parties to the arbitration, provided that each party shall pay for and bear the cost of its or its own experts, evidence and legal counsel, unless otherwise determined by the Arbitrators. ARTICLE XV POWER OF ATTORNEY Section 15.01. APPOINTMENT OF GENERAL PARTNER. Each Limited Partner hereby irrevocably constitutes and appoints the General Partner and any Liquidating Trustee as its true and lawful attorney-in-fact, in its name, place and stead, to make, execute, acknowledge and file the following documents, to the extent consistent with the other provisions of this Agreement; (a) This Agreement, and, to the extent required by law, the Certificate of Limited Partnership; 28 29 (b) Any fictitious or assumed-name certificates required to be filed on behalf of the Partnership; (c) Any application or registration to do business in any State or Country other than, or in addition to, the State of Delaware; (d) Deeds, notes, mortgages, pledges, security instruments of any kind and nature, leases and such other instruments as may be necessary to carry on the business of the Partnership; provided that no such instrument shall increase the personal liability of the Limited Partners; (e) All certificates and other instruments that the General Partner deems appropriate or necessary to form and qualify, or continue the qualification of, the Partnership as a limited partnership in the State of Delaware and all jurisdictions in which the Partnership may intend to conduct business or own property. (f) Any duly adopted amendment to or restatement of this Agreement or the Certificate of Limited Partnership; (g) All conveyances and other instruments or documents that the General Partner deems appropriate or necessary to effect or reflect the dissolution, liquidation and termination of the Partnership pursuant to the terms of this Agreement (including a certificate of cancellation); (h) Any and all financing statements, continuation statements, mortgages or other documents necessary to grant to or perfect for secured creditors of the Partnership, including the General Partner and its Affiliates, a security interest, mortgage, pledge or lien on all or any of the assets of the Partnership; and (i) All other instruments as the attorneys-in-fact or any of them may deem necessary or advisable to carry out fully the provisions of this Agreement in accordance with its terms. Section 15.02. POWER COUPLED WITH INTEREST. It is expressly intended by each Limited Partner that the power of attorney granted by Section 15.0l is coupled with an interest, shall be irrevocable, and shall survive and not be affected by the subsequent disability or incapacity of such Limited Partner (or if such Limited Partner is a corporation, partnership, trust, association, limited liability company or other legal entity, by the dissolution or termination thereof). 29 30 ARTICLE XVI MISCELLANEOUS Section 16.01. NOTICES. All notices provided for in this Agreement shall be in writing, duly signed by the party giving such notice, and shall be personally delivered, or mailed by first-class, registered or certified mail, return receipt requested, postage prepaid, or transmittal by telegram, telefax or telecopier, as follows: (a) If given to the Partnership, in care of the General Partner at its mailing address set forth on Schedule A attached hereto or at such other address as the Partnership may hereafter designate by bitten notice to the Partnership; (b) If given to a General Partner, at its mailing address set forth on Schedule A attached hereto or at such other address as such General Partner may hereafter designate by written notice to the Partnership; or (c) If given to any Limited Partner, at the address set forth opposite its name on Schedule A attached hereto, or at such other address as such Limited Partner may hereafter designate by written notice to the Partnership. Each notice, demand, request or communication that shall be delivered, mailed or transmitted in the manner described above shall be deemed sufficiently given, served, sent or received for all purposes when delivered in person or when sent to a Person at the address on Schedule A attached hereto by first-class mail or by other means of written communication. Section 16.02. AMENDMENTS. (a) Except as provided in (b) of Section 16.02, no amendment to this Agreement shall be effective or binding upon the parties hereto without the written consent of the General Partner and a Majority Vote; provided, however, that any modification or amendment that would: (i) increase the amount of the capital contributions to be made by any Limited Partner, (ii) increase the liability of the Limited Partners or (iii) materially adversely affect the rights of the Limited Partners under this Agreement shall require the consent of the General Partner and each Limited Partner. Upon receipt of a written proposal executed by Limited partners having, in the aggregate, seventy-five percent (75%) or more of the Outstanding Units for the adoption of an amendment of this Agreement, or should the General Partner desire to propose such an amendment, the General Partner shall adopt and implement a plan whereby the Limited Partners may vote for or against the adoption of such an amendment. (b) Notwithstanding anything herein to the contrary, the General Partner may amend this Agreement without the consent of any Limited Partner; 30 31 (1) to reflect the addition or substitution of Limited Partners (made in accordance with the terms hereof) or the reduction of the Capital Accounts upon the return of capital to Limited Partners; (2) to add to the representations, duties or obligations of the General Partner or surrender any right or power granted to the General Partner herein, for the benefit of the Limited Partners; (3) to cure any ambiguity, to correct or supplement any provision herein which may be inconsistent with any other provision herein, or to add any other provisions with respect to matters or questions arising under this Agreement which will not be inconsistent with the provisions of the Agreement; (4) to delete or add any provision from or to this Agreement requested to be so deleted or added by a state regulatory agency, the deletion or addition of which provision is deemed by such regulatory agency to be for the benefit or protection of the Limited Partners; and (5) to modify any provision of this Agreement, if, in the opinion of counsel to the Partnership and the General Partner, such modification is necessary to prevent the Partnership or the General Partner from in any manner being subject to the provisions of the Investment Company Act, to prevent the Partnership from being treated for tax purposes as an association taxable as a corporation, rather than being taxable as a partnership, or to prevent the Partnership from being treated as a "publicly traded partnership" as defined in the Code. Section 16.03. FISCAL YEAR. The fiscal year of the Partnership shall end on December of each year or as otherwise determined by the General Partner and shall be in compliance with the requirements of the Code. Section 16.04. SECURITIES ACT INVESTMENT COVENANT. Each Partner represents and warrants that it is acquiring its interest in the Partnership for its own account, and not with a view to resale or distribution thereof within the meaning of the Securities Act of 1933, as amended, and that no such interest will be sold, transferred, hypothecated, or assigned by it in contravention of the Securities Act of 1933, as amended, or any state Blue Sky or securities statute. Section 16.05. FAILURE TO PURSUE REMEDIES. The failure of any party to seek redress for violation of, or to insist upon the strict performance of, any provision of this Agreement shall not prevent a subsequent act, which would have originally constituted a violation, from having the effect of an original violation. Section 16.06. HEADINGS. The headings in this Agreement are included for convenience and identification only and are in no way intended to describe, interpret, define or limit the scope, extent or intent of this Agreement or any provision hereof. 31 32 Section 16.07. CUMULATIVE REMEDIES. The rights and remedies provided by this Agreement are cumulative and the use of any one right or remedy by any party shall not preclude or waive its right to use any or all other remedies. Said rights and remedies are given in addition to any other rights the parties may have by law, statute, ordinance or otherwise. Section 16.08. BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of all the parties and, to the extent permitted by this Agreement, their successors, legal representatives, and assigns. Section 16.09. INTERPRETATION. Throughout this Agreement and any amendment hereto, nouns, pronouns and verbs shall be construed as masculine, feminine, neuter, singular or plural, whichever shall be applicable. All references herein to "Articles," "Sections" and "Paragraphs" shall refer to Corresponding provisions of this Agreement. Section 16.10. SEVERABILITY. The invalidity or unenforceability of any particular provision of this Agreement shall not affect the other provisions hereof, and this Agreement shall be construed in all respects as if such invalid or unenforceable provision were omitted. Section 16.11. COUNTERPARTS. This Agreement may be executed in any number of counterparts with the same effect as if all Partners had signed the same document. All counterparts shall be construed together and shall constitute one instrument. Section 16.12. GOVERNING LAW. This Agreement and the rights of the parties hereunder shall be interpreted in accordance with the laws of the State of Delaware, and all rights and remedies shall be governed by such laws without regard to principles of conflicts of laws. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above stated. GENERAL PARTNER: Bonneau General, Inc. By: /s/ Martin E. Franklin ------------------------ Name: Martin E. Franklin Title: Chief Executive Officer 32 33 LIMITED PARTNERS: Bonneau Holdings, Inc. By: /s/ Peter Trembath ------------------------- Name: Peter Trembath Title: Secretary O-Ray Holdings, Inc. By: /s/ Peter Trembath ------------------------- Name: Peter Trembath Title: Secretary 33 EX-3.8.1 15 CERTIFICATE OF INCORPORATION OF FOSTER GRANT HLDGS 1 Exhibit 3.8.1 RESTATED CERTIFICATE OF INCORPORATION OF FOSTER GRANT HOLDINGS, INC. Foster Grant Holdings, Inc., a corporation organized and existing under the laws of the State of Delaware, hereby certifies as follows: 1. The name of the corporation is Foster Grant Holdings, Inc. and the name under which the corporation was originally incorporated is Foster Grant Holdings Inc. The date of filing of its original Certificate of Incorporation with the Secretary of State was October 31, 1996. 2. This Restated Certificate of Incorporation only restates and integrates and does not further amend the provision of the Certificate of Incorporation of this corporation as heretofore amended or supplemented and there is not discrepancy between those provisions and the provisions of this Restated Certificate of Incorporation. 3. The text of the Certificate of Incorporation as amended or supplemented heretofore is hereby restated without further amendments or changes to read as herein set forth in full: FIRST: The name of the Corporation (hereinafter referred to as the "Corporation") is: FOSTER GRANT HOLDINGS, INC. SECOND: The address, including street, number, city and county, of the registered office of the Corporation in the State of Delaware is 1013 Centre Road, Wilmington, Delaware 19805, County of New Castle; and the name of the registered agent of the Corporation in the State of Delaware is Corporation Service Company. THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. 2 FOURTH: The aggregate number of shares of capital Shares which the Corporation has authority to issue is Twenty Thousand (20,000), consisting of (i) 10,000 shares of Common Shares with a par value of one cent ($.01) per share (the "Common Shares"), and (ii) 10,000 shares of Preferred Shares with a par value of one dollar ($1.00) per share (the "Preferred Shares"). 1. DESIGNATION AND AMOUNT: The Preferred Shares shall be divided into one or more series. The designation of the first series of the Preferred Shares shall be Series A Redeemable Non Voting Preferred Shares (maximum redemption price $60,000 per share) (the "Series A Preferred Shares"). The number of shared of Series A Preferred Shares shall initially be 100 subject to increase (but only as to shares of Preferred Shares authorized by the Certificate of Incorporation, as amended, with respect to which the powers, designations, preferences and rights shall not then have been previously designated) or decrease (but not below the number of shares thereof then outstanding) from time to time by action of the Board of Directors. The Series A Preferred Shares have been issued pursuant to a Stock Purchase Agreement by and among the Corporation, BEC, FGG, and AAi dated November 13, 1996 (as from time to time in effect, the "Purchase Agreement"). A copy of the Purchase Agreement will be provided to any registered holder of shares of capital Share of the Corporation following written request directed to the Secretary of the Corporation at its registered address. The relative powers, preferences and rights, and relative participating, optional or other special rights, and the qualification, limitations or restrictions thereof, granted to or imposed on the Series A Preferred Shares are set forth below: 2. DEFINITIONS. Certain capitalized terms are used in this Certificate of Amendment as specifically defined below in this Section 2. Except as the context otherwise explicitly requires, (a) the capitalized term "Section" refers to section of this Certificate of Amendment, (b) references to a particular Section include all subsections thereof, (c) the word "including" shall be construed as "including without limitation", (d) accounting terms not otherwise defined herein have the meaning provided under generally accepted accounting principles, (e) references to a particular Person include such Person's successors and assigns to the extent not prohibited by this Certificate of Amendment and the Purchase Agreement. References to "the date hereof" mean the effective date of this Certificate of Amendment. 2.1 "AAi" means Accessories Associates, Inc., a Rhode Island corporation with a principal business address at 500 George Washington Highway, Smithfield, Rhode Island 02917. 2.2 "BEC" means BEC Group, Inc., a Delaware corporation with its executive offices located at 555 Theodore Fremd Avenue, Rye, New York 10580. 2.3 "BY-LAWS" means all written rules, regulations, procedures and by-laws and all other similar documents, relating to the management, governance or internal regulation of a Person other than an individual, or interpretive of the Charter of such Person, each as from time to time amended or modified. 2.4 "COMMON SHARES" means the Common Shares $0.01 par value, of the Corporation. 2.5 "CORPORATION" as defined in the Preamble. 2.6 "FGG" means Foster Grant Group L.P., a Delaware limited partnership with a principal business address of 1601 Valley View Lane, Dallas, Texas 75234. 3 2.7 "HOLDER" means BEC or such other person to whom such Holder shall have assigned or transferred Series A Preferred Shares. 2.8 "PERSON" means an individual, partnership, corporation, company, association, trust, joint venture, unincorporated organization business trust, limited liability company and any governmental department or agency or political subdivision. 2.9 "PURCHASE AGREEMENT" has the meaning set forth in Section 1. 2.10 "RECORDS DATE" means the date as set by the Corporation for determining Holders of Series A Preferred Shares entitled to vote under Section 7. 2.11 "REDEMPTION AMOUNT" has the meaning set forth in Section 5. 2.12 "REDEMPTION DATE" has the meaning set forth in Section 5. 2.13 "REQUIRED HOLDERS" means the holder of two-thirds of the outstanding Series A Preferred Shares on the Record Date. 2.14 "SERIES A" Preferred Shares" has the meaning set forth in Section 1. 3. DIVIDENDS. No dividends of cash or other property shall be paid on the Series A Preferred shares. 4. VOTING RIGHTS: REPRESENTATIVE DIRECTORS, ETC. 4.1 VOTES PER SHARE: NOTICES Except as otherwise provided herein or required by law, the holders of Series A Preferred Shares shall not vote on any matter submitted to the holders of Common Shares. Record Holders of Series A Preferred Shares shall be entitled to notice of any Shareholders' meeting or solicitation of Shareholders' consents in the manner provided in the Bylaws of the Corporation for general notices. 5. REDEMPTION RIGHTS 5.1 MANDATORY REDEMPTION. Except as otherwise provided in this Certificate of Amendment, the Series A Preferred Shares shall be redeemed by the Corporation in immediately available funds on February 28, 2000 (the "Redemption Date") by payment of an amount determined by reference to the combined net sales of sun glasses, reading glasses, and accessories by FGG and AAi for the year ending January 1, 2000, determined in accordance with generally accepted accounting principles consistently applied, and excluding an amount equal to the net sales of AAi of sunglasses, reading glasses, and accessories for the year ending December 31, 1996 (the "Redemption Amount"). On or before February 28, 2000, the Holder shall deliver to AAi at its principal offices, all Series A Preferred Shares owned by such Holder endorsed in blank for transfer or with blank stock powers attached. The Redemption Amount per share shall be calculated pursuant to the formula set forth below. The amounts payable to the Holder upon redemption shall be pro-rated for net sales between the amounts specified below.
NET SALES REDEMPTION AMOUNTS PER SHARE --------- ---------------------------- Less than $90,000,000 $10,000 $90,000,000 but less than $110,000,000 $20,000 $110,000,000 or more $40,000
4 5.2 EARLY REDEMPTION. Subsection 5.1 notwithstanding, in the event that at any time on or prior to the Redemption date (i) AAi completes an initial public offering of its common stock (an "IPO") where the Pre-Money Valuation (as hereinafter defined) equals or exceeds $75,000,000 or (ii) a Transaction (as hereinafter defined) is consummated where the Transaction Amount (as hereinafter defined) equals or exceeds &75,000,000 (or $37,500,000 in the event of an Equity Transaction (as hereinafter defined) (both an IPO and a Transaction are sometimes referenced herein as a "Redemption Event"), Subsection 5.1 shall not be operative, and the Redemption Amount will be calculated as specified in this Subsection 5.2 (the "Redemption Event Amount"). For purposes of this Section 5, "Transaction" shall mean (x) AAi effects a capital reorganization or reclassification of its stock (other than a change in par value or as a result of a stock dividend or subdivision, split-up or combination of shares), or the consolidation or merger of AAi with or into another person (other than a consolidation or merger in which AAi is the continuing corporation and which does not result in any change in the AAi common stock, or in change in ownership of the AAi common stock which constitutes an Equity Transaction, or sells or otherwise disposes of all or substantially all of its properties and assets as an entirety to any other person or persons or (y) at least 50% of the shares of AAi common stock (an "Equity Transaction"). If the Redemption Event is an IPO, the per share Redemption Even Amount will be based upon the Pre-Money Valuation (as hereinafter defined) of AAi immediately prior to the IPO according to the formula set forth below. For this purpose, "Pre-Money Valuation" shall be calculated by dividing the gross IPO proceeds by the percentage of the total issued and outstanding AAi common stock owned by the public immediately after and as a result of such IPO, excluding, however, from such calculation any common stock sold by persons who were holders of AAi common stock immediately prior to the IPO. The amounts payable to the Holder upon redemption shall be pro-rated for Pre-Money Valuations between the amounts specified below provided, however, that in no even shall the Redemption Event Amount exceed $40,000 per share.
PRE-MONEY VALUATION REDEMPTION EVENT AMOUNT PER SHARE ------------------- --------------------------------- $75,000,000 $35,000 More than $75,000,000 $35,000, plus an additional $0.025 for each dollar that the Pre-Money Valuation is in excess of $75,000,000
If the Redemption Event is a Transaction, the Redemption Event Amount will be based on the gross dollar value of the consideration (the "Transaction Consideration") (i) received in the Transaction (other than an Equity Transaction) by holders of the common and convertible preferred stock of AAi or (ii) by AAi in the event the Transaction involves an Equity Transaction. In the event of a Transaction, the per share Redemption Event Amount will be calculated according to the formula set forth below. The amounts payable to the Holder upon redemption shall be pro-rated for Transaction Consideration that is between the amounts specified below provided, however, that in no event shall the Redemption Event Amount exceed $40,000 per share.
TRANSACTION CONSIDERATION REDEMPTION EVENT AMOUNT PER SHARE ------------------------- --------------------------------- $75,000,000 ($37,500,000 $35,000 in the even of an Equity Transaction)
5 More than $75,000,000 $35,000,000, plus an additional (more than $37,500,000 in the $0.025 for each dollar that the event of an Equity Transaction) Transaction Consideration is in excess of $75,000,000 (or in the event of an Equity Transaction, $35,000, plus an additional $0.50 for each dollar that the Transaction Consideration is in excess of $37,500,000) On or before the tenth day following notice delivered in accordance with Subsection 5.6 hereof, the Holder shall deliver to AAi at its principal offices, all Series A Preferred Shares owned by such Holder endorsed in blank for transfer or with blank stock powers attached. The Redemption Event Amount pursuant to this Subsection 5.2 shall be payable by AAi in immediately available funds within ten (10) days of the later of (i) the completion of a Redemption Event, or (ii) delivery by Holder of all of its Series A Preferred Shares. 5.3 SUPPLEMENTAL PAYMENT. Subsection 5.2 notwithstanding, if (i) a Redemption Event occurs after the Redemption Date, and (ii) the per share Redemption Amount received by the Holder pursuant to Section 5.1 was less than the per share Redemption Event Amount that would have been received had the Redemption Event occurred on or prior to the Redemption Date pursuant to Section 5.2, the Corporation shall pay the persons who were Holders on the Redemption Date an amount equal to the difference, if any, between the per share Redemption Amount paid to such Holders on the Redemption Date and the per share Redemption Event Amount that would have been received had the Redemption Even occurred on or prior to the Redemption Date (the "Supplemental Payment"). The Corporation's obligation to pay the Supplemental Payment shall survive the redemption of the Series A Preferred Shares pursuant to Subsection 5.1, and shall be payable in immediately available funds within ten (10) days following the completion of a Redemption Event pursuant to this Subsection 5.3. 5.4 RIGHT OF INSPECTION. On request, the Corporation will provide Holder with an opportunity at Holder's sole cost and expense to inspect the Corporation's books and records upon reasonable notice during normal business hours and for a reasonable period of time in order to determine the accuracy of the Corporation's determination of the Redemption Amount or the Redemption Event Amount. In the event of any dispute over the Redemption Amount or the Redemption Event Amount, the parties shall first attempt to resolve such dispute through mutual consultation. If such dispute cannot be resolved within thirty (30) days of the Holder's written notice, the dispute shall be submitted to an independent certified accountant acceptable to the parties for resolution. The determination of such accountant shall be final and binding on the parties. 5.5 NOTICE OF REDEMPTION. Written notice of Redemption pursuant to Subsection 5.1 shall be given by the Corporation not fewer than thirty (30) days prior the redemption Date by first class mail, postage prepaid, to each Holder of record of Series A preferred Shares at the address of such Holder on the books of the Corporations. Each such notice shall state: (a) the Redemption Date; (b) the number of shares of the Series A Preferred Stock to be redeemed; (c) the Redemption Amount; and (d) the place of places where certificates for such shares are to be surrendered for payment of the Redemption Event Amount. 5.6 NOTICE OF EARLY REDEMPTION. Written notice of a Redemption Event pursuant to Subsection 5.2 shall be given by the Corporation not more than ten (10) days following the completion of the Redemption Even by first class mail, postage prepaid, to each Holder of record of Series A Preferred Shares at the Address of such Holder on the books of the Corporation. Each such notice state: (a) the date of the Redemption Event; (b) the number of shares of the Series A Preferred to be redeemed; (c) the Redemption Event Amount; and (d) the place or places where certificates for such shares are to be surrendered for payment of the Redemption Event Amount. 6 5.7 NOTICE OF SUPPLEMENTAL PAYMENT. Written notice of the completion of Redemption Event pursuant to Subsection 5.3 shall be given by the Corporation not more than five (5) days following the completion of the Redemption Event by first class mail, postage prepaid to each former Holder of Series A Preferred Shares on the Redemption Date at the last known address of such Holder on the books of the Corporation. Such notice shall state (a) the date of the completion of the Redemption Event; (b) the number of Series A Preferred Shares previously redeemed; (c) the Redemption Amount; (e) the Redemption Event Amount; and (f) the Supplemental Payment, if any. 5.8 SPECIFIC PERFORMANCE. If any Holder becomes obligated so to deliver any shares of Series A Preferred Shares to the Corporation upon any redemption under Section 5 hereof and fails to deliver the certificate therefor in accordance with this Certificate of Amendment, the Corporation may, at its option, irrevocably deposit or set aside funds sufficient to pay (i) the Redemption Amount (if such redemption is pursuant to Section 5.1 hereof) or (ii) the Redemption Event Amounts (if such redemption is pursuant to Section 5.2 hereof) against delivery of such certificates and in addition to all other remedies it may have, cancel on its books such certificate representing such shares to be redeemed. 6. COVENANTS 6.1 SPECIAL RESTRICTIONS. At any time when shares of Series A Preferred Shares are outstanding, the Corporation will not without the approval of the Required Holders: 6.2 consent to any liquidation, dissolution or winding up of the Corporation; or 6.3 consolidate or merge into or with any other entity or entities or sell or transfer all or substantially all its assets, except that the Corporation may, without the consent of the holders of the then outstanding shares of Series A Preferred Shares effectuate a merger in which (i) the Corporation is the surviving corporation and (ii) the Shareholders of the Corporation immediately prior to the merger hold more than 50% of the outstanding voting power of the surviving corporation (assuming conversion of all convertible securities and exercise of all outstanding options and warrants). 6.4 NO IMPAIRMENT. The Corporation will not by amendment of its Certificate of Incorporation or through any reorganization, recapitalization, transfer of all or a substantial portion of its assets, consolidation, merger, dissolution, issue or sale of securities, closing of transfer books or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed under this Certificate of Amendment by the Corporation, but will at all times in good faith assist in carrying out all the provisions of this Certificate of Amendment and in taking all such action as may be necessary or appropriate in order to protect the conversion and other rights of the Holders against impairment. 7. AMENDMENTS. The provisions of these terms of the Series A Preferred Shares may not be amended, modified or waived without the written consent or affirmative vote of the Required Holders. Except to the extent required by law, the vote of the holders of any other class of capital shares of the Corporation is not required for the amendment, modification or waiver of the terms of this Certificate of Amendment. 8. ADDITIONAL SHARES. The Corporation may issue such additional series of Preferred Shares as the Board of Directors may establish by the adoption of a resolution or resolution relating thereto, each such additional series to have such voting powers, full or limited, or no voting powers, and such designations, preferences and relative, participating, optional or other special rights and qualification, 7 limitations or restrictions thereof, as shall be stated and expressed in the resolution or resolutions providing for the issue of the such series adopted by the Board of Directors. Unless otherwise expressly set forth in the designation therefor, no series of Preferred Shares shall have the right to vote as a class in connection with the issuance of any additional series of Preferred Shares, whether such additional series shall have rights greater, lesser or identical to the rights of any existing series of Preferred Shares. FIFTH The Corporation is to have perpetual Existence. SIXTH: Whenever a compromise or arrangement is proposed between this Corporation and its creditors or any class of them and/or between this Corporation and its stockholder or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this Corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for this Corporation under the provisions of Section 291 of Title 8 of the Delaware Code or on the application of any receiver of receivers appointed for this Corporation under Section 279 of Title 8 of the Delaware Code order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or the stockholders or class of stockholders of this Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this Corporation as consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholder of this Corporation, as the case may be, and also on this Corporation. SEVENTH: For the management of the business and for the conduct of the affairs of the Corporation, and in further definition, limitation and regulation of the powers of the Corporation and of its directors and of its stockholders or any class thereof, as the case may be, it is further provided: 1. The management of the business and the conduct of the affairs of the Corporation shall be bested in its Board of Directors. The number of directors which shall constitute the whole Board of Directors shall be fixed by, or in the manner provided in, the By-laws. The phrase "whole Board" and the phrase "total number of directors" shall be deemed to have the same meaning to wit, the total number of directors which the Corporation would have if there were no vacancies. No election of directors need be by written ballot. 2. After the original or other By-laws of the Corporation have been adopted, amended, or repealed, as the case may be, in accordance with the provisions of Section 109 of the General Corporation Law of the State of Delaware, and, after the Corporation has received any payment for any of its stock, the power to adopt, amend, or repeal the By-laws of the Corporation may be exercised by the Board of Directors of the Corporation; provided, however that any provision for the classification of directors of the Corporation for staggered terms pursuant to the provisions of subsection (d) of Section 141 of the General Corporation Law of the State of Delaware shall be set forth in the initial By-laws or in by-laws adopted by the stockholders entitled to voted of the Corporation unless provisions for such classification shall be set forth in this Certificate of Incorporation. 3. Whenever the Corporation shall be authorized to issue only one class of stock, each outstanding share shall entitle the holder thereof to notice of, and the right to vote at, any meeting of stockholders. Whenever the Corporation shall be authorized to issue more than one class of stock, no outstanding share of any class of stock which is denied voting power under the provisions of the certificate of incorporation shall entitle 8 the holder thereof to the right to vote at any meeting of the stockholders except as the provisions of paragraph (2) of the subsection (b) of section 242 of the General Corporation law of the State of Delaware shall otherwise require; provided, that no share of any such class which is otherwise denied voting power shall entitle the holder thereof to vote upon the increase of decrease in the number of authorized shared of said class. EIGHTH: The personal liability of the directors of the Corporation is hereby eliminated to the fullest extent permitted by paragraph (7) of subsection (b) of Section 102 of the General Corporation Law of the State of Delaware, as the same may be amended an supplemented. NINTH: The Corporation shall, to the fullest extent permitted by the General Corporation Law, as the same may be amended and supplemented, indemnify any and all persons whom it shall have the power to indemnify under the General Corporation Law from and against any and all of the expenses, liabilities or other matters referred to in or covered by the General Corporation Law, and the indemnification provided for herein shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any By-law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. TENTH: No director or the Corporation shall have any personal liability to the Corporation or to any of its stockholders for monetary damages for breach of fiduciary duty as a director; provided, however, that this provision eliminating such personal liability of a director shall not eliminate or limit the liability of a director (i) for any breach of the director's 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 General corporation Law of Delaware, or (iv) for any transaction from which the director derived an improper personal benefit. If the Delaware General Corporation Law is amended to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Las as so amended. Any repeal or modification of this Article Tenth by the stockholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification with respect to acts or omissions occurring prior to such repeal or modification. ELEVENTH: The board of Directors shall have the power to make, add to, delete from, alter and repeal the Corporation's By-laws. TWELFTH: The Corporation expressly elects not to be governed by Section 203 of the Delaware General Corporation Law. THIRTEENTH: From time to time any of the provisions of this Certificate of Incorporation may be amended, altered or repealed after authorization by the Board of Directors and the affirmative vote of the holders of record of a majority of all of the issued and outstanding shares of the Corporation entitled to vote in respect thereof, and other provisions authorized by the laws of the State of Delaware at the time in force may be added or inserted in the manner and at the time prescribed by said laws, and all rights at any time conferred upon the stockholders of the Corporation by this Certificate of Incorporation are granted subject to the provisions of this Article Thirteenth. 9 4. This Restated Certificate of Incorporation was duly adopted by the written consent of the Board of Directors of the Corporation in accordance with the applicable provisions of Sections 141 and 245 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, said Foster Grant Holdings, Inc. has caused this Certificate to be signed by Duane M. DeSisto, its Vice President, this 4th day of August, 1998. Foster Grant Holdings, Inc. By: /s/ Duane M. DeSisto ------------------------------- Title: Vice President ---------------------------- EX-3.8.2 16 AMEND. & RESTATED BY-LAWS OF FOSTER GRANT HOLDINGS 1 Exhibit 3.8.2 AMENDED AND RESTATED BY-LAWS OF FOSTER GRANT HOLDINGS, INC. ARTICLE I STOCKHOLDERS SECTION 1. ANNUAL MEETINGS. Subject to change by resolution of the Board of Directors, the annual meeting of the Stockholders of the Corporation for the purpose of electing directors and for the transaction of such other business as may be brought before the meeting shall be held on a date fixed, from time to time, by the directors of the Corporation, and each successive annual meeting shall be held on a date within thirteen months after the date of the preceding annual meeting. The meeting may be held at such time and such place within or without the State of Delaware as shall be fixed by the Board of Directors and stated in the notice of the meeting. SECTION 2. SPECIAL MEETINGS. Special meetings of the stockholders may be called at any time by the President, a majority of the Board of Directors or the Chairman of the Board or by a majority of the stockholders of record of all shares entitled to vote. Special meetings shall be held on the date and at the time and place either within or without the State of Delaware as specified in the notice thereof. SECTION 3. NOTICE OF MEETINGS. Except as otherwise expressly required by law or the Certificate of Incorporation of the Corporation, written notice stating the place and time of the meeting and the purpose or purposes of such meeting, shall be given by the Secretary to each stockholder entitled to vote thereat at his address as it appears on the records of the Corporation not less than ten nor more than sixty days prior to the meeting. Notice of any meeting of stockholders shall not be required to be given to any stockholder who shall attend such meeting in person or by proxy; and if any stockholder shall, in person or by attorney thereunto duly authorized, waived notice of any meeting, in writing or by telephone or facsimile, whether before or after such meeting be held, the notice thereof need not be given to him. The attendance of any stockholder at a meeting, in person or by proxy, without protesting prior to the conclusion of the meeting the lack of notice of such meeting, shall constitute a 2 waiver of notice by him. Notice of any adjourned meeting of stockholders need not be given except as provided in SECTION 5 of this Article I. SECTION 4. QUORUM. Subject to the provisions of law in respect of the vote that shall be required for a specific action, the number of shares the holders of which shall be present or represented by proxy at any meeting of stockholders in order to constitute a quorum for the transaction of any business shall be at least a majority of all the shares issued and outstanding and entitled to vote at such meeting. Where a separate vote by a class or classes is required, a majority of the outstanding shares of such class or classes, present in person or represented by proxy, shall constitute a quorum entitled to take action with respect to that vote on that matter and the affirmative vote of the majority of shares of such class or classes present in person or represented by proxy at the meeting shall be the act of such class. SECTION 5. ADJOURNMENT. At any meeting of stockholders, whether or not there shall be a quorum present, the holders of a majority of the shares voting at the meeting, whether present in person at the meeting or represented by proxy at the meeting, may adjourn the meeting from time to time. Except as provided by law, notice of such adjourned meeting need not be given otherwise than by announcement of the time and place of such adjourned meeting at the meeting at which the adjournment is taken. At any adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally called. SECTION 6. ORGANIZATION. The Chairman of the Board or, in his absence or non-election, the Vice Chairman or, in his absence or non-election, the President or, in the absence of both the foregoing officers, a Vice President shall call meetings of the stockholders to order and shall act as Chairman of such meetings. In the absence of all of the foregoing officers, holders of a majority in number of the shares of the capital stock of the Corporation present in person or represented by proxy and entitled to vote at such meeting shall elect a Chairman, who may be the Secretary of the Corporation. The Secretary of the Corporation shall act as secretary of all meetings of the stockholders; but in the absence of the Secretary, the Chairman may appoint any person to act as secretary of the meeting. SECTION 7. VOTING. Each stockholder shall, except as otherwise provided by law or by the Certificate of Incorporation, at every meeting of the stockholders be entitled to one vote in person or by proxy for each share of capital stock entitled to vote held by such stockholder, but no proxy shall be voted on after three years from its date, unless said proxy provides for a longer period. Directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors. Any other action shall be authorized by a vote of a majority 2 3 of the votes cast except where the General Corporation Law prescribes a different percentage of votes and/or a different exercise of voting power, and except as may be otherwise prescribed by the provisions of the Certificate of Incorporation and these By-laws. In the election of directors, and for any other action, voting need not be by ballot, unless the Board of Directors in its discretion, or the officer of the Corporation presiding at a meeting of stockholders, in his or her discretion, may require that any votes cast at such meeting shall be cast by written ballot. SECTION 8. STOCKHOLDERS LIST. The officer of the Corporation who has charge of the stock ledger of the Corporation shall prepare and make a complete list of the stockholders entitled to vote at any meeting of stockholders, arranged in alphabetical order with the address of each and the number of shares held by each, shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole thereof and may be inspected by any stockholder who is present. The stock ledger of the Corporation shall be the only evidence as to who are the stockholders entitled to examine the ledger, the list required by this Section 8 of Article I or the books of the Corporation, or to vote in person or by proxy at any meeting of stockholders. SECTION 9. ADDRESS OF STOCKHOLDERS. Each stockholder shall designate to the Secretary of the Corporation an address at which notices of meetings and all other corporate notices may be served upon or mailed to him, and if any stockholder shall fail to designate such address, corporate notices may be served upon him by mail directed to him at his last known post office address. SECTION 10. INSPECTORS OF ELECTION The Board of Directors may at any time appoint one or more persons to serve as Inspectors of Election at the next succeeding annual meeting of stockholders or at any other meeting or meetings and the Board of Directors may at any time fill any vacancy in the office of Inspector. If the Board of Directors fails to appoint Inspectors, his office becomes vacant and be not filled by the Board of Directors, the Chairman of any meeting of the stockholders may appoint one or more temporary Inspectors for such meeting. All proxies shall be filed with the Inspectors for such meeting. All proxies shall be filed with the Inspectors of Election of the meeting before being voted upon. SECTION 11. ACTION BY CONSENT. Any action required by the General Corporation Law to be taken at any annual or special meeting of 3 4 stockholders, or any action which may be taken at any annual or special meeting of stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing Action taken pursuant to this paragraph shall be subject to the provisions of Section 228 of the General Corporation Law. ARTICLE II BOARD OF DIRECTORS SECTION 1. GENERAL POWERS. The property, affairs and business of the Corporation shall be managed by or under the direction of the Board of Directors. The Board of Directors shall have the power and authority to authorize the officers of the Corporation to enter into such agreements as the Board of Directors shall deem appropriate including the power and authority to authorize the seal of the Corporation to be affixed to all papers that may require it. SECTION 2. NUMBER, QUALIFICATION AND TERM OF OFFICE. The Number of directors shall be fixed at three (3) members. Directors shall be elected by a majority of the common shareholders at the annual shareholder meeting. Directors need not be stockholders. Each director shall hold office for the term for which he is appointed or elected and until his successor shall have been elected and shall qualify, or until his death or until he shall resign or shall have been removed in the manner hereinafter provided. Directors need not be elected by ballot, except upon demand of any stockholder. The Chairman of the Board, if one be elected, and the Vice Chairman of the Board, if one be elected, shall be chosen from among the directors. The number of directors may be increased or decreased only by amendment to these By-laws. SECTION 3. QUORUM AND MANNER OF ACTION. Except as otherwise provided by law or these By-laws, a majority of the entire Board of Directors shall be required to constitute a quorum for the transaction of business at any meeting, and the act of a majority of the entire Board of Directors shall be the act of the Board of Directors. In the absence of a quorum, a majority of the directors present may adjourn any meeting from time to time until a quorum be had. Notice of any adjourned meeting need not be given. The directors shall act only as a board and individual directors shall have no power as such. In the event that the Board of Directors shall be unable to take action on any matter because of a deadlock, upon the motion of any director the matter shall be submitted to a vote of the stockholders. Any action so approved by a majority 4 5 vote of the stockholders shall be the action of the Board of Directors, however, any director who voted against the action taken by the stockholders prior to the submission of such matter to the stockholders may, within 10 days following such stockholder vote, dissent in writing to such action to the Secretary of the Corporation, who shall enter such dissent in the minutes of the Corporation. SECTION 4. PLACE OF MEETING, ETC. The Board of Directors may hold its meetings, have one or more offices and keep the books and records of the Corporation at such place or places within or without the State of Delaware as the Board may from time to time determine or as shall be specified or fixed in the respective notices or waivers of notice thereof. SECTION 5. REGULAR MEETINGS. A regular meeting of the Board of Directors shall be held for the election of officers and the transaction of other business as soon as practicable after each annual meeting of stockholders, and other regular meetings of said Board shall be held at such times and places as said Board shall direct. No notice shall be required for any regular meeting of the Board of Directors but a copy of every resolution fixing or changing the time or place of regular meetings shall be mailed to every director at least three days before the first meeting held in pursuance thereof. SECTION 6. SPECIAL MEETINGS. Special meetings of the Board of Directors may be called by the Chairman of the Board or the President. The Secretary or any Assistant Secretary shall give notice of the time and place of each special meeting by mailing a written notice of the same to each director at his last known post office address at least three (3) business days before the meeting or by causing the same to be delivered personally or to be transmitted by telecopies, overnight mail, telegraph, cable, wireless, telephone or orally at least twenty-four hours before the meeting to each director. In the event the Secretary or Assistant Secretary shall fail to give the notice of a Special Meeting called in accordance with this Section, the person who called such meeting shall be empowered to give notice of such meeting in accordance with the immediately preceding sentence. SECTION 7. ACTION BY CONSENT. Any action required or permitted to be taken at any meeting of the Board or of any committee thereof may be taken without a meeting, written consent thereto is signed by all members of the Board or of such committee, as the case may be, and such written consent is filed with the minutes of proceedings of the Board or committee. SECTION 8. ORGANIZATION. At each meeting of the Board of Directors, the Chairman of the Board or in his absence, the Vice Chairman of the Board, or in his absence, the President, or in his absence or non-election, a director chosen by a majority of the directors present shall act as Chairman. The Secretary or, in his absence, an Assistant Secretary or, in the absence of both 5 6 the Secretary and an Assistant Secretary, any person appointed by the Chairman shall act as Secretary of the meeting. SECTION 9. RESIGNATIONS. Any director of the Corporation may resign at any time by giving written notice to the Board of Directors, the President or the Secretary of the Corporation. The resignation of any director shall take effect at the time specified therein; and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. SECTION 10. REMOVAL OF DIRECTORS. Except as otherwise provided by law, any director may be removed with or without case, by the affirmative vote of a majority of the Board of Directors. SECTION 11. VACANCIES. Any vacancy in the Board of Directors, caused by death resignation, removal, disqualification, an increase in the number of directors or any other cause shall be filled by a majority vote of the directors then in office, though not less than a quorum, or by a sole remaining director, and the directors so chosen shall hold office until the next annual election of directors and until their successors are duly elected and qualified, or until their earlier resignation or removal. SECTION 12. COMPENSATION OF DIRECTORS. Directors may receive such reasonable sums for their services and expenses as may be directed by resolution of the Board; provided that nothing herein contained shall be construed to preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for their services and expenses. SECTION 13. COMMITTEES. By resolution or resolutions passed by a majority of the whole Board at any meeting of the Board of Directors, the directors may designate one or more committees of the Board of Directors, each committee to consist of two or more directors. To the extent provided in said resolution or resolutions, unless otherwise provided by law, such committee or committees shall have and may exercise all of the powers of the Board of Directors in the management of the business and affairs of the Corporation, including the power and authority to authorize the seal of the Corporation to be affixed to all papers that may require it. No committee, however, shall have the power to declare dividends or to authorize the issuance of shares of capital stock of the Corporation. Further, the Board of Directors may designate one or more directors as alternate members of a committee who may replace an absent or disqualified member at any meeting. If an alternative member of a committee is not selected by the Board of Directors, and in the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a 6 7 quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. A committee may make such rules for the conduct of its business and may appoint such committees and assistants as it shall from time to time deem necessary. A majority of the members of a committee shall constitute a quorum for the transaction of business of such committee. Regular meetings of a committee shall be held at such times as such committee shall from time to time by resolution determine. No notice shall be required for any regular meeting of a committee but a copy of every resolution fixing or changing the time or place of at least three days before the first meeting held in pursuance thereof. Special meetings of a committee may be called by the Chairman of such committee or the Secretary of such committee, or any two members thereof. The Secretary of the Corporation or the Secretary of such committee shall give notice of the time and place of each special meting by mail at least two days before such meeting or by telegraph, cable, wireless, telephone or orally at least twenty-four hours before the meeting to each member of such committee. SECTION 14. PARTICIPATION IN MEETINGS. Members of the Board of Directors or of any committee may participate in any meeting of the Board or committee, as the case may be, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation shall constitute presence in person at such meeting. SECTION 15. INTERESTED DIRECTORS. No contract or transaction between the Corporation and one or more of its directors or officers, or between the Corporation and any other corporation, partnership, association, or other organization in which one or more of its directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors or committee thereof which authorizes the contract or transaction, or solely because his or their votes are counted by such purpose if (i) the material facts as to his or their relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board of Directors or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (ii) the material facts to his or their relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (iii) the contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified, by the Board of Directors, a committee thereof or the stockholders. Common or interested directors may be counted in determining the presence of a quorum at 7 8 a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. ARTICLE III OFFICERS SECTION 1. NUMBER. The officers of the Corporation shall be a Chairman of the Board, a Vice Chairman of the Board, a Chief Executive Officer, a Chief Financial Officer and a Secretary. In addition, the Board may elect one or more Vice Presidents, Treasurers, Assistant Treasurers, Assistant Secretaries and such other officers as may be appointed in accordance with the provisions of Section 3 of this Article III. Any number of offices may be held by the same person, as the directors may determine. SECTION 2. ELECTION, TERM OF OFFICE AND QUALIFICATION. The officers shall be elected annually by the Board of Directors at their first meeting after each annual meeting of the stockholders of the Corporation. Each officer, except such officers as may be appointed in accordance with the provisions of Section 3 of this Article, shall hold office until his successor shall have been duly elected and qualified, or until his death or until he shall have resigned or shall have become disqualified or shall have been removed in the manner hereinafter provided. SECTION 3. SUBORDINATE OFFICERS. The Board of Directors or the Chief Executive Officer may from time to time appoint such other officers (including, without limitation, a Treasurer, Assistant Treasurers, or Assistant Secretaries) and such agents and employees of the Corporation as may be deemed necessary or desirable. Such officers, agents and employees shall hold office for such period and upon such terms and conditions, have such authority and perform such duties as in these By-laws provided or as the Board of Directors or the Chief Executive Officer may from time to time prescribe. The Board of Directors or the Chief Executive Officer may from time to time authorize any officer to appoint and remove agents and employees and to prescribe the powers and duties thereof. SECTION 4. REMOVAL. Any officer may be removed, either with or without cause, by the affirmative vote of a majority of the Board of Directors. SECTION 5. RESIGNATIONS. Any officer may resign at any time by giving written notice to the Board of Directors, the Chief Executive Officer or the Secretary. Any such resignation shall take effect at the date of receipt of such notice or at any later time specified therein; and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. 8 9 SECTION 6. VACANCIES. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled for the unexpired portion of the term in the manner prescribed in these By-laws for regular election or appointment to such office. SECTION 7. CHAIRMAN OF THE BOARD. The Chairman of the Board shall be the Chief Executive Officer of the Corporation and shall preside, if present, at all meetings of the stockholders and shall preside, if present, at all meetings of the stockholders and at all meetings of the Board of Directors and shall perform such other duties and have such other powers as from time to time may be assigned by the Board of Directors or prescribed by these By-laws. SECTION 8. VICE CHAIRMAN OF THE BOARD. The Vice Chairman of the Board shall, at the request of the Chairman of the Board or in his absence or disability, perform the duties of the Chairman of the Board and when so acting shall, have all the powers of, and be subject to all restrictions upon, the Chairman of the Board and shall perform such other duties and have such other powers as from time to time may be assigned to him by the Chairman of the Board or prescribed by these By-laws. SECTION 9. CHIEF EXECUTIVE OFFICER. The Chief Executive Officer shall have general direction of the affairs of the Corporation and general supervision over its several officers, subject, however, to the control of the Board of Directors, and in general shall perform such duties and, subject to the other provisions of these By-laws, have such powers incident to the office of Chief Executive Officer and perform such other duties and have such other powers as from time to time may be assigned to him by the Board of Directors. SECTION 10. CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall be responsible to the Board of Directors and the Chief Executive Officer for all financial control and internal audit of the Corporation and its subsidiaries. He shall perform such other duties as may be assigned to him by the Board of Directors, the Chief Executive Officer or prescribed by these By-laws, and shall be responsible to a designated Vice President only for the routine administrative matters pertaining to the duties of his office. The Chief Financial Officer shall, in the absence of an appointed Treasurer, perform the duties and functions of the Treasurer. SECTION 11. VICE PRESIDENT. A Vice President may sign with the Chief Financial Officer or the Secretary or an Assistant Secretary certificates of stock of the Corporation and shall have such other powers and shall perform such other duties as from time to time may be assigned to him by the Board of Directors or the Chief Executive Officer or prescribed by these By-laws. 9 10 SECTION 12. SECRETARY. The Secretary shall keep or cause to be kept, in books provided for the purpose, the minutes of the meetings of the stockholders, the Board of Directors and any committee when so required, shall see that all notices are duly given in accordance with the provisions of these By-laws and as required by law, shall be custodian of the records and the seal of the Corporation and see that the seal is affixed to all documents, the execution of which on behalf of the Corporation under its seal is duly authorized in accordance with the provisions of these By-laws, shall keep or cause to be kept a register of the post office address of each stockholder, may sign with the Chairman of the Board, the Chief Executive Officer or any Vice President certificates of stock of the Corporation, and in general shall perform such duties and have such powers incident to the office of Secretary and shall perform such other duties and have such other powers as from time to time may be assigned to him by the Board of Directors or the Chief Executive Officer or prescribed by these By-laws. SECTION 13. ASSISTANT SECRETARY. Any Assistant Secretary shall, at the request of the Secretary or in his absence or disability, perform the duties of the Secretary and when so acting shall have all the powers of, and be subject to all the restrictions upon, the Secretary and shall perform such other duties and have such other powers as from time to time may be assigned to him by the Chief Executive officer, the Secretary or the Board of Directors or prescribed by these Bylaws. SECTION 14. TREASURER. The Treasurer, if any, shall have charge and custody of, and be responsible for, all funds and securities of the Corporation, and deposit all such funds in the name of the Corporation in such banks, trust companies or other depositories as shall be selected in accordance with the provisions of these By-laws, shall at all reasonable times exhibit his books of account and records, and cause to be exhibited the books of account and records of any corporation controlled by the Corporation to any of the directors of the Corporation upon application during business hours at the office of the Corporation, or such other corporation, where such books and records are kept, shall, if called upon to do so, receive and give receipts for moneys due and payable to the Corporation from any source whatsoever, may sign with the Chairman of the Board, the Chief Executive Officer or any Vice President certificates of stock of the Corporation, and in general shall perform such duties and have such powers incident to the office of Treasurer and such other duties and have such other powers as from time to time may be assigned to him by the Board of Directors or the Chief Executive Officer or prescribed by these By-laws. SECTION 15. ASSISTANT TREASURER. Any Assistant Treasurer shall, at the request of the Treasurer or in his absence or disability, perform the duties of the Treasurer and when so acting shall have all the powers of, and be subject to all the restrictions upon, the Treasurer and shall perform such duties 10 11 and have such other powers as from time to time may be assigned to him by the Chief Executive Officer, the Treasurer or the Board of Directors or prescribed by these By-laws. SECTION 16. OTHER OFFICERS. Such officers as the Board of Directors may choose shall perform such duties and have such powers as may be appropriate to such officer or as from time to time may be assigned to them by the Board of Directors. The Board of Directors may delegate to any other officer of the Corporation the power to choose such other officers and to prescribe their respective duties and powers. SECTION 17. SALARIES. The salaries of the officers shall be fixed from time to time by the Board of Directors. No officer shall be prevented from receiving such salary by reason of the fact that he is also a director of the Corporation. SECTION 18. AUTHORITY OF OFFICERS. The officers of the Corporation shall have such duties and authority as set forth in these By-laws and as shall be determined from time to time by the Board of Directors. ARTICLE IV SHARES AND THEIR TRANSFER SECTION 1. CERTIFICATES OF STOCK. Certificates of Stock. Certificates for shares of the capital stock of the Corporation shall be in such form not inconsistent with law as shall be approved by the Board of Directors. They shall be numbered in order of their issue and shall be signed by the Chairman of the Board or the President or any Vice President and the Treasurer or any Assistant Treasurer, or the Secretary or any Assistant Secretary of the Corporation, and the seal of the Corporation shall be affixed thereto. Any of or all the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who shall have signed or whose facsimile signature shall have been placed upon any such certificate or certificates shall cease to be such officer or officers of the Corporation, whether because of death, resignation or otherwise, before such certificate or certificates shall have been delivered by the Corporation, such certificate or certificates may nevertheless be adopted by the Corporation and be issued and delivered as though the person or persons who signed such certificate or certificates or whose facsimile signature shall have been used thereon had not ceased to be such officer or officers of the Corporation. SECTION 2. TRANSFER OF STOCK. Transfer of shares of the capital stock of the Corporation shall be made only on the books of the Corporation by the holder thereof, or by his attorney thereunto authorized by a power of attorney 11 12 duly executed and filed with the Secretary of the Corporation, or a transfer agent of the Corporation, if any, on surrender of the certificate or certificates for such shares properly endorsed. A person in whose name shares of stock stand on the books of the Corporation shall be deemed the owner thereof as regards the Corporation, and the Corporation shall not be bound to recognize any equitable or other claim to or interest in such shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of the State of Delaware. SECTION 3. LOST, DESTROYED AND MUTILATED CERTIFICATES. The holder of any stock issued by the Corporation shall immediately notify the Corporation of any loss, destruction or mutilation of the certificate therefor or the failure to receive a certificate of stock issued by the Corporation, and the Board of Directors or the Secretary of the Corporation may, in its or his discretion, cause to be issued to such holder a new certificate or certificates of stock, upon compliance with such rules, regulations and/or procedures as may be prescribed or have been prescribed by the Board of Directors with respect to the issuance of new certificates in lieu of such lost, destroyed or mutilated certificate or certificates of stock issued by the Corporation which are not received, including reasonable indemnification to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate. SECTION 4. TRANSFER AGENT AND REGISTRAR; REGULATIONS. The Corporation shall, if and whenever the Board of Directors shall so determine, maintain one or more transfer offices or agencies, each in the charge of a transfer agent designated by the Board of Directors, where the shares of the capital stock of the Corporation shall be directly transferable, and also one or more registry offices, each in the charge of a registrar designated by the Board of Directors, where such shares of stock shall be registered, and no certificate for shares of the capital stock of the Corporation, in respect of which a Registrar and/or Transfer Agent shall have been designated, shall be valid unless countersigned by such Transfer Agent and registered by such Registrar, if any. The Board of Directors shall also make such additional rules and regulations as it may deem expedient concerning the issue, transfer and registration of certificates for shares of the capital stock of the Corporation. SECTION 5. FIXING DATE FOR DETERMINATION OF STOCKHOLDERS OF RECORD. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meting of stockholders or any adjournment thereof, to express consent to corporate action in writing without a meeting, to receive payment of any dividend or other distribution or allotment of any rights, to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date which shall not be more than sixty nor less than ten days 12 13 before the date of such meeting, nor more than sixty days prior to any other action, and only such stockholders as shall be stockholders of record of the date so fixed shall be entitled to such notice of and to vote at such meeting and any adjournment thereof, to express consent to any such corporate action, to receive payment of such dividend or to receive such allotment of rights, or to exercise such rights, as the case may be, notwithstanding any transfer of any stock on the books of the Corporation after any such record date fixed as aforesaid. If the stock transfer books are to be closed for the purpose of determining stockholders entitled to notice of or to vote at a meeting in the case of a merger or consolidation, the books shall be closed at least twenty days before such meeting. SECTION 6. BENEFICIAL OWNERS. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or whether or not it shall have express or other notice thereof, except as otherwise provided by law. ARTICLE V GENERAL PROVISIONS SECTION 1. FISCAL YEAR. The fiscal year of the Corporation shall end on such date of each year as shall be determined by the Board of Directors of the Corporation. SECTION 2. WAIVERS OF NOTICE. Whenever any notice of any nature is required by law, the provisions of the Certificate of Incorporation or these By-laws to be given, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. SECTION 3. QUALIFYING IN FOREIGN JURISDICTION. The Board of Directors shall have the power at any time and from time to time to take or cause to be taken any and all measures which they may deem necessary for qualification to do business as a foreign corporation in any one or more foreign jurisdictions and for withdrawal therefrom. SECTION 4. REGISTERED OFFICE. The registered office of the Corporation shall be in the City of Wilmington, County of New Castle, State of Delaware. 13 14 SECTION 5. OTHER OFFICES. The Corporation may also have offices at such other places, both within and without the State of Delaware as the Board of Directors may from time to time determine. SECTION 6. PROXIES. Except as otherwise provided in these By-laws or in the Certificate of Incorporation of the Corporation, and unless otherwise provided by resolution of the Board of Directors, the Chairman of the Board may appoint from time to time an attorney or attorneys, or agent or agents, of the Corporation, on behalf and in the name of the Corporation, to cast the votes which the Corporation may be entitled to cast as a stockholder or otherwise in any other corporation any of whose stock or other securities may be held by the Corporation, at meetings of the holders of the stock or other securities of such other corporation, or to consent in writing to any action by such other corporation, and may instruct the person or persons so appointed as to the manner of casting such votes or giving such consent, and may execute or cause to be executed on behalf and in the name of the Corporation and under its corporate seal, or otherwise, all such written proxies or other instruments as he may deem necessary or proper in the premises. SECTION 7. SEAL. The Board of Directors shall provide a suitable seal containing the name of the Corporation, which seal shall be in the charge of the Secretary and which may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. If and when so directed by the Board of Directors, a duplicate of the seal may be kept and be used by an officer of the Corporation designated by the Board. SECTION 8. DIVIDENDS. Dividends upon the capital stock of the Corporation, subject to the provisions of the Certificate of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, and may be paid in cash, in property, or in shares of the capital stock. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the Board of Directors from time to time in its absolute discretion, deems proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for any proper purpose, and the Board of Directors may modify or abolish any such reserve. SECTION 9. DISBURSEMENTS. All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or such other person or persons at the Board of Directors may from time to time designate. 14 15 ARTICLE VI INDEMNIFICATION SECTION 1. POWER TO INDEMNIFY IN ACTIONS, SUITS OR PROCEEDINGS OTHER THAN THOSE BY OR IN THE RIGHT OF THE CORPORATION. Subject to Section 3 of this Article VI, the Corporation shall indemnify any person (to the full extent permitted by the laws of the State of Delaware, as amended from time to time) 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 he is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise, against expenses (Including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he 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 his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he 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 reasonable cause to believe that his conduct was unlawful. SECTION 2. POWER TO INDEMNIFY IN ACTIONS, SUITS OR PROCEEDINGS BY OR IN THE RIGHT OF THE CORPORATION. Subject to Section 3 of this Article VI, the Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit, proceeding or claim by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprises against expenses (including attorney's fees and expenses) actually and reasonably incurred by him and to the extent permitted by applicable law in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation; 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 15 16 indemnification for such expenses and amounts which the Court of Chancery or such other court shall deem proper. SECTION 3. AUTHORIZATION OF INDEMNIFICATION. Any indemnification under this Article VI (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in Section l or Section 2 of this Article VI, as the case may be. Such determination and determinations under Section 5 or 6 of this Article VI shall be made (i) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (ii) if such a quorum is not obtainable, or, even if obtainable, a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (iii) by the stockholders. To the extent, however, that a director or officer, employee or agent of the Corporation has been successful on the merits or otherwise in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees and expenses) actually and reasonably incurred by him in connection therewith, without the necessity of authorization in the specific case. SECTION 4. GOOD FAITH DEFINED. (a) For purposes of any determination under Section 3 of this Article VI, a person shall be deemed to have acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, or, with respect to any criminal action or proceeding, to have had no reasonable cause to believe his conduct was unlawful, if his action is based on the records or books of account of the Corporation or another enterprise, or on information supplied to him by the officers of the Corporation or another enterprise or on information or records given or reports made to the Corporation or another enterprise by an independent certified public account or by an appraiser or other expert selected with reasonable care by the Corporation or another enterprise. The term "another enterprise" as used in this Section 4 shall mean any other corporation or any partnership, joint venture, trust, employee benefit plan or other enterprise of which such person is or was serving at the request of the Corporation as a director, officer, agent or employee. (b) References in this Article VI to "penalties" include any excise taxes assessed on a person with respect to an employee benefit plan; references in this Article VI to "serving at the request of the Corporation" include any service as a director or officer (or if appropriate an employee or agent) or former director or officer (or if appropriate a former employee or agent) of the Corporation which imposes duties on, or involves 16 17 services by, such person with respect to an employee benefit plan or its participants or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the participants or beneficiaries of such an employee benefit plan shall be deemed to have acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation. (c) The provisions of this Section 4 shall not be exclusive or to limit in any way the circumstances in which a person may be deemed to have met the applicable standard of conduct set forth in Sections l or 2 of this Article VI, as the case may be. SECTION 5. INDEMNIFICATION UPON APPLICATION; PROCEDURE UPON APPLICATION; ETC. Except as otherwise provided in the proviso to Section 2 of this Article VI: (a) Any indemnification under Section l or 2 of this Article VI shall be made no later than 45 days after receipt by the Corporation of the written request by the director, officer, employee or agent or the former director, officer, employee or agent, unless a determination is made within said 45-day period in accordance with Section 3 of this Article VI that such person has not met the applicable standard of conduct set forth in Section l or 2 of this Article VI. (b) The right to indemnification under Section l or 2 of this Article VI or advances under Section 6 of this Article VI shall be enforceable by the director, officer, employee or agent or former director, officer, employee or agent in any court of competent jurisdiction. The burden of proving that indemnification is not appropriate shall be on the Corporation. Neither the absence of any prior determination that indemnification is proper in the circumstances, nor a prior determination that indemnification is not proper in the circumstance, shall be a defense to the action or create a presumption that the director or officer, or former director or officer, has not met the applicable standard of conduct. The expenses (including attorneys' fees and expenses) incurred by the director, officer, employee or agent in connection with successfully establishing his right to indemnification, in whole or in part, in any such action (or in any action or claim brought by him to recover under any insurance policy or policies referred to in Section 9 of this Article VI) shall also be indemnified by the Corporation. (c) If any person is entitled under any provision of this Article VI to indemnification by the Corporation for some or a portion of expenses, judgments, fines, penalties or amounts paid in settlement incurred by him, but not, however, for the total amount thereof, the corporation shall 17 18 nevertheless indemnify such person for the portion of such expense, judgments, fines, penalties and amounts to which he is entitled. SECTION 6. EXPENSES PAYABLE IN ADVANCE. Expenses (including attorneys' fees and expenses) incurred by an officer, director, employee or agent or a former officer, director, employee or agent in defending a civil or criminal action or investigating a threatened or pending action, suit or proceeding may be paid by the Corporation in advance of the final disposition of such action, suit or proceeding as authorized by the Board of Directors in the specific case upon receipt of an undertaking by or on behalf of the director, officer, employee or agent to repay such amount unless it shall ultimately be determined that he is entitled to be indemnified by the Corporation as authorized in this Article VI; provided, however, that if he seeks to enforce his rights in a court of competent jurisdiction pursuant to Section 5(b) of this Article VI, said understanding to repay shall not be applicable or enforceable unless and until there is a final court determination that he is not entitled to indemnification as to which all rights of approval have been exhausted or have expired. SECTION 7. CERTAIN PERSONS NOT ENTITLED TO INDEMNIFICATION. Notwithstanding any other provision of this Article VI, no person shall be entitled to indemnification under this Article VI or to advances under Section 6 of this Article VI with respect to any action, suit, proceeding or claim brought or made by him against the Corporation, other than an action, suit, proceeding or claim seeking, or defending such person's right to, indemnification and/or expense advances pursuant to this Article VI or otherwise. SECTION 8. NON-EXCLUSIVITY AND SURVIVAL OF INDEMNIFICATION. The indemnification and advancement of expenses provided by, or granted pursuant to, this Article VI shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any By-law, agreement, contract, vote of stockholders or disinterested directors or pursuant to the direction (howsoever embodied) of any court of competent jurisdiction or otherwise, both as to action in his official capacity and as to action in another capacity while holding office, it being the policy of the Corporation that indemnification and expense advances to the persons specified in Section l and 2 of this Article VI shall be made to the fullest extent permitted by law and, accordingly, in the event of any change in law, by legislation or otherwise, permitting greater indemnification and/or expense advances to any such person, the provisions of this Article VI shall be construed so as to require such greater indemnification and/or expense advances. The provisions of this Article VI shall not be deemed to preclude the indemnification of any person who is not specified in Sections l or 2 of this Article VI but whom the Corporation has the power or obligation to indemnify under the provisions of the General Corporation Law of the State of Delaware, or otherwise. The indemnification and advancement of expenses provided by or granted pursuant 18 19 to this Article VI shall continue as to a person who has ceased to be a director or officer (or if appropriate an employee or agent) and shall inure to the benefit of the heirs, executors and administrators of such person. SECTION 9. INSURANCE. The Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, employee benefit plan, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power or the obligation to indemnify him against such liability under the provisions of this Article VI or the provisions of Section 145 of the General Corporation Law of the State of Delaware. The Corporation shall not be obligated under this Article VI to make any payment in connection with any claim made against any person if and to the extent that such person has actually received payment therefore under any insurance policy or policies. SECTION 10. MEANING OF "CORPORATION" FOR PURPOSES OF ARTICLE VI. For purposes of this Article VI, references to "the Corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees or agents, so that any person who is or was a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Article VI with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. SECTION 11. LIMITATION ON ACTIONS. No legal action shall be brought and no cause of action shall be asserted by or on behalf of the Corporation or any affiliate of the Corporation against any person who is or was a director or officer of the Corporation after the expiration of two years from the date of accrual of such cause of action, and any claim or cause of action of the Corporation or its affiliates shall be extinguished and deemed released unless asserted by the timely filing of a legal action within such two-year period; provided, however, that if any shorter period of limitations is otherwise applicable to any such shorter period shall govern. SECTION 12. SEVERABILITY. The provisions of this Article VI shall be severable in the event that any provision hereof (including any provision within a single section, subsection, clause, paragraph or sentence) is held invalid, void or otherwise unenforceable on any ground by any court of competent jurisdiction. In the event of any such holding, the remaining 19 20 provisions of this Article VI shall continue in effect and be enforceable to the fullest extent permitted by law. ARTICLE VII AMENDMENTS These By-laws may be altered, amended or repealed, in whole or in part, or new By-laws may be adopted by either the stockholders or by the Board of Directors, provided, however, that notice of such alteration, amendment, repeal or adoption of new By-laws be contained in the notice of such meeting of stockholders or Board of Directors, as the case may be. All such amendments must be approved by either the holders of a majority of the outstanding capital stock entitled to vote thereon or by a majority of the entire Board of Directors. 20 EX-3.9.1 17 RESTATED CERT. OF INCORPORATION OF OPTI-RAY, INC. 1 Exhibit 3.9.1 RESTATED CERTIFICATE OF INCORPORATION OF OPTI-RAY, INC. UNDER SECTION 807 OF THE BUSINESS CORPORATION LAW * * * * * WE, THE UNDERSIGNED, Gerald F. Cerce and Duane M. DeSisto , being respectively the President and Assistant Secretary hereby certify: 1. The name of the corporation is Opti-Ray, Inc. 2. The certificate of incorporation was filed by the department of state on the 21st of November, 1964. 3. The text of the certificate of incorporation is hereby restated without amendment or changes to read as herein set forth in full: WE, THE UNDERSIGNED, all being of full age, at least two thirds in number being citizens of the United States, and at least one being a resident of the State of New York, and at least one of the persons named as a director being a citizen of the United Sates and a resident of the State of New York, for the purpose of forming a Stock Corporation pursuant to article two of the Stock Corporation Law, do hereby make, subscribe, acknowledge and file this certificate as follows: FIRST: The name of the proposed corporation shall be OPTI-RAY, INC. SECOND: The purposes for which it is to be formed are the following: a. To purchase, sell, lease, manufacture, deal in and deal with every kind of goods, wares and merchandise, and every kind of personal property, whether made of wood, metal, glass, plastics or other material or any combination thereof, including patents and patent rights, chattels, easements, privileges and franchises which may lawfully be purchased, sold, produced or dealt in by corporations under the Statutes of the State of New York. (Article II of the Stock Corporation Law.) b. To take, buy, exchange, lease or otherwise acquire real estate and any interest or right therein, and to hold, own, operate, control, maintain, manage and develop the same and to construct, maintain, alter, manage and control directly or through ownership of stock in any other corporation any and all kinds of buildings, stores, offices, warehouses, mills, shops, factories, machinery and plants, and any and all other structures and erections which may at any time be necessary, useful, incidental or advantageous for the purpose of this corporation. 2 c. To sell, assign and transfer, convey, lease, or otherwise alienate or dispose of, and to mortgage or otherwise encumber the lands, buildings, real and personal property, of the corporation wherever situated, and any and all legal and equitable interests therein. d. To apply for, purchase, acquire, hold and dispose of the stocks, bonds and other evidences of the indebtedness of any corporation, domestic or foreign, and to issue in exchange therefor its stocks, bonds or other obligations, and to exercise in respect thereof all the rights, powers and privileges of individual owners, including the right to vote thereon; and to aid in any manner permitted by law any corporation of which any bonds or other securities or evidences of indebtedness or stocks are held by this corporation, and do any acts or things designed to protect, preserve, improve or enhance the value of any such bonds or other securities or evidence of indebtedness or stock. e. To do any or all of the foregoing in all parts of the world and wither as principal or agent; to do everything necessary, suitable or proper for the accomplishments of any of the purposes or the attainment of any of the objects or the furtherance of any of the powers hereinabove set forth, either alone or in association with other corporations, firms or individuals, and to do every other act or thing incidental or appurtenant to or growing out of or connected with the aforesaid business or powers or any part thereof. f. This corporation shall have the power to conduct its business in all branches in the State of New York or any other State of the United States and in all foreign countries and generally to do all acts and things and to exercise all the powers, now or hereafter authorized by law, necessary to carry on the business of this corporation or to promote any of the objects for which this corporation is formed. g. To apply for, purchase, register, or in any manner to acquire, and to hold, own, use, operate and introduce, and to sell, lease, assign, pledge, or in any manner dispose of any and all inventions, improvements and processes, labels, designs, brands, or other rights, trademarks, copyrights, and patents, and to work, operate, or develop the same and to carry on any business, manufacturing or otherwise, which may directly or indirectly effectuate these objects or any of them. h. The foregoing and following clauses shall be construed as objects and powers in furtherance and not in limitation or the general powers conferred by the laws of the State of New York; and it is hereby expressly provided that the foregoing and following enumeration of specific powers shall not be held to limit or restrict in any manner the powers of this corporation, and that this corporation may do all and everything necessary, suitable or proper for the accomplishment of any of the purposes of objects hereinabove enumerated either alone or in association with other corporations, firms, or individuals, to the same extent and as fully as individuals might or could do as principals, agents, contractors or otherwise. i. Nothing in this certificate contained, however, shall authorize the corporation to carry on any business or exercise any powers in any state or country which a similar corporation organized under the laws of such state of country could not carry on or exercise, or to engage within or without the State of New York in the business of a lighting or a transportation corporation or in the common carrier business, or to issue bills, notes or other evidence of debt for circulation as money. j. To do any or all of the things herein set forth to the same extent as natural persons might or could do and in any part of the world, as principals, agents, contractors, or otherwise, and either alone or in company with others. k. To purchase, insofar as the same may be done without impairing the capital of the corporation, except as otherwise permitted by law, and to hold, pledge and reissue shares of 3 its own capital stock; but such stock, so acquired and held, shall not be entitled to vote nor to receive dividends. l. To acquire the goodwill, rights and property, and the whole or any part of the assets, tangible or intangible, and to undertake or in any way assume the liabilities of any person, firm, association, or corporation engaged in any business which this corporation may carry on to pay for the said goodwill, rights, property, and assets in cash, the stock of this company, bonds or otherwise, or by undertaking the whole or any part of the liabilities of the transferor; to hold or in any manner to dispose of the whole or any part of the property so purchased; to conduct in any lawful manner the whole or any part of any business so acquired; and to exercise all the powers necessary or convenient in and about the conduct of management of such business. m. To make, manufacture, fabricate, purchase, sell, trade in, export and import all types of general wares, goods, plastics, glass, merchandise and personal property. n. To borrow money for its corporate purposes and to make, accept, endorse, execute and issue promissory notes, bills of exchange, bonds, debentures or other obligations from time to time for the purchase of property of for any purpose in or about the business of the corporation, and if deemed proper to secure the payment of any such obligations by mortgage, pledge, deed of trust or otherwise. THIRD: The aggregate number of shares which the corporation shall have authority to issue is 10,000 preferred shares at a par value of $.01 per share and 200 common shares at no par values per share. The capital of the corporation shall be at least equal to the sum of the aggregate par value of all issued shares having par value, plus the aggregate amount of consideration received by the corporation for the issuance of shares without par value, plus such amounts as, from time to time, by resolution of the Board of Directors, may be transferred thereto. FOURTH: A statement of the preferences, privileges and restrictions granted to or imposed upon the respective classes of shares or the holder thereof is as follows: (a) DIVIDENDS The holders of preferred shares shall be entitled to receive out of any funds of this corporation at the time legally available for the declaration of dividends, dividends at the rate of 6% per annum of the par value thereof, and no more, payable in cash annually, but only if, as and when declared by the Board of Directors. No dividends shall be paid on common stock in any one year unless such proffered dividend has been declared and paid simultaneously, but said preferred dividend shall be non-cumulative. (b) REDEMPTION This corporation, at the option of the Board of directors, may redeem in whole or from time to time any part of the preferred shares as follows: Any time hereafter, the preferred shares may be redeemed in whole or in part at par value, such sum being hereinafter sometimes referred to as the redemption price. In case of the redemption of only a part of the preferred shares, the Board of Directors shall effect such redemption pro rata. Such redemption price may, at the option of the Board of Directors, be paid in cash or in equal installments for a five-year period represented by notes of the corporation payable at the end of each succeeding year at 6% per annum. 4 (c) NOTICE OF REDEMPTION At least thirty days previous notice by mail, postage prepaid, shall be given to the holders of record of the preferred shares to be redeemed, such notice to be addressed to each such shareholder at his or her post office address as shown by the records of the corporation. On or after the date fixed for redemption and stated in such notice, each holder of preferred shares called for redemption shall surrender his or her certification evidencing such shares to this corporation and shall thereupon be entitled to receive payment of the redemption price, or notes, as the case may be. In case less than all the shares represented by any such surrendered certificates are redeemed, a new certificate shall be issued representing the unredeemed shares. The notices called for by this paragraph (c) may be waived by each shareholder whose preferred shares are to be redeemed. If such notice or subsequent notice of redemption shall have been duly given, and if on the date fixed for redemption funds necessary for the redemption shall be available therefore on notes tendered, then notwithstanding that the certificates evidencing any preferred shares so called for redemption shall not have been surrendered, all rights with respect to the shares so called for redemption shall forthwith after the date fixed for redemption cease and terminate and the said shares deemed to be no longer outstanding and the holders thereof shall cease to be shareholders with respect to such shares and shall have no rights with respect thereto except the right to payment of the redemption price of the shares without interest or delivery of the proceeds to the holder of the certificates therefor. Any moneys deposited by this corporation pursuant to this paragraph (c) and unclaimed at the end of six years from the date fixed for redemption shall be repaid to this corporation and any notes remaining shall be canceled. (d) LIQUIDATION In the event of voluntary liquidation, dissolution or winding up of this corporation, the holders of preferred shares shall be entitled to receive out of the assets of this corporation, whether such assets are capital or surplus of any nature, an amount equal to one hundred percent of the par value of such preferred shares, before any payment shall be made or any assets distributed to the holders of common shares. In the even of an involuntary liquidation, dissolution or winding up of this corporation the holders of the preferred shares shall be entitle to receive, out of the assets of this corporation, whether such assets are capital or surplus or any nature, an amount equal to one hundred percent of the par value of such preferred shares, before any payment shall be made or any assets distributed to the holders of common shares. (e) COMMON STOCK The holders of common shares issued and outstanding, except where otherwise provided by law or by this Certificate of Incorporation, shall have an possess the exclusive right to notice of shareholders' meetings and the exclusive voting rights and powers, and holders of the preferred shares shall not be entitled to any notice of the shareholders' meetings or to vote upon the election of directors or upon any question affecting the management or affairs of this corporation, except where such notice or vote is required by law of by this Certificate of Incorporation. FIFTH: The Secretary of State is designated as agent of the corporation upon whom process against it may be served. The post office address within the State of New York to which the Secretary of Sate shall mail a copy of any process against the corporation served upon him is c/o The Prentice-Hall Corporation System, Inc., 500 Central Avenue, Albany, New York 12206-2290. The name and the address of the registered agent of the corporation are The Prentice-Hall Corporation System, Inc., 500 Central Avenue, Albany, New York 12206-2290. Said registered agent is to be the agent upon which process against the corporation may be served. 5 SIXTH: The office of the Corporation is to be located in the Borough of Manhattan, County, City and State of New York. SEVENTH: The duration of the Corporation shall be perpetual. EIGHTH: Any and every person made a party to any action, suit or proceeding by or in the right of the corporation to procure a judgment in its favor by reason of the fact that, he, his testator or intestate, is or was a director or officer of this corporation or of any corporation which he served as such, at the request of this corporation, will be indemnified by the corporation to the full extent permitted by law, against any and all reasonable expenses, including attorneys' fees, actually and necessarily incurred by him in connection with the defense of such action or in connection with any appeal therein, except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that such officer or director has breached his duty to the corporation, and that any and every person made a party to any action, suit or proceeding other than one by or in the right of the corporation to procure a judgment in its favor, whether civil or criminal, including an action by or in the right of any other corporation of any type or kind, domestic or foreign, which any director or officer of the corporation served in any capacity at the request of the corporation, by reason of the fact that he, his testator, or intestate, was a director or officer of the corporation, or served such other corporation in any capacity, will be indemnified by the corporation to the full extent permitted by law, against judgments, fines, amounts paid in settlement, and reasonable expenses. 4. This restatement of the certificate of incorporation was authorized by the unanimous written consent of the Board of Directors and the Stockholders of the Corporation on August 4, 1998. IN WITNESS WHEREOF, we have signed this certificate on the 4th of August, 1998, and we affirm the statements contained therein as true under penalties of perjury. /s/ Gerald F. Cerce -------------------------- Gerald F. Cerce, President /s/ Duane M. DeSisto ------------------------------------- Duane M. DeSisto, Assistant Secretary EX-3.9.2 18 BY LAWS OF OPTI-RAY, INC. 1 Exhibit 3.9.2 B Y - L A W S OF OPTI-RAY, INC. ARTICLE 1. MEETING OF STOCKHOLDERS. Sec. l. ANNUAL MEETINGS. The annual meeting of the Stockholders shall be held at the principal office of the Corporation, on the 2nd day of January, of each year, at l0:00 o'clock in the fore noon of that day. If the day so designated falls upon a Sunday or a legal holiday, then the meeting shall be held upon the first secular day thereafter. The Secretary shall serve personally, or send through the post office, at least ten days before such meeting a notice thereof, addressed to each stockholder at his last known post office address, and publish notice thereof as required by law; but at any meeting at which all stockholders shall be present, or of which all stockholders not present have waived notice in writing, the giving of notice as above required may be dispensed with. Sec. 2. QUORUM. At all meetings of stockholders, except where it is otherwise provided by law, it shall be necessary that stockholders, representing in person or by proxy 75% of the capital stock, shall be present to constitute a quorum. Sec. 3. SPECIAL MEETINGS. Special Meetings of Stockholders other than those regulated by statute, maybe called at any time by a majority of the Directors, upon ten days' notice to each stockholder of record, such notice to contain a statement of 2 the business to be transacted at such meeting, and to be served personally or sent through the Post Office, addressed to each of such stockholders of record at his last known Post Office address; but at any meeting at which all stockholders shall be present, or of which stockholders not present have waived notice in writing, the giving of notice as above described may be dispensed with. The Board of Directors shall also, in like manner, call a special meeting of stockholders whenever so requested in writing by stockholders representing not less than one-half of the capital stock of the company. No business other than that specified in the call for the meeting, shall be transacted at any special meeting of the stockholders. Sec. 4. VOTING. At all meetings of the Stockholders all questions, the manner of deciding which is not specifically regulated by statute, shall be determined by a majority vote of the Stockholders present in person or by proxy; provided, however, that any qualified voter may demand a stock vote, in which case each Stockholder present, in person or by proxy, shall be entitled to cast one vote for each share of stock owned or represented by him. All voting shall be viva voce, except that a stock vote shall be by ballot, each of which shall state the name of the Stockholder voting and the number of shares owned by him, and in addition, if such ballot be cast by proxy, the name of the proxy shall be stated. The casting of all votes at special meetings of Stockholders shall be governed by the provisions of the Corporation Laws of this state. Sec. 5. ORDER OF BUSINESS. The order of business at all meetings of the stockholders shall be as follows: l. Roll Call. 2. Proof of notice of meeting or waiver of notice. 3. Reading or minutes of preceding meeting. 4. Reports of Officers. 2 3 5. Reports of Committees. 6. Election of Inspectors of Election. 7. Election of Directors. 8. Unfinished Business. 9. New Business. ARTICLE II. D I R E C T O R S Sec. l. NUMBER. The affairs and business of this Corporation shall be managed by a Board of three (3) Directors, who need not be stockholders of record, and at least one of such Directors shall be a resident of the State of New York and a citizen of the United States. Sec. 2. HOW ELECTED. At the annual meeting of Stockholders, the three persons receiving 8 plurality of the votes cast shall be directors and shall constitute the Board of Directors for the ensuing year. Sec. 3. TERM OF OFFICE. The term of office of each of the Directors shall be one year, and thereafter until his successor has been elected. Sec. 4. DUTIES OF DIRECTORS. The Board of Directors shall have the control and general management of the affairs and business of the Corporation. Such Directors shall in all cases act as a Board, regularly convened, by a majority and they may adopt such rules and regulations for the conduct of their meetings and the management of the Corporation, as they may deem proper, not inconsistent with these BY-LAWS and the Laws of the State of New York. Sec. 5. DIRECTORS' MEETINGS. Regular meetings of the Board of Directors shall be held immediately following the annual meeting of the Stockholders, and at such other times as the Board of Directors may determine. Special meetings of the 3 4 Board of Directors may be called by the President at any time, and shall be called by the President or the Secretary upon the written request of directors. Sec. 6. NOTICE OF MEETINGS. Notice of meetings, other than the regular annual meeting shall be given by service upon each Director in person, or by mailing to him at his last known Post Office address, at least ten days before the date therein designated for such meeting, including the day of mailing, of a written or printed notice thereof specifying the time and place of such meeting, and the business to be brought before the meeting and no business other than that specified in such notice shall be transacted at any special meeting. At any meeting at which every member of the Board of Directors shall be present, although held without notice, any business may be transacted which might have been transacted if the meeting had been duly called. Sec. 7. QUORUM. At any meeting of the Board of Directors, a majority of the Board shall constitute a quorum for the transaction of business; but in the event of a quorum not being present, a less number may adjourn the meeting to some future time, not more than five days later. Article III. O F F I C E R S Sec. l. NUMBER. The officers of this Corporation shall be: l. President. 2. Vice-President. 3. Secretary. 4. Treasurer. 5. Sec. 2. ELECTION. All officers of the Corporation shall be elected annually by the Board of Directors at its meeting held immediately after the meeting of stockholders, and shall hold office for the term of one year or until their successors are duly elected. 4 5 Sec. 3. DUTIES OF OFFICERS. The duties and powers of the officers of the Corporation shall be as follows: PRESIDENT. The President shall preside at all meetings of the Board of Directors and Stockholders. He shall present at each annual meeting of the Stockholders and Directors a report of the condition of the business of the Corporation. He shall cause to be called regular and special meetings of the Stockholders and, Directors in accordance with these By-Laws. He shall appoint and remove, employ and discharge, and fix the compensation of all servants, agents employees and clerks of the Corporation other than the duly appointed officers, subject to the approval of the Board of Directors. He shall sign and make all contracts and agreements in the name of the Corporation, and see that they are properly carried out. He shall see that the books, reports, statements and certificates required by the statutes are properly kept, made and filed according to law. He shall sign all certificates of stock, notes, drafts or bills of exchange, warrants or other orders for the payment of money duly drawn by the Treasurer. He shall enforce these By-Laws and perform all the duties incident to the position and office, and which are required by law. VICE-PRESIDENT. During the absence and inability of the President to render and perform his duties or exercise his powers, as set forth in these By-Laws or in the acts under which this Corporation is organized, the same shall be performed and exercised by the Vice-President; 5 6 and when so acting, he shall have all the powers and be subject to all responsibilities hereby given to or imposed upon such President. SECRETARY. The Secretary shall keep the minutes of the meetings of the Board of Directors and of the Stockholders in appropriate books. He shall give and serve all notices of the Corporation. He shall be custodian of the records and of the seal, and affix the latter when required. He shall keep the stock and transfer books in the manner prescribed by law, so as to show at all times the amount of capital-stock, the manner and the time the same was paid in, the names of the owners thereof, alphabetically arranged, their respective places of residence, their post office addresses, the number of shares owned by each, the time at which each person became such owner, and the amount paid thereon; and keep such stock and transfer books open daily during business hours at the office of the Corporation, subject to the inspection of any Stockholder of the Corporation, and permit such Stockholder to make extracts from said books to the extent and as prescribed by law. He shall sign all certificates of stock. He shall present to the Board of Directors at their stated meetings all communications addressed to him officially by the President or any officer or shareholder of the Corporation. He shall attend to all correspondence and perform all the duties incident to the office of Secretary. TREASURER. The Treasurer shall have the care and custody of and be responsible for all the funds and securities of the Corporation, and deposit all such funds in the name of the 6 7 Corporation in such bank or banks, trust company or trust companies or safe deposit vaults as the Board of Directors may designate. He shall sign, make, and endorse in the name of the Corporation, all checks, drafts, warrants and orders for the payment of money and pay out and dispose of same and receipt therefor, under the direction of the President or the Board of Directors. He shall exhibit at all reasonable times his books and accounts to any director or stockholder of the Corporation upon application at the office of the Corporation during business hours. He shall render a statement of the condition of the finances of the Corporation at each regular meeting of the Board of Directors, and at such other times as shall be required of him, and a full financial report, at the annual meeting of the stockholders. He shall keep at the office of the Corporation, correct books of account of all its business and transactions and such other books of account as the Board of Directors may require. He shall do and perform all duties appertaining to the office of Treasurer. Sec. 4. BOND. The Treasurer shall, if required by the Board of Directors, give to the Corporation such security for the faithful discharge of his duties as the Board may direct. Sec. 5. VACANCIES, HOW FILLED. All vacancies in any office, shall be filled by the Board of Directors without undue delay, at its regular meeting, or at a meeting specially called for that purpose. Sec. 6. COMPENSATION OF OFFICERS. The officers shall receive such salary or compensation as may be determined by the Board of Directors. Sec. 7. REMOVAL OF OFFICERS. The Board of Directors may remove any officer, by a majority vote, at any time, with or without cause. 7 8 ARTICLE IV. Sec. l. SEAL. The seal of the Corporation shall be as follows: ARTICLE V. CERTIFICATES OF STOCK Sec. l. DESCRIPTION OF STOCK CERTIFICATES. The certificates of stock shall be numbered and registered in the order in which they are issued. They shall be bound in a book and shall be issued in consecutive order therefrom, and in the margin thereof shall be entered the name of the person owning the shares therein represented, with the number of shares and the date thereof. Such certificates shall exhibit the holder's name and the number of shares. They shall be signed by the President or Vice-President, and countersigned by the Secretary or Treasurer and sealed with the seal of the Corporation. Sec. 2. TRANSFER OF STOCK. The stock of the Corporation shall be assigned and transferable on the books of the Corporation only by the person in whose name it appears on said books, or his legal representatives. In case of transfer by attorney, the power of attorney, duly executed and acknowledged, shall be deposited with the Secretary. In all cases of transfer, the former certificate must be surrendered up and canceled before a new certificate be issued. No transfer shall be made upon the books of the Corporation within ten days next preceding the annual meeting of the Shareholders. 8 9 ARTICLE VI. DIVIDENDS Sec. 1. WHEN DECLARED. The Board of Directors shall by vote declare dividends from the surplus profits of the Corporation whenever, in their opinion, the condition of the Corporation's affairs will render it expedient for such dividends to be declared. ARTICLE VII. BILLS, NOTES, ETC. Sec. 1. HOW MADE. All bills payable, notes, checks or other negotiable instruments of the Corporation shall be made in the name of the Corporation, and shall be signed by such officer or officers as the Board of Directors shall from time to time direct. No officer or agent of the Corporation, either singly or jointly with others, shall have the power to make any bill payable, note, check, draft or warrant or other negotiable instrument, or endorse the same in the name of the Corporation, or contract or cause to be contracted any debt or liability in the name or in behalf of the Corporation, except as herein expressly prescribed and provided. ARTICLE VIII. AMENDMENTS. Sec. l. HOW AMENDED. These By-Laws may be altered, amended, repealed or added to by an affirmative vote of the stockholders representing a majority of the whole capital stock, at an annual meeting or at a special meeting called for that purpose, provided that a written notice shall have been sent to each stockholder of record at his last known post office address, at least ten days before the date of such annual or special meeting, which notice shall state the alterations, amendments or changes which are proposed to be made in such By-Laws. Only such changes as have been specified in the notice shall be made. If, however, all the stockholders shall be present at any regular or 9 10 special meeting, these By-Laws may be amended by a unanimous vote, without any previous notice. 10 EX-3.10.1 19 CERT. OF INCORPORATION OF O-RAY HOLDINGS, INC. 1 Exhibit 3.10.1 CERTIFICATE OF INCORPORATION OF O-RAY HOLDINGS, INC. The undersigned, a natural person, for the purpose of organizing a corporation for conducting the business and promoting the purpose hereinafter stated, under the provisions and subject to the requirements of the laws of the State of Delaware (particularly Chapter 1, Title 8 of the Delaware Code and the acts amendatory thereof and supplemental thereto, and known, identified and referred to as the "General Corporation Law of the State of Delaware" or the "General Corporation Law"), hereby certifies that: FIRST: The name of the corporation (hereinafter referred to as the "Corporation") is: O-Ray Holdings, Inc. SECOND: The address, including street, number, city and county, of the registered office of the Corporation in the State of Delaware is 32 Loockerman Square, Suite L-100, City of Dover, 19904, County of Kent; and the name of the registered agent of the Corporation in the State of Delaware is The Prentice-Hall Corporation System, Inc. THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which Corporations may be organized under the General Corporation Law of the State of Delaware. FOURTH: The total number of shares of stock which the Corporation shall have authority to issue is One Thousand Five Hundred (1,500) shares, par value $.001 per share. All such shares are of one class and are shares of Common Stock. FIFTH: The name and the mailing address of the incorporator is as follows: NAME MAILING ADDRESS ---- --------------- Robert L. Lawrence c/o Kane Kessler, P.C. 1350 Avenue of the Americas, 26th Fl. New York, New York 10019 SIXTH: The Corporation is to have perpetual existence. SEVENTH: Whenever a compromise or arrangement is proposed between this Corporation and its creditors or any class of them and/or between this Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware 2 may, on the application in a summary way of this Corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for this Corporation under the provisions of Section 291 of Title 8 of the Delaware Code or on the application of any receiver or receivers appointed for this Corporation under Section 279 of Title 8 of the Delaware Code order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or the stockholders or class of stockholders of this Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this Corporation as a consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders of this Corporation, as the case may be, and also on this Corporation. EIGHTH: For the management of the business and for the conduct of the affairs of the Corporation, and in further definition, limitation and regulation of the powers of the Corporation and of its directors and of its stockholders or any class thereof, as the case may be, it is further provided: 1. The management of the business and the conduct of the affairs of the Corporation shall be bested in its Board of Directors. The number of directors which shall constitute the whole Board of Directors shall be fixed by, or in the manner provided in, the By-Laws. The phrase "whole Board" and the phrase "total number of directors" shall be deemed to have the same meaning to wit, the total number of directors which the Corporation would have if there were no vacancies. No election of directors need be by written ballot. 2. After the original or other By-laws of the Corporation have been adopted, amended, or repealed, as the case may be, in accordance with the provisions of Section 109 of the General Corporation Law of the State of Delaware, and, after the Corporation has received any payment for any of its stock, the power to adopt, amend, or repeal the By-laws of the Corporation may be exercised by the Board of Directors of the Corporation; provided, however, that any provision for the classification of Directors of the Corporation for staggered terms pursuant to the provisions of subsection (d) of Section 141 of the General Corporation Law of the State of Delaware shall be set forth in an initial By-law or in a By-law adopted by the stockholders entitled to vote of the Corporation unless provisions for such classification shall be set forth in this Certificate of Incorporation. 3. Whenever the Corporation shall be authorized to issue only one class of stock, each outstanding share shall entitle the holder thereof to notice of, and the right to vote at, any meeting of stockholders. Whenever the Corporation shall be authorized to issue more than one class of stock, no outstanding share of any class of stock which is denied voting power under the provisions of the 2 3 certificate of incorporation shall entitle the holder thereof to the right to vote at any meeting of stockholders except as the provisions of paragraph (2) of subsection (b) of Section 242 of the General Corporation Law of the State of Delaware shall otherwise require; provided, that no share of any such class which is otherwise denied voting power shall entitle the holder thereof to vote upon the increase or decrease in the number of authorized shares of said class. NINTH: The personal liability of the directors of the Corporation is hereby eliminated to the fullest extent permitted by paragraph (7) of subsection (b) of Section 102 of the General Corporation Law of the State of Delaware, as the same may be amended and supplemented. TENTH: The Corporation shall, to the fullest extent permitted by the General Corporation Law, as the same may be amended and supplemented, indemnify any and all persons whom it shall have the power to indemnify under the General Corporation Law from and against any and all of the expenses, liabilities or other matters referred to in or covered by the General Corporation Law, and the indemnification provided for herein shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any By-Law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. ELEVENTH: From time to time any of the provisions of this Certificate of Incorporation may be amended, altered or repealed, and other provisions authorized by the laws of the State of Delaware at the time in force may be added or inserted in the manner and at the time prescribed by said laws, and all rights at any time conferred upon the stockholders of the Corporation by this Certificate of Incorporation are granted subject to the provisions of this Article ELEVENTH. Signed on December 27, 1994. /S/ Robert L. Lawrence -------------------------------- ROBERT L. LAWRENCE, Incorporator 3 EX-3.10.2 20 BY-LAWS OF O-RAY HOLDINGS, INC. 1 Exhibit 3.10.2 BYLAWS OF O-RAY HOLDINGS, INC. (a Delaware corporation) --------------- ARTICLE I STOCKHOLDERS 1. CERTIFICATES REPRESENTING STOCK. Certificates representing stock in the corporation shall be signed by, or in the name of, the corporation by the Chairman or Vice-Chairman of the Board of Directors, if any, or by the President or a Vice-President and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary of the corporation. Any or all the signatures on any such certificate may be a facsimile. In the case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent, or registrar at the date of issue. Whenever the corporation shall be authorized to issue more than one class of stock or more than one series of any class of stock, and whenever the corporation shall issue any shares of its stock as partly paid stock, the certificates representing shares of any such class or series or of any such partly paid stock shall set forth thereon the statements prescribed by the General Corporation Law. Any restrictions on the transfer or registration of transfer of any shares of stock of any class or series shall be noted conspicuously on the certificate representing such shares. The corporation may issue a new certificate of stock or uncertificated shares in place of any certificate theretofore issued by it, alleged to have been lost, stolen, or destroyed, and the Board of Directors may require the owner of the lost, stolen, or destroyed certificate, or his legal representative, to give the corporation a bond sufficient to indemnify the corporation against any claim that may be made against it on account of the alleged loss, theft, or destruction of any such certificate or the issuance of any such new certificate or uncertificated shares. 2. UNCERTIFICATED SHARES. Subject to any conditions imposed by the General Corporation Law, the Board of Directors of the corporation may provide by resolution or resolutions that some or all of any or all classes or series of the stock of the corporation shall be uncertificated shares. Within a reasonable time after the issuance or transfer of any uncertificated 2 shares, the corporation shall send to the registered owner thereof any written notice prescribed by the General Corporation Law. 3. FRACTIONAL SHARE INTERESTS. The corporation may, but shall not be required to, issue fractions of a share. If the corporation does not issue fractions of a share, it shall (1) arrange for the disposition of fractional interests by those entitled thereto, (2) pay in cash the fair value of fractions of a share as of the time when those entitled to receive such fractions are determined, or (3) issue scrip or warrants in registered form (either represented by a certificate or uncertificated) or bearer form (represented by a certificate) which shall entitle the holder to receive a full share upon the surrender of such scrip or warrants aggregating a full share. A certificate for a fractional share or an uncertificated fractional share shall, but scrip or warrants shall not unless otherwise provided therein, entitle the holder to exercise voting rights, to receive dividends thereon, and to participate in any of the assets of the corporation in the event of liquidation. The Board of Directors may cause scrip or warrants to be issued subject to the conditions that they shall become void if not exchanged for certificates representing the full shares or uncertificated full shares before a specified date, or subject to the conditions that the shares for which scrip or warrants are exchangeable may be sold by the corporation and the proceeds thereof distributed to the holders of scrip or warrants, or subject to any other conditions which the Board of Directors may impose. 4. STOCK TRANSFERS. Upon compliance with provisions restricting the transfer or registration of transfer of shares of stock, if any, transfers or registration of transfers by the registered holder thereof, or by his attorney thereunto authorized by power of attorney duly executed and filed with the Secretary of the corporation or with a transfer agent or a registrar, if any, and, in the case of shares represented by certificates, on surrender of the certificate or certificates for such shares of stock properly endorsed and the payment of all taxes due thereon. 5. RECORD DATE FOR STOCKHOLDERS. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than sixty nor less than ten days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. In order that the corporation may determine the stockholders entitled to consent to corporate action in writing 3 without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than ten days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. If no record date has been fixed by the Board of Directors, the record date for determining the stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by the General Corporation Law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation by delivery to its registered office in the State of Delaware, its principal place of business, or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by the General Corporation Law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action. In order that the corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion, or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than sixty days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. 6. MEANING OF CERTAIN TERMS. As used herein in respect of the right to notice of a meeting of stockholders or a waiver thereof or to participate or vote thereat or to consent or dissent in writing in lieu of a meeting, as the case may be, the term "share" or "shares" or "share of stock" or "shares of stock" or "stockholder" or "stockholders" refers to an outstanding share or shares of stock and to a holder or holders of record of outstanding shares of stock when the corporation is authorized to issue only one class of shares of stock, and said reference is also intended to include any outstanding share or shares of stock and any holder or holders of record of outstanding shares of stock of any class upon which or upon whom the certificate of incorporation confers such rights where there are two or more classes or series of shares of stock or upon which or upon whom the General Corporation Law confers such rights notwithstanding that the certificate of incorporation may provide for more than one class or series of shares of stock, one or more of which are limited or denied such rights thereunder; provided, however, that no such right shall vest in the event of an increase or a decrease in the authorized number of shares of stock of any class or series which is otherwise denied voting rights under the provisions of the certificate of incorporation, except as any provision of law may otherwise required. 7. STOCKHOLDER MEETINGS - TIME. The annual meeting shall be held on the date and at the time fixed, from time to time, by the directors, provided, that the first annual meeting shall be held on a date within thirteen months after the organization of the corporation, and each successive annual meeting shall be held on a date within thirteen months after the date of the preceding annual meeting. A special meeting shall be held on the date and at the time fixed by the directors. 4 - PLACE. Annual meetings and special meetings shall be held at such place, within or without the State of Delaware, as the directors may, from time to time, fix. Whenever the directors shall fail to fix such place, the meeting shall be held at the registered office of the corporation in the State of Delaware. - CALL. Annual meetings and special meetings may be called by the directors or by any officer instructed by the directors to call the meeting. - NOTICE OR WAIVER OF NOTICE. Written notice of all meetings shall be given, stating the place, date, and hour of the meeting and stating the place within the city or other municipality or community at which the list of stockholders of the corporation may be examined. The notice of an annual meeting shall state that the meeting is called for the election of directors and for the transaction of other business which may properly come before the meeting, and shall (if any other action which could be taken at a special meeting is to be taken at such annual meeting) state the purpose or purposes. The notice of a special meeting shall in all instances state the purpose or purposes for which the meeting is called. The notice of any meeting shall also include, or be accompanied by, any additional statements, information, or documents prescribed by the General Corporation Law. Except as otherwise provided by the General Corporation Law, a copy of the notice of any meeting shall be given, personally or by mail, not less than ten days nor more than sixty days before the date of the meeting, unless the lapse of the prescribed period of time shall have been waived, and directed to each stockholder at his record address or at such other address which he may have furnished by request in writing to the Secretary of the corporation. Notice by mail shall be deemed to be given when deposited, with postage thereon prepaid, in the United States Mail. If a meeting is adjourned to another time, not more than thirty days hence, and/or to another place, and if an announcement of the adjourned time and/or place is made at the meeting, it shall not be necessary to give notice of the adjourned meeting unless the directors, after adjournment, fix a new record date for the adjourned meeting. Notice need not be given to any stockholder who submits a written waiver of notice signed by him before or after the time stated therein. Attendance of a stockholder at a meeting of stockholders shall constitute a waiver of notice of such meeting, except when the stockholder attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice. - STOCKHOLDER LIST. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city or other municipality or community where the meeting is to be held, which place shall be specified in the notice of the meeting, or if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. 5 The stock ledger shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, the list required by this section or the books of the corporation, or to vote at any meeting of stockholders. - CONDUCT OF MEETING. Meetings of the stockholders shall be presided over by one of the following officers in the order of seniority and if present and acting - the Chairman of the Board, if any, the Vice-Chairman of the Board, if any, the President, a Vice-President, or, if none of the foregoing is in office and present and acting, by a chairman to be chosen by the stockholders. The Secretary of the corporation, or in his absence, an Assistant Secretary, shall act as secretary of every meeting, but if neither the Secretary nor an Assistant Secretary is present the Chairman of the meeting shall appoint a secretary of the meeting. - PROXY REPRESENTATION. Every stockholder may authorize another person or persons to act for him by proxy in all matters in which a stockholder is entitled to participate, whether by waiving notice of any meeting, voting or participating at a meeting, or expressing consent or dissent without a meeting. Every proxy must be signed by the stockholder or by his attorney-in fact. No proxy shall be voted or acted upon after three years from its date unless such proxy provides for a longer period. A duly executed proxy shall be irrevocable if it states that it is irrevocable and, if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A proxy may be made irrevocable regardless of whether the interest with which it is coupled is an interest in the stock itself or an interest in the corporation generally. - INSPECTORS. The directors, in advance of any meeting, may, but need not, appoint one or more inspectors of election to act at the meeting or any adjournment thereof. If an inspector or inspectors are not appointed, the person presiding at the meeting may, but need not, appoint one or more inspectors. In case any person who may be appointed as an inspector fails to appear or act, the vacancy may be filled by appointment made by the directors in advance of the meeting or at the meeting by the person presiding thereat. Each inspector, if any, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspectors at such meeting with strict impartiality and according to the best of his ability. The inspectors, if any, shall determine the number of shares of stock outstanding and the voting power of each, the shares of stock represented at the meeting, the existence of a quorum, the validity and effect of proxies, and shall receive votes, ballots, or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots, or consents, determine the result, and do such acts as are proper to conduct the election or vote with fairness to all stockholders. On request of the person presiding at the meeting, the inspector or inspectors, if any, shall make a report in writing of any challenge, question, or matter determined by him or them and execute a certificate of any fact found by him or them. - QUORUM. The holders of a majority of the outstanding shares of stock shall constitute a quorum at a meeting of stockholders for the transaction of any business. The stockholders present may adjourn the meeting despite the absence of a quorum. - VOTING. Each share of stock shall entitle the holders thereof to one vote. Directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy 6 at the meeting and entitled to vote on the election of directors. Any other action shall be authorized by a majority of the votes cast except where the General Corporation Law prescribed a different percentage of votes and/or a different exercise of voting power, and except as may be otherwise prescribed by the provisions of the certificate of incorporation and these Bylaws. In the election of directors, and for any other action, voting need not be by ballot. 8. STOCKHOLDER ACTION WITHOUT MEETINGS. An action required by the General Corporation Law to be taken at any annual or special meeting of stockholders, or any action which may be taken at any annual or special meeting of stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. Action taken pursuant to this paragraph shall be subject to the provisions of Section 228 of the General Corporation Law. ARTICLE II DIRECTORS 1. FUNCTIONS AND DEFINITION. The business and affairs of the corporation shall be managed by or under the director of the Board of Directors of the corporation. The Board of Directors shall have the authority to fix the compensation of the members thereof. The use of the phrase "whole board" herein refers to the total number of directors which the corporation would have if there were no vacancies. 2. QUALIFICATIONS AND NUMBER. A director need not be a stockholder, a citizen of the United States, or a resident of the State of Delaware. The initial Board of Directors shall consist of 3 persons. Thereafter the number of directors constituting the whole board shall be at least one. Subject to the foregoing limitation and except for the first Board of Directors, such number may be fixed from time to time by action of the stockholders or of the directors, or, if the number is not fixed, the number shall be 3. The number of directors may be increased or decreased by action of the stockholders or of the directors. 3. ELECTION AND TERM. The first Board of Directors, unless the members thereof shall have been named in the certificate of incorporation, shall be elected by the incorporator or incorporators and shall hold office until the first annual meeting of stockholders and until their successors are elected and qualified or until their earlier resignation or removal. Any director may resign at any time upon written notice to the corporation. Thereafter, directors who are elected at an annual meeting of stockholders, and directors who are elected in the interim to fill vacancies and newly created directorships, shall hold office until the next annual meeting of stockholders and until their successors are elected and qualified or until their earlier resignation or removal. Except as the General Corporation Law may otherwise require, in the interim between annual meetings of stockholders or of special meetings of stockholders called for the election of 7 directors and/or for the removal of one or more directors and for the filling of any vacancy in that connection, newly created directorships and any vacancies in the Board of Directors, including unfilled vacancies resulting from the removal of directors for cause or without cause, may be filled by the vote of a majority of the remaining directors then in office, although less than a quorum, or by the sole remaining director. 4. MEETINGS. - TIME. Meetings shall be held at such time as the Board shall fix, except that the first meeting of a newly elected Board shall be held as soon after its election as the directors may conveniently assemble. - PLACE. Meetings shall be held at such place within or without the State of Delaware as shall be fixed by the Board. - CALL. No call shall be required for regular meetings for which the time and place have been fixed. Special meetings may be called by or at the direction of Chairman of the Board, if any, the Vice-Chairman of the Board, if any, of the President, or of a majority of the directors in office. - NOTICE OR ACTUAL OR CONSTRUCTIVE WAIVER. No notice shall be required for regular meetings for which the time and place have been fixed., Written, oral, or any other mode of notice of the time and place shall be given for special meetings in sufficient time for the convenient assembly of the directors thereat. Notice need not be given to any director or to any member of a committee of directors who submits as written waiver of notice signed by him before or after the time stated therein. Attendance of any such person at a meeting shall constitute a waiver of notice of such meeting, except when he attends a meeting for the express purpose of objection, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the directors need be specified in any written waiver of notice. - QUORUM AND ACTION. A majority of the whole Board shall constitute a quorum except when a vacancy or vacancies prevents such majority, whereupon a majority of the directors in office shall constitute a quorum, provided, that such majority shall constitute at least one-third of the whole Board. A majority of the directors present, whether or not a quorum is present, may adjourn a meeting to another time and place. Except as herein otherwise provided, and except as otherwise provided by the General Corporation Law, the vote of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board. The quorum and voting provisions herein stated shall not be construed as conflicting with any provisions of the General Corporation Law and these Bylaws which govern a meeting of directors held to fill vacancies and newly created directorships in the Board or action of disinterested directors. Any member or members of the Board of Directors or of any committee designated by the Board, may participate in a meeting of the Board, or any such committee, as the case may be, by 8 means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. - CHAIRMAN OF THE MEETING. The Chairman of the Board, if any and if present and acting, shall preside at all meetings. Otherwise, the Vice-Chairman of the Board, if any and if present and acting, or the President, if present and acting, or any other director chosen by the Board, shall preside. 5. REMOVAL OF DIRECTORS. Except as may otherwise by provided by the General Corporation Law, any director or the entire Board of Directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors. 6. COMMITTEES. The Board of Directors may, be resolution passed by a majority of the whole Board, designate one or more committees, each committee to consist of one or more of the directors of the corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of any member of any such committee or committees, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board, shall have and may exercise the powers and authority of the Board of Directors in the management of the business and affairs of the corporation with the exception of any authority the delegation of which is prohibited by Section 141 of the General Corporation Law, and may authorize the seal of the corporation to be affixed to all papers which may require it. 7. WRITTEN ACTION. Any action required or permitted to be taken at any meeting of the Board of Directors or any committee thereof may be taken without a meeting if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. ARTICLE III OFFICERS The officers of the corporation shall consist of a President, a Secretary, a Treasurer, and, if deemed necessary, expedient, or desirable by the Board of Directors, a Chairman of the Board, a Vice-Chairman of the Board, an Executive Vice-President, one or more other Vice-Presidents, one or more Assistant Secretaries, one or more Assistant Treasurers, and such other officers with such titles as the resolution of the Board of Directors choosing them shall designate. Except as may otherwise be provided in the resolution of the Board of Directors choosing him, no officer other than the Chairman or Vice-Chairman of the Board, if any, need be a director. Any number of offices may be held by the same person, as the directors may determine. 9 Unless otherwise provided in the resolution choosing him, each officer shall be chosen for a term which shall continue until the meeting of the Board of Directors following the next annual meeting of stockholders and until his successor shall have been chosen and qualified. All officers of the corporation shall have such authority and perform such duties in the management and operation of the corporation as shall be prescribed in the resolutions of the Board of Directors designating and choosing such officers and prescribing their authority and duties, and shall have such additional authority and duties as are incident to their office except to the extent that such resolutions may be inconsistent therewith. The Secretary or an Assistant Secretary of the corporation shall record all of the proceedings of all meetings and actions in writing of stockholders, directors, and committees of directors, and shall exercise such additional authority and perform such additional duties as the Board shall assign to him. Any officer may be removed, with or without cause, by the Board of Directors. Any vacancy in any office may be filled by the Board of Directors. ARTICLE IV CORPORATE SEAL The corporate seal shall be in such form as the Board of Directors shall prescribe. ARTICLE V FISCAL YEAR The fiscal year of the corporation shall be fixed, and shall be subject to change, by the Board of Directors. ARTICLE VI CONTROL OVER BYLAWS Subject to the provisions of the certificate of incorporation and the provisions of the General Corporation Laws, the power to amend, alter, or repeal these Bylaws and to adopt new Bylaws may be exercised by the Board of Directors or by the stockholders. EX-4.1 21 INDENTURE DATED JULY 21, 1998 1 EXHIBIT 4.1 EXECUTION COPY - -------------------------------------------------------------------------------- AAI.FOSTERGRANT, INC. SERIES A AND SERIES B 10 3/4 % SENIOR NOTES DUE 2006 INDENTURE ---------- Dated as of July 21, 1998 ---------- ---------- IBJ Schroder Bank & Trust Company Trustee ---------- - -------------------------------------------------------------------------------- 2 CROSS-REFERENCE TABLE* (a) TRUST INDENTURE ACT SECTION INDENTURE SECTION 310(a)(1).............................................................. 7.10 (a)(2) ................................................................ 7.10 (a)(3)................................................................. N.A. (a)(4)................................................................. N.A. (a)(5)................................................................. 7.10 (i)(b)................................................................. 7.10 (ii)(c)................................................................ N.A. 311(a)................................................................. 7.11 (b).................................................................... 7.11 (iii(c)................................................................ N.A. 312(a)................................................................. 2.05 (b).................................................................... 10.02 (iv)(c)................................................................ 10.02 313(a)................................................................. 7.06 (b)(2)................................................................. 7.07 (v)(c)................................................................. 7.06 (vi)(d)................................................................ 7.06 314(a)................................................................. 4.03 (c)(1)................................................................. 10.03 (c)(2)................................................................. 10.03 (c)(3)................................................................. N.A. (vii)(e)............................................................... 10.04 (f).................................................................... NA 315 (a)................................................................ 7.01 (b).................................................................... 7.05 (A)(c)................................................................. 7.01 (d).................................................................... 7.01 (e).................................................................... 6.11 316(a)(last sentence).................................................. 2.09 (a)(1)(A).............................................................. 6.05 (a)(1)(B).............................................................. 6.04 (a)(2)................................................................. N.A. (b).................................................................... 6.07 (B)(c)................................................................. 2.12 317(a)(1).............................................................. 6.08 (a)(2)................................................................. 6.09 (b) ................................................................... 2.04 318(a)................................................................. 10.01 (b).................................................................... N.A. (c).................................................................... 10.01 N.A. means not applicable. *This Cross-Reference Table is not part of the Indenture. 2 3 TABLE OF CONTENTS PAGE ---- ARTICLE 1. DEFINITIONS AND INCORPORATION BY REFERENCE....................... 1 SECTION 1.01. DEFINITIONS................................................... 1 SECTION 1.02. OTHER DEFINITIONS............................................. 14 SECTION 1.03. PROVISIONS OF THE TIA......................................... 15 SECTION 1.04. RULES OF CONSTRUCTION......................................... 15 ARTICLE 2. THE NOTES........................................................ 16 SECTION 2.01. FORM AND DATING............................................... 16 SECTION 2.02. EXECUTION AND AUTHENTICATION.................................. 17 SECTION 2.03. REGISTRAR AND PAYING AGENT.................................... 18 SECTION 2.04. PAYING AGENT TO HOLD MONEY IN TRUST........................... 18 SECTION 2.05. HOLDER LISTS.................................................. 19 SECTION 2.06. TRANSFER AND EXCHANGE......................................... 19 SECTION 2.07. REPLACEMENT NOTES............................................. 31 SECTION 2.08. OUTSTANDING NOTES............................................. 31 SECTION 2.09. TREASURY NOTES................................................ 31 SECTION 2.10. TEMPORARY NOTES............................................... 32 SECTION 2.11. CANCELLATION.................................................. 32 SECTION 2.12. DEFAULTED INTEREST............................................ 32 ARTICLE 3. REDEMPTION AND PREPAYMENT........................................ 32 SECTION 3.01. NOTICES TO TRUSTEE............................................ 32 SECTION 3.02. SELECTION OF NOTES TO BE REDEEMED............................. 32 SECTION 3.03. NOTICE OF REDEMPTION.......................................... 33 SECTION 3.04. EFFECT OF NOTICE OF REDEMPTION................................ 34 SECTION 3.05. DEPOSIT OF REDEMPTION PRICE................................... 34 SECTION 3.06. NOTES REDEEMED IN PART........................................ 34 SECTION 3.07. OPTIONAL REDEMPTION........................................... 34 SECTION 3.08. MANDATORY REDEMPTION.......................................... 35 SECTION 3.09. OFFER TO PURCHASE BY APPLICATION OF EXCESS PROCEEDS........... 35 ARTICLE 4. COVENANTS........................................................ 36 SECTION 4.01. PAYMENT OF NOTES.............................................. 37 SECTION 4.02. MAINTENANCE OF OFFICE OR AGENCY............................... 37 SECTION 4.03. REPORTS....................................................... 37 SECTION 4.04. COMPLIANCE CERTIFICATE........................................ 38 SECTION 4.05. TAXES......................................................... 38 SECTION 4.06. STAY, EXTENSION AND USURY LAWS................................ 39 SECTION 4.07. RESTRICTED PAYMENTS........................................... 39 SECTION 4.08. DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES................................................ 40 SECTION 4.09. INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK............................................. 41 SECTION 4.10. ASSET SALES................................................... 43 SECTION 4.11. TRANSACTIONS WITH AFFILIATES.................................. 44 i 4 SECTION 4.12. LIENS......................................................... 45 SECTION 4.13. CORPORATE EXISTENCE........................................... 45 SECTION 4.14. OFFER TO REPURCHASE UPON CHANGE OF CONTROL.................... 45 SECTION 4.15. LIMITATION ON SALE AND LEASEBACK TRANSACTIONS................. 46 SECTION 4.16. LIMITATION ON ISSUANCES AND SALES OF EQUITY INTERESTS IN WHOLLY OWNED SUBSIDIARIES................................ 46 SECTION 4.17. PAYMENTS FOR CONSENT.......................................... 47 SECTION 4.18. ADDITIONAL SUBSIDIARY GUARANTEES.............................. 47 ARTICLE 5. SUCCESSORS....................................................... 47 SECTION 5.01. MERGER, CONSOLIDATION, OR SALE OF ASSETS...................... 47 SECTION 5.02. SUCCESSOR CORPORATION SUBSTITUTED............................. 48 ARTICLE 6. DEFAULTS AND REMEDIES............................................ 48 SECTION 6.01. EVENTS OF DEFAULT............................................. 48 SECTION 6.02. ACCELERATION.................................................. 49 SECTION 6.03. OTHER REMEDIES................................................ 50 SECTION 6.04. WAIVER OF PAST DEFAULTS....................................... 50 SECTION 6.05. CONTROL BY MAJORITY........................................... 51 SECTION 6.06. LIMITATION ON SUITS........................................... 51 SECTION 6.07. RIGHTS OF HOLDERS OF NOTES TO RECEIVE PAYMENT................. 51 SECTION 6.08. COLLECTION SUIT BY TRUSTEE.................................... 51 SECTION 6.09. TRUSTEE MAY FILE PROOFS OF CLAIM.............................. 52 SECTION 6.10. PRIORITIES.................................................... 52 SECTION 6.11. UNDERTAKING FOR COSTS......................................... 52 ARTICLE 7. TRUSTEE ......................................................... 53 SECTION 7.01. DUTIES OF TRUSTEE............................................. 53 SECTION 7.02. RIGHTS OF TRUSTEE............................................. 54 SECTION 7.03. INDIVIDUAL RIGHTS OF TRUSTEE.................................. 54 SECTION 7.04. TRUSTEE'S DISCLAIMER.......................................... 54 SECTION 7.05. NOTICE OF DEFAULTS............................................ 55 SECTION 7.06. REPORTS BY TRUSTEE TO HOLDERS OF THE NOTES.................... 55 SECTION 7.07. COMPENSATION AND INDEMNITY.................................... 55 SECTION 7.08. REPLACEMENT OF TRUSTEE........................................ 56 SECTION 7.09. SUCCESSOR TRUSTEE BY MERGER, ETC.............................. 57 SECTION 7.10. ELIGIBILITY; DISQUALIFICATION................................. 57 SECTION 7.11. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY............. 57 ARTICLE 8. LEGAL DEFEASANCE AND COVENANT DEFEASANCE......................... 57 SECTION 8.01. OPTION TO EFFECT LEGAL DEFEASANCE OR COVENANT DEFEASANCE.................................................. 57 SECTION 8.02. LEGAL DEFEASANCE AND DISCHARGE................................ 58 SECTION 8.03. COVENANT DEFEASANCE........................................... 58 SECTION 8.04. CONDITIONS TO LEGAL OR COVENANT DEFEASANCE.................... 58 SECTION 8.05. DEPOSITED MONEY AND GOVERNMENT SECURITIES TO BE HELD IN TRUST; OTHER MISCELLANEOUS PROVISIONS............... 60 SECTION 8.06. REPAYMENT TO COMPANY.......................................... 60 SECTION 8.07. REINSTATEMENT................................................. 60 ii 5 ARTICLE 9. AMENDMENT, SUPPLEMENT AND WAIVER................................. 61 SECTION 9.01. WITHOUT CONSENT OF HOLDERS OF NOTES........................... 61 SECTION 9.02. WITH CONSENT OF HOLDERS OF NOTES.............................. 61 SECTION 9.03. COMPLIANCE WITH TRUST INDENTURE ACT........................... 63 SECTION 9.04. REVOCATION AND EFFECT OF CONSENTS............................. 63 SECTION 9.05. NOTATION ON OR EXCHANGE OF NOTES.............................. 63 SECTION 9.06. TRUSTEE TO SIGN AMENDMENTS, ETC............................... 63 ARTICLE 10. SUBSIDIARY GUARANTEES........................................... 63 SECTION 10.01. GUARANTEE.................................................... 64 SECTION 10.02. LIMITATION ON GUARANTOR LIABILITY............................ 64 SECTION 10.03. EXECUTION AND DELIVERY OF SUBSIDIARY GUARANTEE............... 65 SECTION 10.04. GUARANTORS MAY CONSOLIDATE, ETC., ON CERTAIN TERMS........... 65 SECTION 10.05. RELEASES FOLLOWING SALE OF ASSETS............................ 66 ARTICLE 11. MISCELLANEOUS................................................... 66 SECTION 11.01. TRUST INDENTURE ACT CONTROLS................................. 66 SECTION 11.02. NOTICES...................................................... 66 SECTION 11.03. COMMUNICATION BY HOLDERS OF NOTES WITH OTHER HOLDERS OF NOTES........................................... 68 SECTION 11.04. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT........... 68 SECTION 11.05. STATEMENTS REQUIRED IN CERTIFICATE OR OPINION................ 68 SECTION 11.06. RULES BY TRUSTEE AND AGENTS.................................. 68 SECTION 11.07. NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS................................. 68 SECTION 11.08. GOVERNING LAW................................................ 69 SECTION 11.09. NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS................ 69 SECTION 11.10. SUCCESSORS................................................... 69 SECTION 11.11. SEVERABILITY................................................. 69 SECTION 11.12. COUNTERPART ORIGINALS........................................ 69 SECTION 11.13. TABLE OF CONTENTS, HEADINGS, ETC............................. 69 EXHIBITS Exhibit A FORM OF NOTE Exhibit B FORM OF CERTIFICATE OF TRANSFER Exhibit C FORM OF CERTIFICATE OF EXCHANGE Exhibit D FORM OF CERTIFICATE OF ACQUIRING INSTITUTIONAL ACCREDITED INVESTOR Exhibit E FORM OF SUBSIDIARY GUARANTEE Exhibit F FORM OF SUPPLEMENTAL INDENTURE iii 6 INDENTURE dated as of July 21, 1998 among AAi.FosterGrant, Inc., a Rhode Island corporation (the "Company"), the guarantors listed on the signature pages hereto (the "Guarantors") and IBJ Schroder Bank & Trust Company, as trustee (the "Trustee"). The Company, the Guarantors and the Trustee agree as follows for the benefit of each other and for the equal and ratable benefit of the Holders of the 10 3/4 % Series A Senior Notes due 2006 (the "Series A Notes") and the 10 3/4 % Series B Senior Notes due 2006 (the "Series B Notes" and together, with the Series A Notes, the "Notes"): ARTICLE 1. DEFINITIONS AND INCORPORATION BY REFERENCE SECTION 1.01. DEFINITIONS. "144A Global Note" means a global note in the form of Exhibit A-1 hereto bearing the Global Note Legend and the Private Placement Legend and deposited with or on behalf of, and registered in the name of, the Depositary or its nominee that will be issued in a denomination equal to the outstanding principal amount of the Notes sold in reliance on Rule 144A. "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 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 Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien encumbering any asset acquired by such specified Person. "Additional Notes" means up to $75.0 million in aggregate principal amount of Notes (other than the Initial Notes) issued under this Indenture in accordance with Sections 2.02 and 4.09 hereof. "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 Stock of a Person shall be deemed to be control. "Agent" means any Registrar, Paying Agent or co-registrar. "Applicable Procedures" means, with respect to any transfer or exchange of or for beneficial interests in any Global Note, the rules and procedures of the Depositary, Euroclear and Cedel that apply to such transfer or exchange. "Asset Sale" means (i) the sale, lease, conveyance or other disposition of any assets or rights (including, without limitation, by way of a sale and leaseback) other than sales of inventory in the ordinary course of business (provided that the sale, conveyance or other disposition of all or substantially all of the assets of the Company and its Subsidiaries taken as a whole will be governed by the provisions 7 of Section 4.14 hereof and/or Section 5.01 hereof and not by Section 4.10 hereof, and (ii) the issue or sale by the Company or any of its Subsidiaries of Equity Interests of any of the Company's Subsidiaries, in the case of either clause (i) or (ii), whether in a single transaction or a series of related transactions (a) that have a fair market value in excess of $1.0 million or (b) for net proceeds in excess of $1.0 million. Notwithstanding the foregoing, the following items shall not be deemed to be Asset Sales: (i) a transfer of assets by the Company to a Wholly Owned Subsidiary or by a Wholly Owned Subsidiary to the Company or to another Wholly Owned Subsidiary, (ii) an issuance of Equity Interests by a Wholly Owned Subsidiary to the Company or to another Wholly Owned Subsidiary, and (iii) a Restricted Payment that is permitted by Section 4.07 hereof. "Attributable Debt" in respect of a sale and leaseback transaction means, at the time of determination, the present value (discounted at the rate of interest implicit in such transaction, determined in accordance with GAAP) of the obligation of the lessee for net rental payments during the remaining term of the lease included in such sale and leaseback transaction (including any period for which such lease has been extended or may, at the option of the lessor, be extended). "Bankruptcy Law" means Title 11, U.S. Code or any similar federal or state law for the relief of debtors. "Board of Directors" means the Board of Directors of the Company, or any authorized committee of the Board of Directors. "Business Day" means any day other than a Legal Holiday. "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 or limited liability company, partnership or membership 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. "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 (provided that the full faith and credit of the United States is pledged in support thereof) having maturities of not more than six months from the date of acquisition, (iii) certificates of deposit and eurodollar time deposits with maturities of six months or less from the date of acquisition, bankers' acceptances with maturities not exceeding six months and overnight bank deposits, in each case with any lender party to the Senior Credit Facility or with any domestic commercial bank having capital and surplus in excess of $500.0 million and a Thompson Bank Watch Rating of "B" 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, (v) commercial paper having the highest rating obtainable from Moody's Investors Service, Inc. or Standard & Poor's Corporation and in each case maturing within six months after the date of acquisition and (vi) money market funds at least 95% of the assets of which constitute Cash Equivalents of the kinds described in clauses (i)--(v) of this definition. 2 8 "Cedel" means Cedel Bank, SA. "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 related transactions, of all or substantially all of the assets of the Company and its Subsidiaries taken as a whole to any "person" (as such term is used in Section 13(d)(3) of the Exchange Act) other than a Principal or a Related Party; (ii) the adoption of a plan relating to the liquidation or dissolution of the Company; (iii) the consummation of any transaction (including, without limitation, any merger or consolidation) the result of which is that any "person" (as defined above) other than the Principals, their Related Parties or a Permitted Group becomes the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except that a person shall be deemed to have "beneficial ownership" of all securities that such person has the right to acquire, whether such right is currently exercisable or is exercisable only upon the occurrence of a subsequent condition), directly or indirectly, of more than 35% of the Voting Stock of the Company (measured by voting power rather than number of shares); or (iv) the first day on which a majority of the members of the Board of Directors of the Company are not Continuing Directors. "Company" means AAi.FosterGrant, Inc., and any and all successors thereto. "Consolidated Assets" means, with respect to any Person as of any date, the total assets of such Person and its consolidated Subsidiaries as of such date, calculated on a consolidated basis in accordance with GAAP. "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 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 Subsidiaries for such period, whether paid or accrued and whether or not capitalized (including, without limitation, amortization of debt issuance costs and original issue discount, noncash interest payments, the interest component of any deferred payment obligations, the interest component of all payments associated with Capital Lease Obligations, imputed interest with respect to Attributable Debt, 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 expenses that were paid in a prior period) and other noncash expenses (excluding any such noncash expense to the extent that it represents an accrual of or reserve for cash expenses in any future period or amortization of a prepaid cash expense that was paid in a prior period) of such Person and its Subsidiaries for such period to the extent that such depreciation, amortization and other noncash expenses were deducted in computing such Consolidated Net Income, plus (v) Restructuring Charges, minus (vi) noncash items increasing such Consolidated Net Income for such period (other than items that were accrued in the ordinary course of business), in each case, on a consolidated basis and determined in accordance with GAAP. Notwithstanding the foregoing, the provision for taxes on the income or profits of, and the depreciation and amortization and other noncash expenses of, a Subsidiary of the referent Person shall be added to Consolidated Net Income to compute Consolidated Cash Flow only to the extent that a corresponding amount would be permitted at the date of determination to be dividended to the Company by such Subsidiary without prior governmental approval (that has not been obtained), and 3 9 without direct or indirect restriction pursuant to the terms of its charter and all agreements, instruments, judgments, decrees, orders, statutes, rules and governmental regulations applicable to that Subsidiary or its shareholders. "Consolidated Net Income" means, with respect to any Person for any period, the aggregate of the Net Income of such Person and its Subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP; provided that (i) the Net Income (but not loss) of any Person that is not a Subsidiary or that is accounted for by the equity method of accounting 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 Subsidiary thereof, (ii) the Net Income of any Subsidiary shall be excluded to the extent that the declaration or payment of dividends or similar distributions by that Subsidiary of that Net Income is not at the date of determination permitted without any prior governmental approval (that has not been obtained) or, directly or indirectly, by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Subsidiary or its shareholders, (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 and (iv) the cumulative effect of a change in accounting principles shall be excluded. "Consolidated Net Worth" means, with respect to any Person as of any date, the sum of (i) the consolidated equity of the common shareholders of such Person and its consolidated Subsidiaries as of such date plus (ii) the respective amounts reported on such Person's balance sheet as of such date with respect to any series of preferred stock (other than Disqualified Stock) that by its terms is not entitled to the payment of dividends unless such dividends may be declared and paid only out of net earnings in respect of the year of such declaration and payment, but only to the extent of any cash received by such Person upon issuance of such preferred stock, less (a) all write-ups (other than write-ups resulting from foreign currency translations and write-ups of tangible assets of a going concern business made within 12 months after the acquisition of such business) subsequent to the date of this Indenture in the book value of any asset owned by such Person or a consolidated Subsidiary of such Person, (b) all investments as of such date in unconsolidated Subsidiaries and in Persons that are not Subsidiaries (except, in each case, Permitted Investments) and (c) all unamortized debt discount and expense and unamortized deferred charges as of such date, all of the foregoing determined in accordance with GAAP. "Continuing Directors" means, as of any date of determination, any member of the Board of Directors of the Company who (i) was a member of such Board of Directors on the date of this Indenture or (ii) was nominated for election or elected to such Board of Directors with the approval of a majority of the Continuing Directors who were members of such Board at the time of such nomination or election. "Corporate Trust Office of the Trustee" shall be at the address of the Trustee specified in Section 11.02 hereof or such other address as to which the Trustee may give notice to the Company. "Credit Facilities" means, with respect to the Company or a Foreign Subsidiary, one or more debt facilities (including, without limitation, the Senior Credit Facility) or commercial paper facilities, in each case with banks or other institutional lenders providing for revolving credit loans, term loans, receivables financing (including through the sale of receivables to such lenders or to special purpose entities formed to borrow from such lenders against such receivables) or letters of credit, in each case, as amended, restated, modified, renewed, refunded, replaced or refinanced in whole or in part from time to time. Indebtedness under Credit Facilities outstanding on the date on which Notes are first issued and authenticated under this Indenture shall be deemed to have been incurred on such date in reliance on the exception provided by clause (i) of Section 4.09(b) hereof. 4 10 "Custodian" means the Trustee, as custodian with respect to the Notes in global form, or any successor entity thereto. "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. "Definitive Note" means a certificated Note registered in the name of the Holder thereof and issued in accordance with Section 2.06 hereof, in the form of Exhibit A-1 hereto except that such Note shall not bear the Global Note Legend and shall not have the "Schedule of Exchanges of Interests in the Global Note" attached thereto. "Depositary" means, with respect to the Notes issuable or issued in whole or in part in global form, the Person specified in Section 2.03 hereof as the Depositary with respect to the Notes, and any and all successors thereto appointed as depositary hereunder and having become such pursuant to the applicable provision of this Indenture. "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, in each case at the option of the holder thereof), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable at the option of the Holder thereof, in whole or in part, on or prior to the date that is 91 days after the date on which the Notes mature; provided, however, that any Capital Stock that would constitute Disqualified Stock solely because the holders thereof have the right to require the Company to repurchase such Capital Stock upon the occurrence of a Change of Control or an Asset Sale shall not constitute Disqualified Stock if the terms of such Capital Stock provide that the Company may not repurchase or redeem any such Capital Stock pursuant to such provisions unless such repurchase or redemption complies with Section 4.07 hereof. "Domestic Subsidiary" means, with respect to the Company, any Subsidiary of the Company that was formed under the laws of the United States of America or that guarantees or otherwise provides credit support for any Indebtedness of the Company. "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). "Euroclear" means Morgan Guaranty Trust Company of New York, Brussels office, as operator of the Euroclear system. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Exchange Notes" means the Notes issued in the Exchange Offer pursuant to Section 2.06(f) hereof. "Exchange Offer" has the meaning set forth in the Registration Rights Agreement. "Exchange Offer Registration Statement" has the meaning set forth in the Registration Rights Agreement. "Existing Indebtedness" means Indebtedness of the Company and its Subsidiaries (other than Indebtedness under the Senior Credit Facility) in existence on the date of this Indenture (calculated 5 11 in the case of contingent Indebtedness on the basis of the maximum amount due under agreements existing as of the date of this Indenture), until such Indebtedness is repaid. "Existing Leases" means (i) that certain Lease effective January 1, 1998 by and between Sunrise Properties LLC and the Company, covering the premises at 4 Warren Avenue, North Providence, Rhode Island; (ii) that certain Lease effective January 1, 1998 by and between 299 Carpenter Street Associates, LLC and the Company, covering the premises located at 299 Carpenter Street, Providence, Rhode Island; and (iii) that certain Standard Net Commercial Lease dated December 11, 1996, by and between Foster Grant Group L.P. and OCR Management Corporation, covering the Texas Property. "Fantasma Agreement" means and includes that certain Member Agreement dated as of June 23, 1998 by and among the Company, Roger D. Dreyer and Houdini Capital LTD and that certain Member Agreement dated as of June 23, 1998 by and between the Company and Paul Michaels. "Fixed Charges" means, with respect to any Person for any period, the sum, without duplication, of (i) the consolidated interest expense of such Person and its Subsidiaries for such period, whether paid or accrued (including, without limitation, amortization of debt issuance costs and original issue discount, non-cash interest payments, the interest component of any deferred payment obligations, the interest component of all payments associated with Capital Lease Obligations, imputed interest with respect to Attributable Debt, 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 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 Subsidiaries or secured by a Lien on assets of such Person or one of its Subsidiaries (whether or not such Guarantee or Lien is called upon) and (iv) the product of (a) all dividend payments, whether or not in cash, on any series of preferred stock of such Person or any of its Subsidiaries, other than dividend payments on Equity Interests payable solely in Equity Interests of the Company (other than Disqualified Stock) or to the Company or a Subsidiary of the Company, times (b) a fraction, the numerator of which is one and the denominator of which is one minus the then current combined federal, state and local statutory tax rate of such Person, expressed as a decimal, in each case, on a consolidated basis and in accordance with GAAP. "Fixed Charge Coverage Ratio" means with respect to any Person for any period, the ratio of the Consolidated Cash Flow of such Person for such period to the Fixed Charges of such Person for such period. In the event that the referent Person or any of its Subsidiaries incurs, assumes, Guarantees or redeems any Indebtedness (other than revolving credit borrowings) or issues or redeems preferred stock subsequent to the commencement of the period for which the Fixed Charge Coverage Ratio is being calculated but 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 addition, for purposes of making the computation referred to above, (i) acquisitions that have been made by the Company or any of its Subsidiaries, including through mergers or consolidations and including any related financing transactions, during the four-quarter reference period or subsequent to such reference period and on or prior to the Calculation Date shall be deemed to have occurred on the first day of the four-quarter reference period and Consolidated Cash Flow for such reference period shall be calculated without giving effect to clause (iii) of the proviso set forth in the definition of Consolidated Net Income, and (ii) the Consolidated Cash Flow attributable to discontinued operations, as determined in accordance with GAAP, and operations or businesses disposed of prior to the Calculation Date, shall be 6 12 excluded, and (iii) the Fixed Charges attributable to discontinued operations, as determined in accordance with GAAP, and operations or businesses disposed of 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 referent Person or any of its Subsidiaries following the Calculation Date. "Foreign Subsidiary" means any Subsidiary of the Company that is not a Domestic Subsidiary. "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 this Indenture. "Global Notes" means, individually and collectively, each of the Restricted Global Notes and the Unrestricted Global Notes, in the form of Exhibit A-1 hereto issued in accordance with Section 2.01, 2.06(b)(iv), 2.06(d)(ii) or 2.06(f) hereof. "Global Note Legend" means the legend set forth in Section 2.06(g)(ii) hereof, which is required to be placed on all Global Notes issued under this Indenture. "Government Securities" means direct Obligations of, or Obligations guaranteed by, the United States of America, and the payment for which the United States pledges its full faith and credit. "Guarantee" means a guarantee (other than by endorsement of negotiable instruments for collection in the ordinary course of business), direct or indirect, in any manner (including, without limitation, by way of a pledge of assets or through letters of credit or reimbursement agreements in respect thereof), of all or any part of any Indebtedness. "Guarantors" means (i) each current and future Domestic Subsidiary of the Company and (ii) any other Subsidiary of the Company that executes a Subsidiary Guarantee in accordance with the provisions of this Indenture, and their respective successors and assigns. "Hedging Obligations" means, with respect to any Person, the Obligations of such Person under (i) interest rate swap agreements, interest rate cap agreements and interest rate collar agreements and (ii) other agreements or arrangements designed to protect such Person against fluctuations in interest rates or currency exchange rates. "Holder" means a Person in whose name a Note is registered. "IAI Global Note" means the global Note in the form of Exhibit A-1 hereto bearing the Global Note Legend and the Private Placement Legend and deposited with or on behalf of and registered in the name of the Depositary or its nominee that will be issued in a denomination equal to the outstanding principal amount of the Notes sold to Institutional Accredited Investors. "Indebtedness" means, with respect to any Person, (i) 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 7 13 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, (ii) 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 (iii) to the extent not otherwise included, the Guarantee by such Person of any indebtedness of any other Person. The amount of any Indebtedness outstanding as of any date shall be (i) the accreted value thereof, in the case of any Indebtedness issued with original issue discount, and (ii) the principal amount thereof, together with any interest thereon that is more than 30 days past due, in the case of any other Indebtedness. "Indenture" means this Indenture, as amended or supplemented from time to time. "Indirect Participant" means a Person who holds a beneficial interest in a Global Note through a Participant. "Initial Notes" means $75,000,000 in aggregate principal amount of Notes issued under this Indenture on the date hereof. "Initial Purchasers" means NationsBanc Montgomery Securities LLC, Prudential Securities Incorporated and BancBoston Securities Inc. "Institutional Accredited Investor" means an institution that is an "accredited investor" as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act, who is not also a QIB. "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 or capital contributions (excluding commission, travel and similar advances to officers and employees made in the ordinary course of business and advances to customers in the ordinary course of business that are recorded as accounts receivable of the lender), purchases or other acquisitions for consideration of Indebtedness, Equity Interests or other securities, together with all items that are or would be classified as investments on a balance sheet prepared in accordance with GAAP. If the Company or any Subsidiary of the Company sells or otherwise disposes of any Equity Interests of any direct or indirect Subsidiary of the Company such that, after giving effect to any such sale or disposition, such Person is no longer a Subsidiary of the Company, the Company 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 in an amount determined as provided in the final paragraph of Section 4.07 hereof. "Legal Holiday" means a Saturday, a Sunday or a day on which banking institutions in the City of New York or at a place of payment are authorized by law, regulation or executive order to remain closed. If a payment date is a Legal Holiday at a place of payment, payment may be made at that place on the next succeeding day that is not a Legal Holiday, and no interest shall accrue on such payment for the intervening period. "Letter of Transmittal" means the letter of transmittal to be prepared by the Company and sent to all Holders of the Notes for use by such Holders in connection with the Exchange Offer. "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 8 14 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). "Liquidated Damages" means all liquidated damages then owing pursuant to Section 5 of the Registration Rights Agreement. "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 Subsidiaries or the extinguishment of any Indebtedness of such Person or any of its Subsidiaries and (ii) any extraordinary gain (but not loss), together with any related provision for taxes on such extraordinary gain (but not loss). "Net Proceeds" means the aggregate cash proceeds received by the Company or any of its Subsidiaries in respect of any Asset Sale (including, without limitation, any cash received upon the sale or other disposition of any non-cash consideration received in any Asset Sale), net of the direct costs relating to such Asset Sale (including, without limitation, legal, accounting and investment banking fees, and sales commissions) and any relocation expenses incurred as a result 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 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-U.S. Person" means a Person who is not a U.S. Person. "Notes" has the meaning assigned to it in the preamble to this Indenture. "Obligations" means any principal, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness. "Officer" means, with respect to any Person, the Chairman of the Board, the Chief Executive Officer, the President, the Chief Operating Officer, the Chief Financial Officer, the Treasurer, any Assistant Treasurer, the Controller, the Secretary or any Vice-President of such Person. "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 of Section 11.05 hereof. "Opinion of Counsel" means an opinion from legal counsel who is reasonably acceptable to the Trustee, that meets the requirements of Section 11.05 hereof. The counsel may be an employee of or counsel to the Company, any Subsidiary of the Company or the Trustee. "Participant" means, with respect to the Depositary, Euroclear or Cedel, a Person who has an account with the Depositary, Euroclear or Cedel, respectively (and, with respect to The Depository Trust Company, shall include Euroclear and Cedel). 9 15 "Permitted Group" means, at any time prior to an initial public offering of common stock of the Company, any group of investors that is deemed to be a "person" (as such term is used in Section 13(d)(3) of the Exchange Act) by virtue of the Shareholders Agreement, as the same may be amended, modified or supplemented from time to time; provided that no single Person (together with its Affiliates), other than the Principals and their Related Parties, is the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except that a person shall be deemed to have "beneficial ownership" of all securities that such person has the right to acquire, whether such right is currently exercisable or is exercisable only upon the occurrence of a subsequent condition, and beneficial ownership shall be determined without regard to the Shareholders Agreement, as the same may be amended, modified or supplemented from time to time), directly or indirectly, of more than 50% of the Voting Stock of the Company (measured by voting power rather than number of shares) that is "beneficially owned" (as defined above) by such Permitted Group. "Permitted Investments" means (a) any Investment in the Company, in a Wholly Owned Subsidiary or in a Guarantor; (b) any Investment in Cash Equivalents; (c) any Investment by the Company or any Subsidiary of the Company in a Person, if as a result of such Investment (i) such Person becomes a Guarantor or a Wholly Owned Subsidiary or (ii) such Person is merged, consolidated or amalgamated with or into, or transfers or conveys substantially all of its assets to, or is liquidated into, the Company or a Guarantor or a Wholly Owned Subsidiary; (d) any Investment made as a result of the receipt of noncash consideration from an Asset Sale that was made pursuant to and in compliance with Section 4.10 hereof; (e) any acquisition of assets solely in exchange for the issuance of Equity Interests (other than Disqualified Stock) of the Company; (f) other Investments in Subsidiaries of the Company that are not Guarantors having an aggregate fair market value (measured on the date each such Investment was made and without giving effect to subsequent changes in value), when taken together with all other Investments made pursuant to this clause (f) that are at the time outstanding, not to exceed 10% of the Company's Consolidated Assets on the date of such Investment; (g) Investments existing on the date of this Indenture; (h) receivables owing to the Company or any Subsidiary of the Company if created or acquired in the ordinary course of business and payable or dischargeable in accordance with customary trade terms; provided that such trade terms may include concessionary terms as the Company of such Subsidiary deems reasonable under the circumstances; (i) loans or advances to employees permitted by clause (v) of Section 4.11 hereof; (j) stock obligations or securities received in settlement of debts created in the ordinary course of business and owing to the Company or any of its Subsidiaries or in satisfaction of judgments; and (k) other Investments in any Person having an aggregate fair market value (measured on the date each such Investment was made and without giving effect to subsequent changes in value), when taken together with all other Investments made pursuant to this clause (k) that are at the time outstanding, not to exceed $5.0 million. "Permitted Liens" means (i) Liens on assets of the Company or any of the Guarantors or Foreign Subsidiaries securing obligations of such Persons under Credit Facilities that was permitted by the terms of this Indenture to be incurred; (ii) Liens in favor of the Company; (iii) Liens on property of a Person existing at the time such Person is merged with or into or consolidated with the Company or any Subsidiary of the Company; provided that such Liens were in existence prior to the contemplation of such merger or consolidation and do not extend to any assets other than those of the Person merged into or consolidated with the Company; (iv) Liens on property existing at the time of acquisition thereof by the Company or any Subsidiary of the Company, provided that such Liens were in existence prior to the contemplation of such acquisition; (v) Liens to secure the performance of statutory obligations, surety or appeal bonds, performance bonds or other obligations of a like nature incurred in the ordinary course of business; (vi) Liens to secure Indebtedness (including Capital Lease Obligations) permitted by Section 4.09(b)(iv) hereof covering only the assets acquired with such Indebtedness; (vii) Liens existing on the date of this 10 16 Indenture; (viii) Liens on the Smithfield Property incurred in connection with a sale and leaseback transaction permitted under the terms of this Indenture; (ix) Liens for taxes, assessments or governmental charges or claims that are not yet delinquent or that are being contested in good faith by appropriate proceedings promptly instituted and diligently concluded, provided that any reserve or other appropriate provision as shall be required in conformity with GAAP shall have been made therefor; (x) Liens to secure Permitted Refinancing Indebtedness, provided that such Liens extend only to the assets that secured the Indebtedness refinanced with the proceeds of such Permitted Refinancing Indebtedness; (xi) statutory Liens of landlords and Liens of carriers, warehousemen, mechanics, suppliers, materialmen, repairmen and other Liens imposed by law incurred in the ordinary course of business for sums not delinquent or being contested in good faith, if such reserve or other appropriate provision, if any, as shall be required by GAAP shall have been made in respect thereof; (xii) Liens securing Hedging Obligations; (xiii) easements, rights-of-way, municipal and zoning ordinances and similar charges, encumbrances, title defects or other irregularities that do not materially interfere with the ordinary course of business of the Company and its Subsidiaries; (xiv) Liens on assets of Subsidiaries securing Indebtedness of such persons that was permitted by the terms of this Indenture to be incurred; and (xv) Liens incurred in the ordinary course of business of the Company or any Subsidiary of the Company with respect to obligations that do not exceed $5.0 million at any one time outstanding. "Permitted Refinancing Indebtedness" means any Indebtedness of the Company or any of its 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 Subsidiaries (other than intercompany Indebtedness); provided that: (i) the principal amount (or accreted value, if applicable) of such Permitted Refinancing Indebtedness does not exceed the principal amount of (or accreted value, if applicable), plus accrued interest on, the Indebtedness 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 later than the final maturity date of, and has a Weighted Average Life to Maturity equal to or greater than the Weighted Average Life to Maturity of, the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; (iii) if the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded is subordinated in right of payment to the Notes, such Permitted Refinancing Indebtedness has a final maturity date later than the final maturity date of, and is subordinated in right of payment to, the Notes on terms at least as favorable to the Holders of Notes as those contained in the documentation governing the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; and (iv) such Indebtedness is incurred either by the Company or by the Subsidiary that is the obligor on the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded. "Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or agency or political subdivision thereof (including any subdivision or ongoing business of any such entity or substantially all of the assets of any such entity, subdivision or business). "Principals" means Gerald F. Cerce, John H. Flynn, Jr., Robert V. Lallo and Felix A. Porcaro, Jr. "Private Placement Legend" means the legend set forth in Section 2.06(g)(i) hereof to be placed on all Notes issued under this Indenture except where otherwise permitted by the provisions of this Indenture. "QIB" means a "qualified institutional buyer" as defined in Rule 144A. 11 17 "Registration Rights Agreement" means the Registration Rights Agreement, dated as of July 21, 1998, by and among the Company and the other parties named on the signature pages thereof, as such agreement may be amended, modified or supplemented from time to time and, with respect to any Additional Notes, one or more registration rights agreements between the Company and the other parties thereto, as such agreement(s) may be amended, modified or supplemented from time to time, relating to rights given by the Company to the purchasers of Additional Notes to register such Additional Notes under the Securities Act. "Regulation S" means Regulation S promulgated under the Securities Act. "Regulation S Global Note" means a Regulation S Temporary Global Note or Regulation S Permanent Global Note, as appropriate. "Regulation S Permanent Global Note" means a permanent global Note in the form of Exhibit A-1 hereto bearing the Global Note Legend and the Private Placement Legend and deposited with or on behalf of and registered in the name of the Depositary or its nominee, issued in a denomination equal to the outstanding principal amount of the Regulation S Temporary Global Note upon expiration of the Restricted Period. "Regulation S Temporary Global Note" means a temporary global Note in the form of Exhibit A-2 hereto bearing the Private Placement Legend and deposited with or on behalf of and registered in the name of the Depositary or its nominee, issued in a denomination equal to the outstanding principal amount of the Notes initially sold in reliance on Rule 903 of Regulation S. "Related Party" with respect to any Principal means (i) any controlling shareholder, 80% (or more) owned Subsidiary, or spouse or immediate family member (in the case of an individual) of such Principal or (ii) any trust, corporation, partnership or other entity, the beneficiaries, shareholders, partners, owners or Persons beneficially holding an 80% or more controlling interest of which consist of such Principal and/or such other Persons referred to in the immediately preceding clause (i). "Responsible Officer," when used with respect to the Trustee, means any officer within the Corporate Trust Administration of the Trustee (or any successor group of the Trustee) or any other officer of the Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of his knowledge of and familiarity with the particular subject. "Restricted Broker-Dealer" has the meaning set forth in the Registration Rights Agreement. "Restricted Definitive Note" means a Definitive Note bearing the Private Placement Legend. "Restricted Global Note" means a Global Note bearing the Private Placement Legend. "Restricted Investment" means an Investment other than a Permitted Investment. "Restricted Period" means the 40-day restricted period as defined in Regulation S. "Restructuring Charges" means any charges or write-offs associated with the discontinuance of operations at the Company's Texas Property less any tax benefit received from any 12 18 such charge being deducted from the taxable income of the Company or any of its Subsidiaries; provided, however, that such charges or write-offs are charged within 12 months of the date of this Indenture and the maximum amount of charges that may be treated as "Restructuring Charges" shall be $2.6 million. "Rule 144" means Rule 144 promulgated under the Securities Act. "Rule 144A" means Rule 144A promulgated under the Securities Act. "Rule 903" means Rule 903 promulgated under the Securities Act. "Rule 904" means Rule 904 promulgated the Securities Act. "SEC" means the Securities and Exchange Commission. "Securities Act" means the Securities Act of 1933, as amended. "Senior Credit Facility" means that certain Amended and Restated Financing and Security Agreement, dated as of May 9, 1997, by and among the Company, certain of its Subsidiaries, NationsBank, N.A., as agent, and the other lenders party thereto, as amended by the Second Amended and Restated Financing and Security Agreement, dated as of the date hereof, by and among the Company, its existing Domestic Subsidiaries and NationsBank, N.A., as agent and the other lenders party thereto, providing for up to $60.0 million of revolving credit borrowings, including any related notes, guarantees, collateral documents, instruments and agreements executed in connection therewith, and in each case as amended, modified, renewed, refunded, replaced or refinanced from time to time. "Shareholders Agreement" means the Tag-Along, Transfer Restriction and Voting Agreement dated as of December 11, 1996, as amended, among the Company and the shareholders and option holders party thereto. "Shelf Registration Statement" means the Shelf Registration Statement as defined in the Registration Rights Agreement. "Significant Subsidiary" means any Subsidiary that would be a "significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated pursuant to the Act, as such Regulation is in effect on the date hereof. "Smithfield Property" means the real property and fixtures located at 500 George Washington Highway, Smithfield, Rhode Island, which are used by the Company as an office and distribution facility. "Stated Maturity" means, with respect to any installment of interest or principal on any series of Indebtedness, the date on which such payment of interest or principal was scheduled to be paid in the original documentation governing such Indebtedness, and shall not include any contingent obligations to repay, redeem or repurchase any such interest or principal prior to the date originally scheduled for the payment thereof. "Subsidiary" means, with respect to any 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 13 19 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 of one or more Subsidiaries of such Person (or any combination thereof). "Subsidiary Guarantee" means the Guarantee by each Guarantor of the Company's payment obligations under this Indenture and the Notes, executed pursuant to the provisions of this Indenture. "Texas Property" means the real property and fixtures located at Valley View Lane, Farmers Branch, Texas, which are leased by the Company. "TIA" means the Trust Indenture Act of 1939 (15 U.S.C.ss.ss. 77aaa-77bbbb) as in effect on the date on which this Indenture is qualified under the TIA. "Trustee" means the party named as such above until a successor replaces it in accordance with the applicable provisions of this Indenture and thereafter means the successor serving hereunder. "Unrestricted Global Note" means a permanent global Note in the form of Exhibit A-1 attached hereto that bears the Global Note Legend and that has the "Schedule of Exchanges of Interests in the Global Note" attached thereto, and that is deposited with or on behalf of and registered in the name of the Depositary, representing a series of Notes that do not bear the Private Placement Legend. "Unrestricted Definitive Note" means one or more Definitive Notes that do not bear and are not required to bear the Private Placement Legend. "U.S. Person" means a U.S. person as defined in Rule 902(o) under the Securities Act. "Voting Stock" of any Person as of any date means the Capital Stock of such Person that is at the time entitled to vote in the election of the Board of Directors of such Person. "Weighted Average Life to Maturity" means, when applied to any Indebtedness at any date, the number of years obtained by dividing (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 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 and one or more Wholly Owned Subsidiaries of such Person. 14 20 SECTION 1.02. OTHER DEFINITIONS.
Defined in Term Section "Affiliate Transaction"......................................... 4.11 "Asset Sale Offer".............................................. 3.09 "Authentication Order".......................................... 2.02 "Change of Control Offer"....................................... 4.14 "Change of Control Payment"..................................... 4.14 "Change of Control Payment Date" ............................... 4.14 "Covenant Defeasance"........................................... 8.03 "Event of Default".............................................. 6.01 "Excess Proceeds"............................................... 4.10 "incur"......................................................... 4.09 "Legal Defeasance".............................................. 8.02 "Offer Amount".................................................. 3.09 "Offer Period".................................................. 3.09 "Paying Agent".................................................. 2.03 "Payment Default"............................................... 6.01 "Permitted Debt"................................................ 4.09 "Purchase Date"................................................. 3.09 "Registrar"..................................................... 2.03 "Restricted Payments"........................................... 4.07
SECTION 1.03 PROVISIONS OF THE TIA. Whenever this Indenture refers to a provision of the TIA, the provision is incorporated by reference in and made a part of this Indenture. The following TIA terms used in this Indenture have the following meanings: "indenture securities" means the Notes; "indenture security Holder" means a Holder of a Note; "indenture to be qualified" means this Indenture; "indenture trustee" or "institutional trustee" means the Trustee; and "obligor" on the Notes and the Subsidiary Guarantees means the Company and the Guarantors, respectively, and any successor obligor upon the Notes and the Subsidiary Guarantees, respectively. All other terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by SEC rule under the TIA have the meanings so assigned to them. SECTION 1.04. RULES OF CONSTRUCTION. Unless the context otherwise requires: (1) a term has the meaning assigned to it; 15 21 (2) an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP; (3) "or" is not exclusive; (4) words in the singular include the plural, and in the plural include the singular; (5) provisions apply to successive events and transactions; and (6) references to sections of or rules under the Securities Act shall be deemed to include substitute, replacement of successor sections or rules adopted by the SEC from time to time. ARTICLE 2. THE NOTES SECTION 2.01. FORM AND DATING. (a) General. The Notes and the Trustee's certificate of authentication shall be substantially in the form of Exhibit A-1 hereto. The Notes may have notations, legends or endorsements required by law, stock exchange rule or usage. Each Note shall be dated the date of its authentication. The Notes shall be in denominations of $1,000 and integral multiples thereof. The terms and provisions contained in the Notes shall constitute, and are hereby expressly made, a part of this Indenture and the Company, the Guarantors and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby. However, to the extent any provision of any Note conflicts with the express provisions of this Indenture, the provisions of this Indenture shall govern and be controlling. (b) Global Notes. Notes issued in global form shall be substantially in the form of Exhibit A-1 attached hereto (including the Global Note Legend thereon and the "Schedule of Exchanges of Interests in the Global Note" attached thereto). Notes issued in definitive form shall be substantially in the form of Exhibits A-1 or A-2 attached hereto (but without the Global Note Legend thereon and without the "Schedule of Exchanges of Interests in the Global Note" attached thereto). Each Global Note shall represent such of the outstanding Notes as shall be specified therein and each shall provide that it shall represent the aggregate principal amount of outstanding Notes from time to time endorsed thereon and that the aggregate principal amount of outstanding Notes represented thereby may from time to time be reduced or increased, as appropriate, to reflect exchanges and redemptions. Any endorsement of a Global Note to reflect the amount of any increase or decrease in the aggregate principal amount of outstanding Notes represented thereby shall be made by the Trustee or the Note Custodian, at the direction of the Trustee, in accordance with instructions given by the Holder thereof as required by Section 2.06 hereof. (c) Temporary Global Notes. Notes offered and sold in reliance on Regulation S shall be issued initially in the form of the Regulation S Temporary Global Note, which shall be deposited on behalf of the purchasers of the Notes represented thereby with the Trustee, at its New York office, as custodian for the Depositary, and registered in the name of the Depositary or the nominee of the Depositary for the accounts of designated agents holding on behalf of Euroclear or Cedel Bank, duly executed by the Company and authenticated by the Trustee as hereinafter provided. The Restricted 16 22 Period shall be terminated upon the receipt by the Trustee of (i) a written certificate from the Depositary, together with copies of certificates from Euroclear and Cedel Bank certifying that they have received certification of non-United States beneficial ownership of 100% of the aggregate principal amount of the Regulation S Temporary Global Note (except to the extent of any beneficial owners thereof who acquired an interest therein during the Restricted Period pursuant to another exemption from registration under the Securities Act and who will take delivery of a beneficial ownership interest in a 144A Global Note or an IAI Global Note bearing a Private Placement Legend, all as contemplated by Section 2.06(a)(ii) hereof), and (ii) an Officers' Certificate from the Company. Following the termination of the Restricted Period, beneficial interests in the Regulation S Temporary Global Note shall be exchanged for beneficial interests in Regulation S Permanent Global Notes pursuant to the Applicable Procedures. Simultaneously with the authentication of Regulation S Permanent Global Notes, the Trustee shall cancel the Regulation S Temporary Global Note. The aggregate principal amount of the Regulation S Temporary Global Note and the Regulation S Permanent Global Notes may from time to time be increased or decreased by adjustments made on the records of the Trustee and the Depositary or its nominee, as the case may be, in connection with transfers of interest as hereinafter provided. d) Euroclear and Cedel Procedures Applicable. The provisions of the "Operating Procedures of the Euroclear System" and "Terms and Conditions Governing Use of Euroclear" and the "General Terms and Conditions of Cedel Bank" and "Customer Handbook" of Cedel Bank shall be applicable to transfers of beneficial interests in the Regulation S Temporary Global Note and the Regulation S Permanent Global Notes that are held by Participants through Euroclear or Cedel Bank. SECTION 2.02. EXECUTION AND AUTHENTICATION. Two Officers shall sign the Notes for the Company by manual or facsimile signature. The Company's seal shall be reproduced on the Notes and may be in facsimile form. If an Officer whose signature is on a Note no longer holds that office at the time a Note is authenticated, the Note shall nevertheless be valid. A Note shall not be valid until authenticated by the manual signature of the Trustee. The signature shall be conclusive evidence that the Note has been authenticated under this Indenture. The Trustee shall, upon a written order of the Company signed by two Officers (an "Authentication Order"), authenticate Notes for original issue up to the aggregate principal amount stated in paragraph 4 of the Notes, plus up to $75.0 million of Additional Notes issued pursuant to this Section 2.02 and Section 4.09 hereof. The aggregate principal amount of Notes outstanding at any time may not exceed such amount except as provided in Section 2.07 hereof. The Trustee may appoint an authenticating agent acceptable to the Company to authenticate Notes. An authenticating agent may authenticate Notes whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as an Agent to deal with Holders or an Affiliate of the Company. SECTION 2.03. REGISTRAR AND PAYING AGENT. The Company shall maintain an office or agency where Notes may be presented for registration of transfer or for exchange ("Registrar") and an office or agency where Notes may be 17 23 presented for payment ("Paying Agent"). The Registrar shall keep a register of the Notes and of their transfer and exchange. The Company may appoint one or more co-registrars and one or more additional paying agents. The term "Registrar" includes any co-registrar and the term "Paying Agent" includes any additional paying agent. The Company may change any Paying Agent or Registrar without notice to any Holder. The Company shall notify the Trustee in writing of the name and address of any Agent not a party to this Indenture. If the Company fails to appoint or maintain another entity as Registrar or Paying Agent, the Trustee shall act as such. The Company or any of its Subsidiaries may act as Paying Agent or Registrar. The Company initially appoints The Depository Trust Company ("DTC") to act as Depositary with respect to the Global Notes. The Company initially appoints the Trustee to act as the Registrar and Paying Agent and to act as Custodian with respect to the Global Notes. SECTION 2.04. PAYING AGENT TO HOLD MONEY IN TRUST. The Company shall require each Paying Agent other than the Trustee to agree in writing that the Paying Agent will hold in trust for the benefit of Holders or the Trustee all money held by the Paying Agent for the payment of principal, premium or Liquidated Damages, if any, or interest on the Notes, and will promptly notify the Trustee of any default by the Company in making any such payment. While any such default continues, the Trustee may require a Paying Agent to pay all money held by it to the Trustee. The Company at any time may require a Paying Agent to pay all money held by it to the Trustee. Upon payment over to the Trustee, the Paying Agent (if other than the Company or a Subsidiary) shall have no further liability for the money. If the Company or a Subsidiary acts as Paying Agent, it shall segregate and hold in a separate trust fund for the benefit of the Holders all money held by it as Paying Agent. Upon any bankruptcy or reorganization proceedings relating to the Company, the Trustee shall serve as Paying Agent for the Notes. Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of, and premium, interest and Liquidated Damages, if any, on any Note and remaining unclaimed for two years after such principal, and premium, interest and Liquidated Damages, if any, has become due and payable shall be paid to the Company on its request or (if then held by the Company) shall be discharged from such trust; and the Holder of such Note shall thereafter, as an unsecured creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once, in the New York Times (national edition) and The Wall Street Journal (national edition), notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such notification or publication, any unclaimed balance of such money then remaining will be repaid to the Company. SECTION 2.05. HOLDER LISTS. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of all Holders and shall otherwise comply with TIA ss. 312(a). If the Trustee is not the Registrar, the Company shall furnish to the Trustee at least seven Business Days before each interest payment date and at such other times as the Trustee may request in 18 24 writing, a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of the Holders of Notes and the Company shall otherwise comply with TIA ss. 312(a). SECTION 2.06. TRANSFER AND EXCHANGE. (a) Transfer and Exchange of Global Notes. A Global Note may not be transferred as a whole except by the Depositary to a nominee of the Depositary, by a nominee of the Depositary to the Depositary or to another nominee of the Depositary, the Depositary or any such nominee to a successor Depositary or a nominee of such successor Depositary. All Global Notes shall be exchanged by the Company for Definitive Notes if (i) the Company delivers to the Trustee notice from the Depositary that it is unwilling or unable to continue to act as Depositary or that it is no longer a clearing agency registered under the Exchange Act and, in either case, a successor Depositary is not appointed by the Company within 120 days after the date of such notice from the Depositary or (ii) the Company in its sole discretion determines that the Global Notes (in whole but not in part) should be exchanged for Definitive Notes and delivers a written notice to such effect to the Trustee; provided that in no event shall the Regulation S Temporary Global Note be exchanged by the Company for Definitive Notes prior to (x) the expiration of the Restricted Period and (y) the receipt by the Registrar of any certificates required pursuant to Rule 903(c)(3)(ii)(B) under the Securities Act. Upon the occurrence of either of the preceding events in (i) or (ii) above, Definitive Notes shall be issued in such names as the Depositary shall instruct the Trustee. Global Notes also may be exchanged or replaced, in whole or in part, as provided in Sections 2.07 and 2.10 hereof. Every Note authenticated and delivered in exchange for, or in lieu of, a Global Note or any portion thereof, pursuant to this Section 2.06 or Section 2.07 or 2.10 hereof, shall be authenticated and delivered in the form of, and shall be, a Global Note. A Global Note may not be exchanged for another Note other than as provided in this Section 2.06(a), however, beneficial interests in a Global Note may be transferred and exchanged as provided in Section 2.06(b),(c) or (f) hereof. (b) Transfer and Exchange of Beneficial Interests in the Global Notes. The transfer and exchange of beneficial interests in the Global Notes shall be effected through the Depositary, in accordance with the provisions of this Indenture and the Applicable Procedures. Beneficial interests in the Restricted Global Notes shall be subject to restrictions on transfer comparable to those set forth herein to the extent required by the Securities Act. Transfers of beneficial interests in the Global Notes also shall require compliance with either subparagraph (i) or (ii) below, as applicable, as well as one or more of the other following subparagraphs, as applicable: (i) Transfer of Beneficial Interests in the Same Global Note. Beneficial interests in any Restricted Global Note may be transferred to Persons who take delivery thereof in the form of a beneficial interest in the same Restricted Global Note in accordance with the transfer restrictions set forth in the Private Placement Legend; provided, however, that prior to the expiration of the Restricted Period, transfers of beneficial interests in the Temporary Regulation S Global Note may not be made to a U.S. Person or for the account or benefit of a U.S. Person (other than an Initial Purchaser). Beneficial interests in any Unrestricted Global Note may be transferred to Persons who take delivery thereof in the form of a beneficial interest in an Unrestricted Global Note. No written orders or instructions shall be required to be delivered to the Registrar to effect the transfers described in this Section 2.06(b)(i). (ii) All Other Transfers and Exchanges of Beneficial Interests in Global Notes. In connection with all transfers and exchanges of beneficial interests that are not subject to Section 2.06(b)(i) above, the transferor of such beneficial interest must deliver to the Registrar either (A) (1) 19 25 a written order from a Participant or an Indirect Participant given to the Depositary in accordance with the Applicable Procedures directing the Depositary to credit or cause to be credited a beneficial interest in another Global Note in an amount equal to the beneficial interest to be transferred or exchanged and (2) instructions given in accordance with the Applicable Procedures containing information regarding the Participant account to be credited with such increase or (B) (1) a written order from a Participant or an Indirect Participant given to the Depositary in accordance with the Applicable Procedures directing the Depositary to cause to be issued a Definitive Note in an amount equal to the beneficial interest to be transferred or exchanged and (2) instructions given by the Depositary to the Registrar containing information regarding the Person in whose name such Definitive Note shall be registered to effect the transfer or exchange referred to in (1) above; provided that in no event shall Definitive Notes be issued upon the transfer or exchange of beneficial interests in the Regulation S Temporary Global Note prior to (x) the expiration of the Restricted Period and (y) the receipt by the Registrar of any certificates required pursuant to Rule 903 under the Securities Act. Upon consummation of an Exchange Offer by the Company in accordance with Section 2.06(f) hereof, the requirements of this Section 2.06(b)(ii) shall be deemed to have been satisfied upon receipt by the Registrar of the instructions contained in the Letter of Transmittal delivered by the Holder of such beneficial interests in the Restricted Global Notes. Upon satisfaction of all of the requirements for transfer or exchange of beneficial interests in Global Notes contained in this Indenture and the Notes or otherwise applicable under the Securities Act, the Trustee shall adjust the principal amount of the relevant Global Note(s) pursuant to Section 2.06(h) hereof. (iii) Transfer of Beneficial Interests to Another Restricted Global Note. A beneficial interest in any Restricted Global Note may be transferred to a Person who takes delivery thereof in the form of a beneficial interest in another Restricted Global Note if the transfer complies with the requirements of Section 2.06(b)(ii) above and the Registrar receives the following: (A) if the transferee will take delivery in the form of a beneficial interest in the 144A Global Note, then the transferor must deliver a certificate in the form of Exhibit B hereto, including the certifications in item (1) thereof; (B) if the transferee will take delivery in the form of a beneficial interest in the Regulation S Temporary Global Note or the Regulation S Global Note, then the transferor must deliver a certificate in the form of Exhibit B hereto, including the certifications in item (2) thereof; and (C) if the transferee will take delivery in the form of a beneficial interest in the IAI Global Note, then the transferor must deliver a certificate in the form of Exhibit B hereto, including the certifications and certificates and an Opinion of Counsel required by item (3) thereof, if applicable. (iv) Transfer and Exchange of Beneficial Interests in a Restricted Global Note for Beneficial Interests in the Unrestricted Global Note. A beneficial interest in any Restricted Global Note may be exchanged by any holder thereof for a beneficial interest in an Unrestricted Global Note or transferred to a Person who takes delivery thereof in the form of a beneficial interest in an Unrestricted Global Note if the exchange or transfer complies with the requirements of Section 2.06(b)(ii) above and: (A) such exchange or transfer is effected pursuant to the Exchange Offer in accordance with the Registration Rights Agreement and the holder of the beneficial 20 26 interest to be transferred, in the case of an exchange, or the transferee, in the case of a transfer, certifies in the applicable Letter of Transmittal that it is not (1) a broker-dealer, (2) a Person participating in the distribution of the Exchange Notes or (3) a Person who is an affiliate (as defined in Rule 144) of the Company; (B) such transfer is effected pursuant to the Shelf Registration Statement in accordance with the Registration Rights Agreement or pursuant to any other effective registration statement under the Securities Act and a certificate to the effect set forth in Exhibit B hereto is received by the Registrar; (C) such transfer is effected by a Restricted Broker-Dealer pursuant to the Exchange Offer Registration Statement in accordance with the Registration Rights Agreement; or (D) the Registrar receives the following: (1) if the holder of such beneficial interest in a Restricted Global Note proposes to exchange such beneficial interest for a beneficial interest in an Unrestricted Global Note, a certificate from such holder in the form of Exhibit C hereto, including the certifications in item (1)(a) thereof; or (2) if the holder of such beneficial interest in a Restricted Global Note proposes to transfer such beneficial interest to a Person who shall take delivery thereof in the form of a beneficial interest in an Unrestricted Global Note, a certificate from such holder in the form of Exhibit B hereto, including the certifications in item (4) thereof; and, in each such case set forth in this subparagraph (D), if the Registrar so requests or if the Applicable Procedures so require, an Opinion of Counsel in form reasonably acceptable to the Registrar to the effect that such exchange or transfer is in compliance with the Securities Act and that the restrictions on transfer contained herein and in the Private Placement Legend are no longer required in order to maintain compliance with the Securities Act. If any such transfer is effected pursuant to subparagraph (B) or (D) above at a time when an Unrestricted Global Note has not yet been issued, the Company shall issue and, upon receipt of an Authentication Order in accordance with Section 2.02 hereof, the Trustee shall authenticate one or more Unrestricted Global Notes in an aggregate principal amount equal to the aggregate principal amount of beneficial interests transferred pursuant to subparagraph (B) or (D) above. Beneficial interests in an Unrestricted Global Note cannot be exchanged for, or transferred to Persons who take delivery thereof in the form of, a beneficial interest in a Restricted Global Note. (c) Transfer or Exchange of Beneficial Interests for Definitive Notes. (i) Beneficial Interests in Restricted Global Notes to Restricted Definitive Notes. If any holder of a beneficial interest in a Restricted Global Note proposes to exchange such beneficial interest for a Restricted Definitive Note or to transfer such beneficial interest to a Person who takes delivery thereof in the form of a Restricted Definitive Note, then, upon receipt by the Registrar of the following documentation: 21 27 (A) if the holder of such beneficial interest in a Restricted Global Note proposes to exchange such beneficial interest for a Restricted Definitive Note, a certificate from such holder in the form of Exhibit C hereto, including the certifications in item (2)(a) thereof; (B) if such beneficial interest is being transferred to a QIB in accordance with Rule 144A, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (1) thereof; (C) if such beneficial interest is being transferred to a Non-U.S. Person in an offshore transaction in accordance with Rule 903 or Rule 904, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (2) thereof; (D) if such beneficial interest is being transferred pursuant to an exemption from the registration requirements of the Securities Act in accordance with Rule 144, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (3)(a) thereof; (E) if such beneficial interest is being transferred to an Institutional Accredited Investor in reliance on an exemption from the registration requirements of the Securities Act other than those listed in subparagraphs (B) through (D) above, a certificate to the effect set forth in Exhibit B hereto, including the certifications, certificates and an Opinion of Counsel required by item (3) thereof, if applicable; (F) if such beneficial interest is being transferred to the Company or any of its Subsidiaries, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (3)(b) thereof; or (G) if such beneficial interest is being transferred pursuant to an effective registration statement under the Securities Act, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (3)(c) thereof, the Trustee shall cause the aggregate principal amount of the applicable Global Note to be reduced accordingly pursuant to Section 2.06(h) hereof, and the Company shall execute and the Trustee shall authenticate and deliver to the Person designated in the instructions a Definitive Note in the appropriate principal amount. Any Definitive Note issued in exchange for a beneficial interest in a Restricted Global Note pursuant to this Section 2.06(c)(i) shall be registered in such name or names and in such authorized denomination or denominations as the holder of such beneficial interest shall instruct the Registrar through instructions from the Depositary and the Participant or Indirect Participant. The Trustee shall deliver such Definitive Notes to the Persons in whose names such Notes are so registered. Any Definitive Note issued in exchange for a beneficial interest in a Restricted Global Note pursuant to this Section 2.06(c)(i) shall bear the Private Placement Legend and shall be subject to all restrictions on transfer contained therein. (ii) Notwithstanding Sections 2.06(c)(i)(A) and (C) hereof, a beneficial interest in the Regulation S Temporary Global Note may not be exchanged for a Definitive Note or transferred to a Person who takes delivery thereof in the form of a Definitive Note prior to (x) the expiration of the Restricted Period and (y) the receipt by the Registrar of any certificates required pursuant to Rule 22 28 903(c)(3)(ii)(B) under the Securities Act, except in the case of a transfer pursuant to an exemption from the registration requirements of the Securities Act other than Rule 903 or Rule 904. (iii) Beneficial Interests in Restricted Global Notes to Unrestricted Definitive Notes. A holder of a beneficial interest in a Restricted Global Note may exchange such beneficial interest for an Unrestricted Definitive Note or may transfer such beneficial interest to a Person who takes delivery thereof in the form of an Unrestricted Definitive Note only if: (A) such exchange or transfer is effected pursuant to the Exchange Offer in accordance with the Registration Rights Agreement and the holder of such beneficial interest, in the case of an exchange, or the transferee, in the case of a transfer, certifies in the applicable Letter of Transmittal that it is not (1) a broker-dealer, (2) a Person participating in the distribution of the Exchange Notes or (3) a Person who is an affiliate (as defined in Rule 144) of the Company; (B) such transfer is effected pursuant to the Shelf Registration Statement in accordance with the Registration Rights Agreement or pursuant to any other effective registration statement and a certificate to the effect set forth in Exhibit B hereto is received by the Registrar; (C) such transfer is effected by a Restricted Broker-Dealer pursuant to the Exchange Offer Registration Statement in accordance with the Registration Rights Agreement; or (D) the Registrar receives the following: (1) if the holder of such beneficial interest in a Restricted Global Note proposes to exchange such beneficial interest for a Definitive Note that does not bear the Private Placement Legend, a certificate from such holder in the form of Exhibit C hereto, including the certifications in item (1)(b) thereof; or (2) if the holder of such beneficial interest in a Restricted Global Note proposes to transfer such beneficial interest to a Person who shall take delivery thereof in the form of a Definitive Note that does not bear the Private Placement Legend, a certificate from such holder in the form of Exhibit B hereto, including the certifications in item (4) thereof; and, in each such case set forth in this subparagraph (D), if the Registrar so requests or if the Applicable Procedures so require, an Opinion of Counsel in form reasonably acceptable to the Registrar to the effect that such exchange or transfer is in compliance with the Securities Act and that the restrictions on transfer contained herein and in the Private Placement Legend are no longer required in order to maintain compliance with the Securities Act. (iv) Beneficial Interests in Unrestricted Global Notes to Unrestricted Definitive Notes. If any holder of a beneficial interest in an Unrestricted Global Note proposes to exchange such beneficial interest for a Definitive Note or to transfer such beneficial interest to a Person who takes delivery thereof in the form of a Definitive Note, then, upon satisfaction of the conditions set forth in Section 2.06(b)(iii) hereof, the Trustee shall cause the aggregate principal amount of the applicable 23 29 Global Note to be reduced accordingly pursuant to Section 2.06(h) hereof, and the Company shall execute and the Trustee shall authenticate and deliver to the Person designated in the instructions a Definitive Note in the appropriate principal amount. Any Definitive Note issued in exchange for a beneficial interest pursuant to this Section 2.06(c)(iv) shall be registered in such name or names and in such authorized denomination or denominations as the holder of such beneficial interest shall instruct the Registrar through instructions from the Depositary and the Participant or Indirect Participant. The Trustee shall deliver such Definitive Notes to the Persons in whose names such Notes are so registered. Any Definitive Note issued in exchange for a beneficial interest pursuant to this Section 2.06(c)(iv) shall not bear the Private Placement Legend. (d) Transfer and Exchange of Definitive Notes for Beneficial Interests. (i) Restricted Definitive Notes to Beneficial Interests in Restricted Global Notes. If any Holder of a Restricted Definitive Note proposes to exchange such Note for a beneficial interest in a Restricted Global Note or to transfer such Restricted Definitive Notes to a Person who takes delivery thereof in the form of a beneficial interest in a Restricted Global Note, then, upon receipt by the Registrar of the following documentation: (A) if the Holder of such Restricted Definitive Note proposes to exchange such Note for a beneficial interest in a Restricted Global Note, a certificate from such Holder in the form of Exhibit C hereto, including the certifications in item (2)(b) thereof; (B) if such Restricted Definitive Note is being transferred to a QIB in accordance with Rule 144A, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (1) thereof; (C) if such Restricted Definitive Note is being transferred to a Non-U.S. Person in an offshore transaction in accordance with Rule 903 or Rule 904, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (2) thereof; (D) if such Restricted Definitive Note is being transferred pursuant to an exemption from the registration requirements of the Securities Act in accordance with Rule 144, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (3)(a) thereof; (E) if such Restricted Definitive Note is being transferred to an Institutional Accredited Investor in reliance on an exemption from the registration requirements of the Securities Act other than those listed in subparagraphs (B) through (D) above, a certificate to the effect set forth in Exhibit B hereto, including the certifications, certificates and an Opinion of Counsel required by item (3) thereof, if applicable; (F) if such Restricted Definitive Note is being transferred to the Company or any of its Subsidiaries, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (3)(b) thereof; or 24 30 (G) if such Restricted Definitive Note is being transferred pursuant to an effective registration statement under the Securities Act, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (3)(c) thereof, the Trustee shall cancel the Restricted Definitive Note, increase or cause to be increased the aggregate principal amount of, in the case of clause (A) above, the appropriate Restricted Global Note, in the case of clause (B) above, the 144A Global Note, in the case of clause (C) above, the Regulation S Global Note, and in all other cases, the IAI Global Note. (ii) Restricted Definitive Notes to Beneficial Interests in Unrestricted Global Notes. A Holder of a Restricted Definitive Note may exchange such Note for a beneficial interest in an Unrestricted Global Note or transfer such Restricted Definitive Note to a Person who takes delivery thereof in the form of a beneficial interest in an Unrestricted Global Note only if: (A) such exchange or transfer is effected pursuant to the Exchange Offer in accordance with the Registration Rights Agreement and the Holder, in the case of an exchange, or the transferee, in the case of a transfer, certifies in the applicable Letter of Transmittal that it is not (1) a broker-dealer, (2) a Person participating in the distribution of the Exchange Notes or (3) a Person who is an affiliate (as defined in Rule 144) of the Company; (B) such transfer is effected pursuant to the Shelf Registration Statement in accordance with the Registration Rights Agreement or pursuant to any other effective registration statement and a certificate to the effect set forth in Exhibit B hereto is received by the Registrar; (C) such transfer is effected by a Restricted Broker-Dealer pursuant to the Exchange Offer Registration Statement in accordance with the Registration Rights Agreement; or (D) the Registrar receives the following: (1) if the Holder of such Definitive Notes proposes to exchange such Notes for a beneficial interest in the Unrestricted Global Note, a certificate from such Holder in the form of Exhibit C hereto, including the certifications in item (1)(c) thereof; or (2) if the Holder of such Definitive Notes proposes to transfer such Notes to a Person who shall take delivery thereof in the form of a beneficial interest in the Unrestricted Global Note, a certificate from such Holder in the form of Exhibit B hereto, including the certifications in item (4) thereof; and, in each such case set forth in this subparagraph (D), if the Registrar so requests or if the Applicable Procedures so require, an Opinion of Counsel in form reasonably acceptable to the Registrar to the effect that such exchange or transfer is in compliance with the Securities Act and that the restrictions on transfer contained herein and in the Private Placement Legend are no longer required in order to maintain compliance with the Securities Act. 25 31 Upon satisfaction of the conditions of any of the subparagraphs in this Section 2.06(d)(ii), the Trustee shall cancel the Definitive Notes and increase or cause to be increased the aggregate principal amount of the Unrestricted Global Note. (iii) Unrestricted Definitive Notes to Beneficial Interests in Unrestricted Global Notes. A Holder of an Unrestricted Definitive Note may exchange such Note for a beneficial interest in an Unrestricted Global Note or transfer such Definitive Notes to a Person who takes delivery thereof in the form of a beneficial interest in an Unrestricted Global Note at any time. Upon receipt of a request for such an exchange or transfer, the Trustee shall cancel the applicable Unrestricted Definitive Note and increase or cause to be increased the aggregate principal amount of one of the Unrestricted Global Notes. If any such exchange or transfer from a Definitive Note to a beneficial interest is effected pursuant to subparagraphs (ii)(B), (ii)(D) or (iii) above at a time when an Unrestricted Global Note has not yet been issued, the Company shall issue and, upon receipt of an Authentication Order in accordance with Section 2.02 hereof, the Trustee shall authenticate one or more Unrestricted Global Notes in an aggregate principal amount equal to the principal amount of Definitive Notes so transferred. (e) Transfer and Exchange of Definitive Notes for Definitive Notes. Upon request by a Holder of Definitive Notes and such Holder's compliance with the provisions of this Section 2.06(e), the Registrar shall register the transfer or exchange of Definitive Notes. Prior to such registration of transfer or exchange, the requesting Holder shall present or surrender to the Registrar the Definitive Notes duly endorsed or accompanied by a written instruction of transfer in form satisfactory to the Registrar duly executed by such Holder or by his attorney, duly authorized in writing. In addition, the requesting Holder shall provide any additional certifications, documents and information, as applicable, required pursuant to the following provisions of this Section 2.06(e). (i) Restricted Definitive Notes to Restricted Definitive Notes. Any Restricted Definitive Note may be transferred to and registered in the name of Persons who take delivery thereof in the form of a Restricted Definitive Note if the Registrar receives the following: (A) if the transfer will be made pursuant to Rule 144A, then the transferor must deliver a certificate in the form of Exhibit B hereto, including the certifications in item (1) thereof; (B) if the transfer will be made pursuant to Rule 903 or Rule 904, then the transferor must deliver a certificate in the form of Exhibit B hereto, including the certifications in item (2) thereof; and (C) if the transfer will be made pursuant to any other exemption from the registration requirements of the Securities Act, then the transferor must deliver a certificate in the form of Exhibit B hereto, including the certifications, certificates and an Opinion of Counsel required by item (3) thereof, if applicable. (ii) Restricted Definitive Notes to Unrestricted Definitive Notes. Any Restricted Definitive Note may be exchanged by the Holder thereof for an Unrestricted Definitive Note or transferred to a Person or Persons who take delivery thereof in the form of an Unrestricted Definitive Note if: 26 32 (A) such exchange or transfer is effected pursuant to the Exchange Offer in accordance with the Registration Rights Agreement and the Holder, in the case of an exchange, or the transferee, in the case of a transfer, certifies in the applicable Letter of Transmittal that it is not (1) a broker-dealer, (2) a Person participating in the distribution of the Exchange Notes or (3) a Person who is an affiliate (as defined in Rule 144) of the Company; (B) any such transfer is effected pursuant to the Shelf Registration Statement in accordance with the Registration Rights Agreement or pursuant to any other effective registration statement and a certificate to the effect set forth in Exhibit B hereto is received by the Registrar; (C) any such transfer is effected by a Restricted Broker-Dealer pursuant to the Exchange Offer Registration Statement in accordance with the Registration Rights Agreement; or (D) the Registrar receives the following: (1) if the Holder of such Restricted Definitive Notes proposes to exchange such Notes for an Unrestricted Definitive Note, a certificate from such Holder in the form of Exhibit C hereto, including the certifications in item (1)(d) thereof; or (2) if the Holder of such Restricted Definitive Notes proposes to transfer such Notes to a Person who shall take delivery thereof in the form of an Unrestricted Definitive Note, a certificate from such Holder in the form of Exhibit B hereto, including the certifications in item (4) thereof; and, in each such case set forth in this subparagraph (D), if the Registrar so requests, an Opinion of Counsel in form reasonably acceptable to the Company to the effect that such exchange or transfer is in compliance with the Securities Act and that the restrictions on transfer contained herein and in the Private Placement Legend are no longer required in order to maintain compliance with the Securities Act. (iii) Unrestricted Definitive Notes to Unrestricted Definitive Notes. A Holder of Unrestricted Definitive Notes may transfer such Notes to a Person who takes delivery thereof in the form of an Unrestricted Definitive Note. Upon receipt of a request to register such a transfer, the Registrar shall register the Unrestricted Definitive Notes pursuant to the instructions from the Holder thereof. (f) Exchange Offer. Upon the occurrence of the Exchange Offer in accordance with the Registration Rights Agreement, the Company shall issue and, upon receipt of an Authentication Order in accordance with Section 2.02, the Trustee shall authenticate (i) one or more Unrestricted Global Notes in an aggregate principal amount equal to the principal amount of the beneficial interests in the Restricted Global Notes tendered for acceptance by Persons that certify in the applicable Letters of Transmittal that (x) they are not broker-dealers, (y) they are not participating in a distribution of the Exchange Notes and (z) they are not affiliates (as defined in Rule 144) of the Company, and accept for exchange in the Exchange Offer and (ii) Definitive Notes in an aggregate principal amount equal to the principal amount of the Restricted Definitive Notes accepted for exchange in the Exchange Offer. Concurrently with the issuance of such Notes, the Trustee shall cause the aggregate principal amount of the applicable 27 33 Restricted Global Notes to be reduced accordingly, and the Company shall execute and the Trustee shall authenticate and deliver to the Persons designated by the Holders of Definitive Notes so accepted Definitive Notes in the appropriate principal amount. (g) Legends. The following legends shall appear on the face of all Global Notes and Definitive Notes issued under this Indenture unless specifically stated otherwise in the applicable provisions of this Indenture. (i) Private Placement Legend. (A) Except as permitted by subparagraph (B) below, each Global Note and each Definitive Note (and all Notes issued in exchange therefor or substitution thereof) shall bear the legend in substantially the following form: "THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND THIS NOTE MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OR IN ACCORDANCE WITH AN APPLICABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (SUBJECT TO THE DELIVERY OF SUCH EVIDENCE, IF REQUIRED UNDER THE INDENTURE PURSUANT TO WHICH THIS NOTE IS ISSUED) AND IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER JURISDICTION. EACH PURCHASER OF THE SECURITY EVIDENCED HEREBY IS HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER OR ANOTHER EXEMPTION UNDER THE SECURITIES ACT. THE HOLDER OF THE SECURITY EVIDENCED HEREBY AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) SUCH SECURITY MAY BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY (1) (a) TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (b) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (c) OUTSIDE THE UNITED STATES TO A FOREIGN PERSON IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 904 UNDER THE SECURITIES ACT OR (d) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND BASED UPON AN OPINION OF COUNSEL IF THE COMPANY SO REQUESTS), SUBJECT TO THE RECEIPT BY THE REGISTRAR OF A CERTIFICATION OF THE TRANSFEROR AND AN OPINION OF COUNSEL TO THE EFFECT THAT SUCH TRANSFER IS IN COMPLIANCE WITH THE SECURITIES ACT, (2) TO THE COMPANY OR (3) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (B) THE HOLDER WILL AND EACH SUBSEQUENT HOLDER IS REQUIRED TO NOTIFY ANY PURCHASER FROM IT OF THE SECURITY EVIDENCED HEREBY OF THE RESALE RESTRICTION SET FORTH IN (A) ABOVE." 28 34 (B) Notwithstanding the foregoing, any Global Note or Definitive Note issued pursuant to subparagraphs (b)(iv), (c)(ii), (c)(iii), (d)(ii), (d)(iii), (e)(ii), (e)(iii) or (f) to this Section 2.06 (and all Notes issued in exchange therefor or substitution thereof) shall not bear the Private Placement Legend. (ii) Global Note Legend. Each Global Note shall bear a legend in substantially the following form: "THIS GLOBAL NOTE IS HELD BY THE DEPOSITARY (AS DEFINED IN THE INDENTURE GOVERNING THIS NOTE) OR ITS NOMINEE IN CUSTODY FOR THE BENEFIT OF THE BENEFICIAL OWNERS HEREOF, AND IS NOT TRANSFERABLE TO ANY PERSON UNDER ANY CIRCUMSTANCES EXCEPT THAT (I) THE TRUSTEE MAY MAKE SUCH NOTATIONS HEREON AS MAY BE REQUIRED PURSUANT TO SECTION 2.07 OF THE INDENTURE, (II) THIS GLOBAL NOTE MAY BE EXCHANGED IN WHOLE BUT NOT IN PART PURSUANT TO SECTION 2.06(a) OF THE INDENTURE, (III) THIS GLOBAL NOTE MAY BE DELIVERED TO THE TRUSTEE FOR CANCELLATION PURSUANT TO SECTION 2.11 OF THE INDENTURE AND (IV) THIS GLOBAL NOTE MAY BE TRANSFERRED TO A SUCCESSOR DEPOSITARY WITH THE PRIOR WRITTEN CONSENT OF AAI.FOSTERGRANT, INC." (iii) Regulation S Temporary Global Note Legend. The Regulation S Temporary Global Note shall bear a legend in substantially the following form: "THE RIGHTS ATTACHING TO THIS REGULATION S TEMPORARY GLOBAL NOTE, AND THE CONDITIONS AND PROCEDURES GOVERNING ITS EXCHANGE FOR CERTIFICATED NOTES, ARE AS SPECIFIED IN THE INDENTURE (AS DEFINED HEREIN). NEITHER THE HOLDER NOR THE BENEFICIAL OWNERS OF THIS REGULATION S TEMPORARY GLOBAL NOTE SHALL BE ENTITLED TO RECEIVE PAYMENT OF INTEREST HEREON." (h) Cancellation and/or Adjustment of Global Notes. At such time as all beneficial interests in a particular Global Note have been exchanged for Definitive Notes or a particular Global Note has been redeemed, repurchased or canceled in whole and not in part, each such Global Note shall be returned to or retained and canceled by the Trustee in accordance with Section 2.11 hereof. At any time prior to such cancellation, if any beneficial interest in a Global Note is exchanged for or transferred to a Person who will take delivery thereof in the form of a beneficial interest in another Global Note or for Definitive Notes, the principal amount of Notes represented by such Global Note shall be reduced accordingly and an endorsement shall be made on such Global Note by the Trustee or by the Depositary at the direction of the Trustee to reflect such reduction; and if the beneficial interest is being exchanged for or transferred to a Person who will take delivery thereof in the form of a beneficial interest in another Global Note, such other Global Note shall be increased accordingly and an endorsement shall be made on such Global Note by the Trustee or by the Depositary at the direction of the Trustee to reflect such increase. (i) General Provisions Relating to Transfers and Exchanges. (i) To permit registrations of transfers and exchanges, the Company shall execute and the Trustee shall authenticate Global Notes and Definitive Notes upon receipt of an Authentication Order or at the Registrar's request. 29 35 (ii) No service charge shall be made to a holder of a beneficial interest in a Global Note or to a Holder of a Definitive Note for any registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any transfer tax or similar governmental charge payable in connection therewith (other than any such transfer taxes or similar governmental charge payable upon exchange or transfer pursuant to Sections 2.10, 3.06, 3.09, 4.10, 4.14 and 9.05 hereof). (iii) The Registrar shall not be required to register the transfer of or exchange any Note selected for redemption in whole or in part, except the unredeemed portion of any Note being redeemed in part. (iv) All Global Notes and Definitive Notes issued upon any registration of transfer or exchange of Global Notes or Definitive Notes shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Global Notes or Definitive Notes surrendered upon such registration of transfer or exchange. (v) The Company shall not be required (A) to issue, to register the transfer of or to exchange any Notes during a period beginning at the opening of business 15 days before the day of any selection of Notes for redemption under Section 3.02 hereof and ending at the close of business on the day of selection, (B) to register the transfer of or to exchange any Note so selected for redemption in whole or in part, except the unredeemed portion of any Note being redeemed in part or (C) to register the transfer of or to exchange a Note between a record date and the next succeeding Interest Payment Date. (vi) Prior to due presentment for the registration of a transfer of any Note, the Trustee, any Agent and the Company may deem and treat the Person in whose name any Note is registered as the absolute owner of such Note for the purpose of receiving payment of principal of and interest on such Notes and for all other purposes, and none of the Trustee, any Agent or the Company shall be affected by notice to the contrary. (vii) The Trustee shall authenticate Global Notes and Definitive Notes in accordance with the provisions of Section 2.02 hereof. (viii) All certifications, certificates and Opinions of Counsel required to be submitted to the Registrar pursuant to this Section 2.06 to effect a registration of transfer or exchange may be submitted by facsimile. SECTION 2.07. REPLACEMENT NOTES. If any mutilated Note is surrendered to the Trustee or the Company and the Trustee receives evidence to its satisfaction of the destruction, loss or theft of any Note, the Company shall issue and the Trustee, upon receipt of an Authentication Order, shall authenticate a replacement Note if the Trustee's requirements are met. If required by the Trustee or the Company, an indemnity bond must be supplied by the Holder that is sufficient in the judgment of the Trustee and the Company to protect the Company, the Trustee, any Agent and any authenticating agent from any loss that any of them may suffer if a Note is replaced. The Company may charge for its expenses in replacing a Note. Every replacement Note is an additional obligation of the Company and shall be entitled to all of the benefits of this Indenture equally and proportionately with all other Notes duly issued hereunder. 30 36 SECTION 2.08. OUTSTANDING NOTES. The Notes outstanding at any time are all the Notes authenticated by the Trustee except for those canceled by it, those delivered to it for cancellation, those reductions in the interest in a Global Note effected by the Trustee in accordance with the provisions hereof, and those described in this Section as not outstanding. Except as set forth in Section 2.09 hereof, a Note does not cease to be outstanding because the Company or an Affiliate of the Company holds the Note. If a Note is replaced pursuant to Section 2.07 hereof, it ceases to be outstanding unless the Trustee receives proof satisfactory to it that the replaced Note is held by a bona fide purchaser. If the principal amount of any Note is considered paid under Section4.01 hereof, it ceases to be outstanding and interest on it ceases to accrue. If the Paying Agent (other than the Company, a Subsidiary or an Affiliate of any thereof) holds, on a redemption date or maturity date, money sufficient to pay Notes payable on that date, then on and after that date such Notes shall be deemed to be no longer outstanding and shall cease to accrue interest. SECTION 2.09. TREASURY NOTES. In determining whether the Holders of the required principal amount of Notes have concurred in any direction, waiver or consent, Notes owned by the Company, or by any Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company, shall be considered as though not outstanding, except that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Notes that the Trustee actually knows are so owned shall be so disregarded. SECTION 2.10. TEMPORARY NOTES. Until certificates representing Notes are ready for delivery, the Company may prepare and the Trustee, upon receipt of an Authentication Order, shall authenticate temporary Notes. Temporary Notes shall be substantially in the form of certificated Notes but may have variations that the Company considers appropriate for temporary Notes and as shall be reasonably acceptable to the Trustee. Without unreasonable delay, the Company shall prepare and the Trustee shall authenticate Definitive Notes in exchange for temporary Notes. Holders of temporary Notes shall be entitled to all of the benefits of this Indenture. SECTION 2.11. CANCELLATION. The Company at any time may deliver Notes to the Trustee for cancellation. The Registrar and Paying Agent shall forward to the Trustee any Notes surrendered to them for registration of transfer, exchange or payment. The Trustee and no one else shall cancel all Notes surrendered for registration of transfer, exchange, payment, replacement or cancellation and shall destroy canceled Notes (subject to the record retention requirement of the Exchange Act). Certification of the destruction of all canceled Notes shall be delivered to the Company. The Company may not issue new Notes to replace Notes that it has paid or that have been delivered to the Trustee for cancellation. 31 37 SECTION 2.12. DEFAULTED INTEREST. If the Company defaults in a payment of interest on the Notes, it shall pay the defaulted interest in any lawful manner plus, to the extent lawful, interest payable on the defaulted interest, to the Persons who are Holders on a subsequent special record date, in each case at the rate provided in the Notes and in Section 4.01 hereof. The Company shall notify the Trustee in writing of the amount of defaulted interest proposed to be paid on each Note and the date of the proposed payment. The Company shall fix or cause to be fixed each such special record date and payment date, provided that no such special record date shall be less than 10 days prior to the related payment date for such defaulted interest. At least 15 days before the special record date, the Company (or, upon the written request of the Company, the Trustee in the name and at the expense of the Company) shall mail or cause to be mailed to Holders a notice that states the special record date, the related payment date and the amount of such interest to be paid. ARTICLE 3. REDEMPTION AND PREPAYMENT SECTION 3.01. NOTICES TO TRUSTEE. If the Company elects to redeem Notes pursuant to the optional redemption provisions of Section 3.07 hereof, it shall furnish to the Trustee, at least 30 days but not more than 60 days before a redemption date, an Officers' Certificate setting forth (i) the clause of this Indenture pursuant to which the redemption shall occur, (ii) the redemption date, (iii) the principal amount of Notes to be redeemed and (iv) the redemption price. SECTION 3.02. SELECTION OF NOTES TO BE REDEEMED. If less than all of the Notes are to be redeemed or purchased in an offer to purchase at any time, the Trustee shall select the Notes to be redeemed or purchased among the Holders of the Notes in compliance with the requirements of the principal national securities exchange, if any, on which the Notes are listed or, if the Notes are not so listed, on a pro rata basis, by lot or in accordance with any other method the Trustee considers fair and appropriate. In the event of partial redemption by lot, the particular Notes to be redeemed shall be selected, unless otherwise provided herein, at least 30 but not more than 60 days prior to the redemption date by the Trustee from the outstanding Notes not previously called for redemption. The Trustee shall promptly notify the Company in writing of the Notes selected for redemption and, in the case of any Note selected for partial redemption, the principal amount thereof to be redeemed. Notes and portions of Notes selected shall be in amounts of $1,000 or whole multiples of $1,000; except that if all of the Notes of a Holder are to be redeemed, the entire outstanding amount of Notes held by such Holder, even if not a multiple of $1,000, shall be redeemed. Except as provided in the preceding sentence, provisions of this Indenture that apply to Notes called for redemption also apply to portions of Notes called for redemption. SECTION 3.03. NOTICE OF REDEMPTION. Subject to the provisions of Section 3.09 hereof, at least 30 days but not more than 60 days before a redemption date, the Company shall mail or cause to be mailed, by first class mail, a notice of redemption to each Holder whose Notes are to be redeemed at its registered address. 32 38 The notice shall identify the Notes to be redeemed and shall state: (a) the redemption date; (b) the redemption price; (c) if any Note is being redeemed in part, the portion of the principal amount of such Note to be redeemed and that, after the redemption date upon surrender of such Note, a new Note or Notes in principal amount equal to the unredeemed portion shall be issued upon cancellation of the original Note; (d) the name and address of the Paying Agent; (e) that Notes called for redemption must be surrendered to the Paying Agent to collect the redemption price; (f) that, unless the Company defaults in making such redemption payment, interest on Notes called for redemption ceases to accrue on and after the redemption date; (g) the paragraph of the Notes and/or Section of this Indenture pursuant to which the Notes called for redemption are being redeemed; and (h) that no representation is made as to the correctness or accuracy of the CUSIP number, if any, listed in such notice or printed on the Notes. At the Company's request, the Trustee shall give the notice of redemption in the Company's name and at its expense; provided, however, that the Company shall have delivered to the Trustee, at least 45 days prior to the redemption date, an Officers' Certificate requesting that the Trustee give such notice and setting forth the information to be stated in such notice as provided in the preceding paragraph. SECTION 3.04. EFFECT OF NOTICE OF REDEMPTION. Once notice of redemption is mailed in accordance with Section 3.03 hereof, Notes called for redemption become irrevocably due and payable on the redemption date at the redemption price. A notice of redemption may not be conditional. SECTION 3.05. DEPOSIT OF REDEMPTION PRICE. One Business Day prior to the redemption date, the Company shall deposit with the Trustee or with the Paying Agent money sufficient to pay the redemption price of and accrued interest on all Notes to be redeemed on that date. The Trustee or the Paying Agent shall promptly return to the Company any money deposited with the Trustee or the Paying Agent by the Company in excess of the amounts necessary to pay the redemption price of, and accrued interest on, all Notes to be redeemed. If the Company complies with the provisions of the preceding paragraph, on and after the redemption date, interest shall cease to accrue on the Notes or the portions of Notes called for redemption. If a Note is redeemed on or after an interest record date but on or prior to the related interest payment date, then any accrued and unpaid interest shall be paid to the Person in whose name such Note was registered at the close of business on such record date. If any Note called for redemption shall not be so paid upon surrender for redemption because of the failure of the Company to comply with the 33 39 preceding paragraph, interest shall be paid on the unpaid principal, from the redemption date until such principal is paid, and to the extent lawful on any interest not paid on such unpaid principal, in each case at the rate provided in the Notes and in Section 4.01 hereof. SECTION 3.06. NOTES REDEEMED IN PART. Upon surrender of a Note that is redeemed in part, the Company shall issue and, upon receipt of an Authentication Order, the Trustee shall authenticate for the Holder at the expense of the Company a new Note equal in principal amount to the unredeemed portion of the Note surrendered. SECTION 3.07. OPTIONAL REDEMPTION. (a) The Notes shall not be redeemable at the Company's option prior to July 15, 2002. Thereafter, the Notes shall be subject to redemption at any time at the option of the Company, in whole or in part, upon not less than 30 nor more than 60 days' notice, at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the applicable redemption date, if redeemed during the twelve-month period beginning on July 15th of the years indicated below: YEAR PERCENTAGE ---- ---------- 2002..................................................... 105.375% 2003..................................................... 102.688% 2004 and thereafter...................................... 100.000% (b) Notwithstanding the foregoing, at any time on or before July 15, 2001, the Company may redeem up to 35% of the aggregate principal amount of Notes originally issued under this Indenture at a redemption price of 110.750% of the principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the redemption date, with the net cash proceeds of a public sale of common stock of the Company; provided that at least 65% of the aggregate principal amount of Notes originally issued under this Indenture remains outstanding immediately after the occurrence of such redemption (excluding Notes held by the Company or any of its Subsidiaries); and provided, further, that such redemption shall occur within 45 days after the date of the closing of such public sale. (c) Any redemption pursuant to this Section 3.07 shall be made pursuant to the provisions of Section 3.01 through 3.06 hereof. SECTION 3.08. MANDATORY REDEMPTION. The Company shall not be required to make mandatory redemption or sinking fund payments with respect to the Notes. SECTION 3.09. OFFER TO PURCHASE BY APPLICATION OF EXCESS PROCEEDS. In the event that, pursuant to Section 4.10 hereof, the Company shall be required to commence an offer to all Holders to purchase Notes (an "Asset Sale Offer"), it shall follow the procedures specified below. The Asset Sale Offer shall remain open for a period of 20 Business Days following its commencement and no longer, except to the extent that a longer period is required by applicable law (the 34 40 "Offer Period"). No later than five Business Days after the termination of the Offer Period (the "Purchase Date"), the Company shall purchase the principal amount of Notes required to be purchased pursuant to Section 4.10 hereof (the "Offer Amount") or, if less than the Offer Amount has been tendered, all Notes tendered in response to the Asset Sale Offer. Payment for any Notes so purchased shall be made in the same manner as interest payments are made. If the Purchase Date is on or after an interest record date and on or before the related interest payment date, any accrued and unpaid interest shall be paid to the Person in whose name a Note is registered at the close of business on such record date, and no additional interest shall be payable to Holders who tender Notes pursuant to the Asset Sale Offer. Upon the commencement of an Asset Sale Offer, the Company shall send, by first class mail, a notice to the Trustee and each of the Holders, with a copy to the Trustee. The notice shall contain all instructions and materials necessary to enable such Holders to tender Notes pursuant to the Asset Sale Offer. The Asset Sale Offer shall be made to all Holders. The notice, which shall govern the terms of the Asset Sale Offer, shall state: (a) that the Asset Sale Offer is being made pursuant to this Section 3.09 and Section 4.10 hereof and the length of time the Asset Sale Offer shall remain open; (b) the Offer Amount, the purchase price and the Purchase Date; (c) that any Note not tendered or accepted for payment shall continue to accrue interest; (d) that, unless the Company defaults in making such payment, any Note accepted for payment pursuant to the Asset Sale Offer shall cease to accrue interest after the Purchase Date; (e) that Holders electing to have a Note purchased pursuant to an Asset Sale Offer may only elect to have all of such Note purchased and may not elect to have only a portion of such Note purchased; (f) that Holders electing to have a Note purchased pursuant to any Asset Sale Offer shall be required to surrender the Note, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the Note completed, or transfer by book-entry transfer, to the Company, a depositary, if appointed by the Company, or a Paying Agent at the address specified in the notice prior to the expiration of the Offer Period; (g) that Holders shall be entitled to withdraw their election if the Company, the depositary or the Paying Agent, as the case may be, receives, not later than the expiration of the Offer Period, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the principal amount of the Note the Holder delivered for purchase and a statement that such Holder is withdrawing his election to have such Note purchased; (h) that, if the aggregate principal amount of Notes surrendered by Holders exceeds the Offer Amount, the Company shall select the Notes to be purchased on a pro rata basis (with such adjustments as may be deemed appropriate by the Company so that only Notes in denominations of $1,000, or integral multiples thereof, shall be purchased); and 35 41 (i) that Holders whose Notes were purchased only in part shall be issued new Notes equal in principal amount to the unpurchased portion of the Notes surrendered (or transferred by book-entry transfer). On or before the Purchase Date, the Company shall, to the extent lawful, accept for payment, on a pro rata basis to the extent necessary, the Offer Amount of Notes or portions thereof tendered pursuant to the Asset Sale Offer, or if less than the Offer Amount has been tendered, all Notes tendered, and shall deliver to the Trustee an Officers' Certificate stating that such Notes or portions thereof were accepted for payment by the Company in accordance with the terms of this Section 3.09. The Company, the Depositary or the Paying Agent, as the case may be, shall promptly (but in any case not later than five days after the Purchase Date) mail or deliver to each tendering Holder an amount equal to the purchase price of the Notes tendered by such Holder and accepted by the Company for purchase, and the Company shall promptly issue a new Note, and the Trustee, upon written request from the Company shall authenticate and mail or deliver such new Note to such Holder, in a principal amount equal to any unpurchased portion of the Note surrendered. Any Note not so accepted shall be promptly mailed or delivered by the Company to the Holder thereof. The Company shall publicly announce the results of the Asset Sale Offer on the Purchase Date. The Company shall 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 Notes in connection with an Asset Sale Offer and, to the extent inconsistent with the provisions of this Indenture, such laws and regulations shall govern. Other than as specifically provided in this Section 3.09, any purchase pursuant to this Section 3.09 shall be made pursuant to the provisions of Sections 3.01 through 3.06 hereof. ARTICLE 4. COVENANTS SECTION 4.01. PAYMENT OF NOTES. The Company shall pay or cause to be paid the principal of, premium, if any, and interest on the Notes on the dates and in the manner provided in the Notes. Principal, premium, if any, and interest shall be considered paid on the date due if the Paying Agent, if other than the Company or a Subsidiary thereof, holds as of 11:00 a.m. Eastern Time on the due date money deposited by the Company in immediately available funds and designated for and sufficient to pay all principal, premium, if any, and interest then due. The Company shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue principal at the rate equal to 1% per annum in excess of the then applicable interest rate on the Notes to the extent lawful; it shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue installments of interest and Liquidated Damages (without regard to any applicable grace period) at the same rate to the extent lawful. SECTION 4.02. MAINTENANCE OF OFFICE OR AGENCY. The Company shall maintain in the Borough of Manhattan, the City of New York, an office or agency (which may be an office of the Trustee or an affiliate of the Trustee, Registrar or co-registrar) where Notes may be surrendered for registration of transfer or for exchange and where notices and demands to or upon the Company in respect of the Notes and this Indenture may be served. 36 42 The Company shall give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee. The Company may also from time to time designate one or more other offices or agencies where the Notes may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in the Borough of Manhattan, the City of New York for such purposes. The Company shall give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency. The Company hereby designates the Corporate Trust Office of the Trustee as one such office or agency of the Company in accordance with Section 2.03 hereof. SECTION 4.03. REPORTS. (a) Whether or not required by the rules and regulations of the SEC, so long as any Notes are outstanding, the Company shall furnish to the Trustee and Holders of Notes (i) all quarterly and annual financial information that would be required to be contained in a filing with the SEC 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 SEC on Form 8-K if the Company were required to file such reports, in each case within the time periods specified in the SEC's rules and regulations. In addition, following the consummation of the Exchange Offer, whether or not required by the rules and regulations of the SEC, the Company shall file a copy of all such information and reports with the SEC for public availability within the time periods specified in the SEC's rules and regulations (unless the SEC will not accept such a filing) and make such information available to securities analysts and prospective investors upon request. (b) In addition, for so long as any Notes remain outstanding, the Company and the Guarantors shall furnish to the Trustee and Holders and to securities analysts and prospective investors, upon their request, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act. SECTION 4.04. COMPLIANCE CERTIFICATE. (a) The Company and each Guarantor (to the extent that such Guarantor is so required under the TIA) shall deliver to the Trustee, within 90 days after the end of each fiscal year, an Officers' Certificate stating that a review of the activities of the Company and its Subsidiaries during the preceding fiscal year has been made under the supervision of the signing Officers with a view to determining whether the Company and the Guarantors have kept, observed, performed and fulfilled its obligations under this Indenture, and further stating, as to each such Officer signing such certificate, that to the best of his or her knowledge the Company and the Guarantors have kept, observed, performed and fulfilled each and every covenant contained in this Indenture and is not in default in the performance or observance of any of the terms, provisions and conditions of this Indenture (or, if a Default or Event of Default shall have occurred, describing all such Defaults or Events of Default of which he or she may 37 43 have knowledge and what action the Company and the Guarantors are taking or propose to take with respect thereto) and that to the best of his or her knowledge no event has occurred and remains in existence by reason of which payments on account of the principal of or interest, if any, on the Notes is prohibited or if such event has occurred, a description of the event and what action the Company and the Guarantors are taking or propose to take with respect thereto. (b) So long as not contrary to the then current recommendations of the American Institute of Certified Public Accountants, the year-end financial statements delivered pursuant to Section 4.03(a) above shall be accompanied by a written statement of the Company's independent public accountants (who shall be a firm of established national reputation) that in making the examination necessary for certification of such financial statements, nothing has come to their attention that would lead them to believe that the Company has violated any provisions of Article 4 or Article 5 hereof or, if any such violation has occurred, specifying the nature and period of existence thereof, it being understood that such accountants shall not be liable directly or indirectly to any Person for any failure to obtain knowledge of any such violation. (c) The Company shall, so long as any of the Notes are outstanding, deliver to the Trustee, forthwith upon any Officer becoming aware of any Default or Event of Default, an Officers' Certificate specifying such Default or Event of Default and what action the Company is taking or proposes to take with respect thereto. SECTION 4.05. TAXES. The Company shall pay, and shall cause each of its Subsidiaries to pay, prior to delinquency, all material taxes, assessments, and governmental levies except such as are contested in good faith and by appropriate proceedings or where the failure to effect such payment is not adverse in any material respect to the Holders of the Notes. SECTION 4.06. STAY, EXTENSION AND USURY LAWS. The Company and each of the Guarantors covenants (to the extent that it may lawfully do so) that it shall not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law wherever enacted, now or at any time hereafter in force, that may affect the covenants or the performance of this Indenture; and the Company and each of the Guarantors (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it shall not, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the Trustee, but shall suffer and permit the execution of every such power as though no such law has been enacted. SECTION 4.07. RESTRICTED PAYMENTS. The Company shall not, and shall not permit any of its 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 Subsidiaries' Equity Interests (including, without limitation, any payment in connection with any merger or consolidation involving the Company or any of its Subsidiaries) or to the direct or indirect holders of the Company's or any of its Subsidiaries' Equity Interests in their capacity as such (other than dividends or distributions (a) payable in Equity Interests (other than Disqualified Stock) of the Company or (b) to the Company or a Wholly Owned Subsidiary of the Company); (ii) purchase, redeem or otherwise acquire or retire for value (including, without limitation, in connection with any 38 44 merger or consolidation involving the Company) any Equity Interests of the Company or any direct or indirect parent of the Company (other than any such Equity Interests owned by the Company or any Wholly Owned Subsidiary of the Company); (iii) make any payment on or with respect to, or purchase, redeem, defease or otherwise acquire or retire for value any Indebtedness of the Company or any of its Subsidiaries that is subordinated to the Notes or any Subsidiary Guarantee thereof, except a payment of interest or principal 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; and (b) the Company would, at the time of such Restricted Payment and after giving pro forma effect thereto as if such Restricted Payment had been made at the beginning of the applicable four-quarter period, have been permitted to incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in Section 4.09 hereof; and (c)......such Restricted Payment, together with the aggregate amount of all other Restricted Payments made by the Company and its Subsidiaries after the date of this Indenture (excluding Restricted Payments permitted by clauses (ii), (iii), (iv), (v)(a) and (vi) of the next succeeding paragraph), is less than the sum, without duplication, 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 this 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 received by the Company since the date of this Indenture as a contribution to its common equity capital or from the issue or sale of Equity Interests of the Company (other than Disqualified Stock) or Disqualified Stock or debt securities of the Company that have been converted into such Equity Interests (other than Equity Interests (or Disqualified Stock or convertible debt securities) sold to a Subsidiary of the Company), plus (iii) to the extent that any Restricted Investment that was made after the date of this Indenture is sold for cash or otherwise liquidated or repaid for cash, the lesser of (A) the cash return of capital with respect to such Restricted Investment (less the cost of disposition, if any) and (B) the initial amount of such Restricted Investment, plus (iv) $3.0 million. The foregoing provisions shall 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 Indenture; (ii) the redemption, repurchase, retirement, defeasance or other acquisition of any subordinated Indebtedness of the Company or any Guarantor or Equity Interests of the Company in exchange for, or out of the net cash proceeds of the substantially concurrent sale (other than to a Subsidiary of the Company) of, other Equity Interests of the Company (other than any Disqualified Stock); provided that the amount of any such net cash proceeds that are utilized for any such redemption, repurchase, retirement, defeasance or other acquisition shall be excluded from clause (c) (ii) of the preceding paragraph; (iii) the defeasance, redemption, repurchase or other acquisition of subordinated Indebtedness of the Company or any Guarantor with the net cash proceeds from an incurrence of Permitted Refinancing Indebtedness; (iv) the payment of any dividend by a Subsidiary of the Company to the holders of its common Equity Interests on a pro rata basis; (v) the repurchase, redemption or other acquisition or retirement for value of any Equity Interests of the Company or any Subsidiary of the Company held by any member of the Company's (or any of its Subsidiaries') management pursuant to any stock purchase, stock 39 45 redemption, stock option or similar agreement; provided that the aggregate price paid for all such repurchased, redeemed, acquired or retired Equity Interests in any twelve-month period shall not exceed the sum of (a) any amounts available to the Company under insurance policies insuring the lives of such member of management and (b) $250,000 in any twelve-month period and no Default or Event of Default shall have occurred and be continuing immediately after such transaction; and (vi) repurchases of Capital Stock deemed to occur upon exercise of stock options if such Capital Stock represents a portion of the exercise price of such options. 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) or securities proposed to be transferred or issued by the Company or such Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair market value of any asset or securities that are required to be valued by this Section 4.07 shall be determined by the Board of Directors whose resolution with respect thereto shall be delivered to the Trustee, such determination to be based upon an opinion or appraisal issued by an accounting, appraisal or investment banking firm of national standing if such fair market value exceeds $1.0 million. 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 this Section 4.07 were computed, together with a copy of any fairness opinion or appraisal required by this Indenture. SECTION 4.08. DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES. The Company shall not, and shall not permit any of its 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 Subsidiary to (i)(a) pay dividends or make any other distributions to the Company or any of its 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 Subsidiaries, (ii) make loans or advances to the Company or any of its Subsidiaries or (iii) transfer any of its properties or assets to the Company or any of its Subsidiaries. However, the foregoing restrictions shall not apply to encumbrances or restrictions existing under or by reason of (a) Existing Indebtedness as in effect on the date of this Indenture, (b) the Senior Credit Facility as in effect as of the date of this Indenture, and any amendments, modifications, restatements, renewals, increases, supplements, refundings, replacements or refinancings thereof, provided that such amendments, modifications, restatements, renewals, increases, supplements, refundings, replacement or refinancings are no more restrictive, taken as a whole, with respect to such dividend and other payment restrictions than those contained in the Senior Credit Facility as in effect on the date of this Indenture, (c) the Notes and the Subsidiary Guarantees, (d) applicable law, (e) any instrument governing Indebtedness or Capital Stock of a Person acquired by the Company or any of its 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 Indenture to be incurred, (f) customary non-assignment provisions in leases 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) any agreement for the sale or other disposition of a Subsidiary that restricts distributions by that Subsidiary pending its sale or other disposition, (i) Permitted Refinancing Indebtedness, provided that the restrictions contained in the agreements governing such Permitted Refinancing Indebtedness are no more restrictive, taken as a whole, than those contained in the agreements governing the Indebtedness being refinanced, (j) Liens securing Indebtedness 40 46 otherwise permitted to be incurred pursuant to Section 4.12 hereof that limits the right of the debtor to dispose of the assets securing such Indebtedness, (k) provisions with respect to the disposition or distribution of assets or property in joint venture agreements and other similar agreements entered into in the ordinary course of business and (l) restrictions on cash or other deposits or net worth imposed by customers under contracts entered into in the ordinary course of business. SECTION 4.09. INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK. (a) The Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, create, incur, issue, assume, guarantee or otherwise become directly or indirectly liable, contingently or otherwise, with respect to (collectively, "incur") any Indebtedness (including Acquired Debt) and the Company shall not issue any Disqualified Stock and shall not permit any of its Subsidiaries to issue any shares of preferred stock; provided, however, that the Company may incur Indebtedness (including Acquired Debt) or issue shares of Disqualified Stock if the Fixed Charge Coverage Ratio for the Company's most recently ended four full fiscal quarters for which internal financial statements are available immediately preceding the date on which such additional Indebtedness is incurred or such Disqualified Stock or preferred stock is issued would have been at least 2 to 1, 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 or preferred stock had been issued, as the case may be, at the beginning of such four-quarter period. (b) The provisions of Section 4.09(a) hereof shall not apply to the incurrence of any of the following items of Indebtedness (collectively, "Permitted Debt"): (i) the incurrence by the Company or a Foreign Subsidiary of Indebtedness (including letters of credit, with letters of credit being deemed to have a principal amount equal to the maximum potential liability of the Company and its Subsidiaries thereunder) under Credit Facilities and the Guarantee thereof by the Guarantors; provided that the aggregate principal amount of all Indebtedness of the Company and its Subsidiaries (including letters of credit) outstanding under Credit Facilities after giving effect to such incurrence does not exceed an amount equal to the greater of (a) $60.0 million less the aggregate amount of all Net Proceeds of Asset Sales applied to permanently repay any Indebtedness under a Credit Facility pursuant to Section 4.10 hereof or (b) the sum of 85% of the accounts receivable plus 55% of the jewelry inventory, 65% of the optical inventory and 55% of all other inventory, in each case of the Company and its Subsidiaries net of reserves, as shown on the most recent balance sheet of the Company and its Subsidiaries; (ii) the incurrence by the Company and its Subsidiaries of the Existing Indebtedness; (iii) the incurrence by the Company of Indebtedness represented by the Notes (other than any Additional Notes) and the Exchange Notes (other than any Additional Notes) and the incurrence by the Guarantors of Indebtedness represented by the Subsidiary Guarantees; (iv) the incurrence by the Company or any of its Subsidiaries of Indebtedness represented by Capital Lease Obligations, mortgage financings or purchase money obligations, in each case incurred for the purpose of financing all or any part of the purchase price or cost of construction or improvement of property, plant or equipment used in the business of the Company or such Subsidiary, in an aggregate principal amount, together with any Attributable Debt with respect to the Smithfield Property permitted pursuant to Section 4.15 hereof, not to exceed $10.0 million at any 41 47 time outstanding, including any Permitted Refinancing Indebtedness incurred pursuant to clause (v) below to refund, refinance or replace any Indebtedness incurred pursuant to this clause (iv); (v) the incurrence by the Company or any of its Subsidiaries of Permitted Refinancing Indebtedness in exchange for, or the net proceeds of which are used to refund, refinance or replace Indebtedness (other than intercompany Indebtedness) that was permitted by this Indenture to be incurred by Section 4.09(a) hereof, or by clauses (ii), (iii) or (iv) of this Section 4.09(b); (vi) the incurrence by the Company or any of its Subsidiaries of intercompany Indebtedness between or among the Company and any of its Subsidiaries; provided, however, that (a) if the Company is the obligor on such Indebtedness, such Indebtedness is expressly subordinated to the prior payment in full in cash of all Obligations with respect to the Notes and (b)(1) any subsequent issuance or transfer of Equity Interests that results in any such Indebtedness being held by a Person other than the Company or a Subsidiary thereof and (2) any sale or other transfer of any such Indebtedness to a Person that is not either the Company or a Subsidiary thereof shall be deemed, in each case, to constitute an incurrence of such Indebtedness by the Company or such Subsidiary, as the case may be, that was not permitted by this clause (vi); (vii) the incurrence by the Company or any of its Subsidiaries of Hedging Obligations that are incurred for the purpose of (a) fixing or hedging interest rate risk with respect to any floating rate Indebtedness that is permitted by the terms of this Indenture to be outstanding or (b) hedging currency exchange rate risks in connection with transactions entered into in the ordinary course of business; (viii) the guarantee by the Company or any of the Guarantors of Indebtedness of the Company or a Subsidiary of the Company that was permitted to be incurred by another provision of this Section 4.09; (ix) the incurrence by the Company of Indebtedness in connection with a repurchase of Notes or Exchange Notes following a Change of Control; provided that the principal amount of such Indebtedness does not exceed 101% of the aggregate principal amount of the Notes and the Exchange Notes repurchased, and such Indebtedness (a) has a Weighted Average Life to Maturity equal to or greater than the Weighted Average Life to Maturity of the Notes and the Exchange Notes and (b) does not mature prior to the Stated Maturity of the Notes and the Exchange Notes; (x) the incurrence of Indebtedness arising from agreements providing for indemnification, adjustment of purchase price or similar obligations, incurred in connection with the disposition of any business, assets or Subsidiary of the Company (other than Guarantees of Indebtedness incurred by any Person acquiring all or any portion of such business, assets or Subsidiary for the purpose of financing such acquisition), provided that none of the foregoing results in Indebtedness required to be reflected as Indebtedness on the balance sheet of the Company or any such Subsidiary in accordance with GAAP and the maximum aggregate liability in respect of all such Indebtedness shall at no time exceed 100% of the gross proceeds actually received by the Company and its Subsidiaries in connection with such disposition; and (xi) the incurrence by the Company of additional Indebtedness in an aggregate principal amount (or accreted value, as applicable) at any time outstanding not to exceed $7.5 million. 42 48 For purposes of determining compliance with this covenant, in the event that an item of proposed Indebtedness meets the criteria of more than one of the categories of Permitted Debt described in clauses (i) through (xi) above or is entitled to be incurred pursuant to Section 4.09(a) hereof, the Company shall, in its sole discretion, classify such item of Indebtedness on the date of its incurrence in any manner that complies with this Section 4.09. Accrual of interest, the accretion or amortization of original issue discount, the payment of interest on any Indebtedness in the form of additional Indebtedness with the same terms, and the payment of dividends on Disqualified Stock in the form of additional shares of the same class of Disqualified Stock will not be deemed to be an incurrence of Indebtedness or an issuance of Disqualified Stock for purposes of this Section 4.09; provided, in each such case, that the amount thereof is included in Fixed Charges of the Company as accrued. SECTION 4.10. ASSET SALES The Company shall not, and shall not permit any of its Subsidiaries to, consummate an Asset Sale unless (i) the Company (or the Subsidiary, as the case may be) receives consideration at the time of such Asset Sale at least equal to the fair market value (evidenced by a resolution of the Board of Directors set forth in an Officers' Certificate delivered to the Trustee) of the assets or Equity Interests issued or sold or otherwise disposed of and (ii) at least 75% of the consideration therefor received by the Company or such Subsidiary is in the form of cash or Cash Equivalents; provided that the amount of (a) any liabilities (as shown on the Company's or such Subsidiary's most recent balance sheet), of the Company or any Subsidiary (other than contingent liabilities and liabilities that are by their terms subordinated to the Notes or any guarantee thereof) that are assumed by the transferee of any such assets pursuant to a customary novation agreement that releases the Company or such Subsidiary from further liability and (b) any securities, notes or other obligations received by the Company or any such Subsidiary from such transferee that are contemporaneously (subject to ordinary settlement periods) converted by the Company or such Subsidiary into cash (to the extent of the cash received) shall be deemed to be cash for purposes of this provision; provided, further that the provisions of this paragraph shall not apply to transactions pursuant to the Fantasma Agreement, as in effect on the date of this Indenture. Within 270 days after the receipt of any Net Proceeds from an Asset Sale, the Company may apply such Net Proceeds, at its option, (a) to permanently repay Indebtedness of the Company under a Credit Facility or (b) to acquire all or substantially all of the assets of, or a majority of the Voting Stock of, another business, (c) to make a capital expenditure or (d) to acquire other long-term assets. Pending the final application of any such Net Proceeds, the Company may temporarily reduce revolving credit borrowings or otherwise invest such Net Proceeds in any manner that is not prohibited by this Indenture. Any Net Proceeds from Asset Sales that are not applied or invested as provided in the first sentence of this paragraph shall be deemed to constitute "Excess Proceeds." When the aggregate amount of Excess Proceeds exceeds $5.0 million, the Company shall be required to make an offer to all Holders of Notes and all holders of other Indebtedness that is pari passu with the Notes containing provisions similar to those set forth in this Indenture with respect to offers to purchase or redeem with the proceeds of sales of assets (an "Asset Sale Offer") to purchase the maximum principal amount of Notes and such other pari passu Indebtedness that may be purchased out of the Excess Proceeds, at an offer price in cash in an amount equal to 100% of the principal amount thereof plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the date of purchase, in accordance with the procedures set forth in this Indenture and such other pari passu Indebtedness. To the extent that any Excess Proceeds remain after consummation of an Asset Sale Offer, the Company may use such Excess Proceeds for any purpose not otherwise prohibited by this Indenture. If the aggregate principal amount of Notes and such other pari passu Indebtedness tendered into such Asset Sale Offer surrendered by Holders thereof exceeds the amount of Excess Proceeds, the Trustee shall select 43 49 the Notes and such other pari passu Indebtedness to be purchased on a pro rata basis. Upon completion of an Asset Sale Offer, the amount of Excess Proceeds shall be reset at zero. SECTION 4.11. TRANSACTIONS WITH AFFILIATES. The Company shall not, and shall not permit any of its Subsidiaries to, make any payment to, or sell, lease, transfer or otherwise dispose of any of its properties or assets to, or purchase any property or assets from, or enter into or make or amend any transaction, contract, agreement, understanding, loan, advance or guarantee with, or for the benefit of, any Affiliate (each of the foregoing, an "Affiliate Transaction"), unless (i) such Affiliate Transaction is on terms that are no less favorable to the Company or such Subsidiary than those that would have been obtained in a comparable transaction by the Company or such 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 $1.0 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 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 $5.0 million, an opinion as to the fairness to the Holders of such Affiliate Transaction from a financial point of view issued by an accounting, appraisal or investment banking firm of national standing. Notwithstanding the foregoing, the following items shall not be deemed to be Affiliate Transactions: (i) any employment agreement or benefit plan entered into by the Company or any of its Subsidiaries in the ordinary course of business and consistent with the past practice of the Company or such Subsidiary, (ii) transactions between or among the Company and/or its Subsidiaries, (iii) payment of reasonable directors fees to Persons who are not otherwise Affiliates of the Company, (iv) any sale or other issuance of Equity Interests (other than Disqualified Stock) of the Company, (v) loans or advances to employees in the ordinary course of business consistent with past practices of the Company or its Subsidiaries in an aggregate amount at any time outstanding not to exceed $1.0 million, (vi) transactions pursuant to Existing Leases, (vii) purchases of Common Stock of deceased shareholders pursuant to the Shareholders Agreement, (viii) reasonable indemnities of officers, directors and employees of the Company or any Subsidiary permitted by applicable law and (ix) Restricted Payments that are permitted by Section 4.07 hereof. SECTION 4.12. LIENS. The Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, create, incur, assume or suffer to exist any Lien securing Indebtedness, Attributable Debt or trade payables on any asset now owned or hereafter acquired, except Permitted Liens. SECTION 4.13. CORPORATE EXISTENCE. Subject to Article 5 hereof, the Company shall do or cause to be done all things necessary to preserve and keep in full force and effect (i) its corporate existence, and the corporate, partnership or other existence of each of its Subsidiaries, in accordance with the respective organizational documents (as the same may be amended from time to time) of the Company or any such Subsidiary and (ii) the rights (charter and statutory), licenses and franchises of the Company and its Subsidiaries; provided, however, that the Company shall not be required to preserve any such right, license or franchise, or the corporate, partnership or other existence of any of its Subsidiaries, if the Board of Directors shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and its Subsidiaries, taken as a whole, and that the loss thereof is not adverse in any material respect to the Holders of the Notes. 44 50 SECTION 4.14. OFFER TO REPURCHASE UPON CHANGE OF CONTROL. (a) Upon the occurrence of a Change of Control, each Holder of Notes shall have the right to require the Company to repurchase all or any part (equal to $1,000 or an integral multiple thereof) of such Holder's Notes pursuant to the offer described below (the "Change of Control Offer") at an offer price in cash equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the date of purchase (the "Change of Control Payment"). Within ten days following a Change of Control, the Company shall mail a notice to the Trustee and each Holder describing the transaction or transactions that constitute the Change of Control and stating: (1) that the Change of Control Offer is being made pursuant to this Section 4.14 and that all Notes tendered will be accepted for payment; (2) the purchase price and the purchase date, which shall be no earlier than 30 days and no later than 60 days from the date such notice is mailed (the "Change of Control Payment Date"); (3) that any Note not tendered will continue to accrue interest; (4) that, unless the Company defaults in the payment of the Change of Control Payment, all Notes accepted for payment pursuant to the Change of Control Offer shall cease to accrue interest after the Change of Control Payment Date; (5) that Holders electing to have any Notes purchased pursuant to a Change of Control Offer will be required to surrender the Notes, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the Notes completed, to the Paying Agent at the address specified in the notice prior to the expiration of the Change of Control Offer; (6) that Holders will be entitled to withdraw their election if the Paying Agent receives, not later than the expiration of the Change of Control Offer, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the principal amount of Notes delivered for purchase, and a statement that such Holder is withdrawing his election to have the Notes purchased; and (7) that Holders whose Notes are being purchased only in part will be issued new Notes equal in principal amount to the unpurchased portion of the Notes surrendered, which unpurchased portion must be equal to $1,000 in principal amount or an integral multiple thereof. The Company shall comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of the Notes as a result of a Change of Control and, to the extent inconsistent with the provisions of this Indenture, such laws and regulations shall govern. (b) On the Change of Control Payment Date, the Company shall, to the extent lawful, (i) accept for payment all Notes or portions thereof properly tendered pursuant to the Change of Control Offer, (ii) deposit with the Paying Agent an amount equal to the Change of Control Payment in respect of all Notes or portions thereof so tendered and (iii) deliver or cause to be delivered to the Trustee the Notes so accepted together with an Officers' Certificate stating the aggregate principal amount of Notes or portions thereof being purchased by the Company. The Paying Agent shall promptly mail to each Holder of Notes so tendered the Change of Control Payment for such Notes, and the Trustee shall promptly authenticate and mail (or cause to be transferred by book entry) to each Holder a new Note equal in principal amount to any unpurchased portion of the Notes surrendered, if any; provided that each such new Note will be in a principal amount of $1,000 or an integral multiple thereof. The Company shall publicly announce the results of the Change of Control Offer on or as soon as practicable after the Change of Control Payment Date. (c) The Company shall 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 this Section 4.14 and Section 3.09 hereof and purchases all Notes validly tendered and not withdrawn under such Change of Control Offer. 45 51 SECTION 4.15. LIMITATION ON SALE AND LEASEBACK TRANSACTIONS. The Company shall not, and shall not permit any of its Subsidiaries to, enter into any sale and leaseback transaction; provided that the Company may enter into a sale and leaseback transaction if (i) the Company could have (a) incurred Indebtedness in an amount equal to the Attributable Debt relating to such sale and leaseback transaction pursuant to the Fixed Charge Coverage Ratio set forth in Section 4.09(a) hereof and (b) incurred a Lien to secure such Indebtedness pursuant to Section 4.12 hereof , (ii) the gross cash proceeds of such sale and leaseback transaction are at least equal to the fair market value (as determined in good faith by the Board of Directors and set forth in an Officers' Certificate delivered to the Trustee) of the property that is the subject of such sale and leaseback transaction and (iii) the transfer of assets in such sale and leaseback transaction is permitted by, and the Company applies the proceeds of such transaction in compliance with, Section 4.10 hereof. The foregoing provisions will not apply to a sale and leaseback transaction relating to the Smithfield Property resulting in Attributable Debt with respect to such transaction in an aggregate amount not to exceed $5.0 million at any time outstanding. SECTION 4.16. LIMITATION ON ISSUANCES AND SALES OF EQUITY INTERESTS IN WHOLLY OWNED SUBSIDIARIES. The Company (i) shall not, and shall not permit any Subsidiary of the Company to, transfer, convey, sell, lease or otherwise dispose of any Equity Interests in any Wholly Owned Subsidiary of the Company to any Person (other than the Company or a Wholly Owned Subsidiary of the Company), unless (a) such transfer, conveyance, sale, lease or other disposition is of all the Equity Interests in such Wholly Owned Subsidiary and (b) the cash Net Proceeds from such transfer, conveyance, sale, lease or other disposition are applied in accordance with Section 4.10 hereof and (ii) shall not permit any Wholly Owned Subsidiary of the Company to issue any of its Equity Interests (other than, if necessary, shares of its Capital Stock constituting directors' qualifying shares) to any Person other than to the Company or a Wholly Owned Subsidiary of the Company. SECTION 4.17. PAYMENTS FOR CONSENT. Neither the Company nor any of its Subsidiaries shall, directly or indirectly, pay or cause to be paid any consideration, whether by way of interest, fee or otherwise, to any Holder of any Notes for or as an inducement to any consent, waiver or amendment of any of the terms or provisions of this Indenture or the Notes unless such consideration is offered to be paid or is paid to all Holders of the Notes that consent, waive or agree to amend in the time frame set forth in the solicitation documents relating to such consent, waiver or agreement. SECTION 4.18. ADDITIONAL SUBSIDIARY GUARANTEES If the Company or any of the Guarantors shall acquire or create another Domestic Subsidiary after the date of this Indenture, or if any Subsidiary of the Company becomes a Domestic Subsidiary of the Company after the date of the Indenture, then such newly acquired or created Domestic Subsidiary shall become a Guarantor and execute a Supplemental Indenture in the form attached hereto as Exhibit F and deliver an Opinion of Counsel to the Trustee to the effect that such Supplemental Indenture has been duly authorized, executed and delivered by such Subsidiary and constitutes a valid and binding obligation of such Subsidiary, enforceable against such Subsidiary in accordance with its terms (subject to customary exceptions). 46 52 ARTICLE 5. SUCCESSORS SECTION 5.01. MERGER, CONSOLIDATION, OR SALE OF ASSETS. The Company may not, directly or indirectly, consolidate or merge with or into (whether or not the Company is the surviving corporation), or sell, assign, transfer, 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, 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 the Person to which such sale, assignment, transfer, conveyance or other disposition shall have been made assumes all the obligations of the Company under the Registration Rights Agreement, the Notes and this Indenture pursuant to a Supplemental Indenture in a 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 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, conveyance or other disposition shall have been made (a) shall have Consolidated Net Worth immediately after the transaction equal to or greater than the Consolidated Net Worth of the Company immediately preceding the transaction and (b) shall, immediately after such transaction after giving pro forma effect thereto and any related financing transaction as if the same had occurred at the beginning of the applicable four-quarter period, be permitted to incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in Section 4.09(a) hereof. The Company also may not, directly or indirectly, lease all or substantially all of its properties or assets, in one or more related transactions, to any other Person. This Section 5.01 shall not be applicable to a sale, assignment, transfer, conveyance or other disposition of assets between or among the Company and its Wholly Owned Subsidiaries. SECTION 5.02. SUCCESSOR CORPORATION SUBSTITUTED. Upon any consolidation or merger, or any sale, assignment, transfer, lease, conveyance or other disposition of all or substantially all of the assets of the Company in accordance with Section 5.01 hereof, the successor corporation formed by such consolidation or into or with which the Company is merged or to which such sale, assignment, transfer, lease, conveyance or other disposition is made shall succeed to, and be substituted for (so that from and after the date of such consolidation, merger, sale, lease, conveyance or other disposition, the provisions of this Indenture referring to the "Company" shall refer instead to the successor corporation and not to the Company), and may exercise every right and power of the Company under this Indenture with the same effect as if such successor Person had been named as the Company herein; provided, however, that the predecessor Company shall not be relieved from the obligation to pay the principal of and interest on the Notes except in the case of a sale of all of the Company's assets that meets the requirements of Section 5.01 hereof. ARTICLE 6. DEFAULTS AND REMEDIES SECTION 6.01. EVENTS OF DEFAULT. An "Event of Default" occurs if: 47 53 (a) the Company defaults in the payment when due of interest on, or Liquidated Damages, if any, with respect to, the Notes and such default continues for a period of 30 days; (b) the Company defaults in the payment when due of principal of or premium, if any, on the Notes; (c) the Company or any of its Subsidiaries fails to comply with any of the provisions of Section 4.07, 4.09, 4.10, 4.14 or 5.01 hereof; (d) the Company or any of its Subsidiaries fails to comply with any of its other agreements in this Indenture or the Notes for 60 days after notice by the Trustee or the Holders of at least 25% in principal amount of the then outstanding Notes; (e) a default occurs under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by the Company or any of its Subsidiaries (or the payment of which is guaranteed by the Company or any of its Subsidiaries), whether such Indebtedness or guarantee now exists, or is created after the date of this Indenture, which default (i) is caused by a failure to pay principal of or premium, if any, or interest on such Indebtedness prior to the expiration of the grace period provided in such Indebtedness on the date of such default (a "Payment Default") or (ii) results in the acceleration of such Indebtedness prior to its express maturity and, in each case, the principal amount of such Indebtedness, together with the principal amount of any other such Indebtedness under which there has been a Payment Default or the maturity of which has been so accelerated, aggregates $5.0 million or more; (f) a final judgment or final judgments for the payment of money are entered by a court or courts of competent jurisdiction against the Company or any of its Significant Subsidiaries or any group of Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary and such judgment or judgments remain undischarged for a period (during which execution shall not be effectively stayed) of 60 days, provided that the aggregate of all such undischarged judgments exceeds $5.0 million; (g) the Company or any of its Significant Subsidiaries or any group of Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary pursuant to or within the meaning of 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 custodian of it or for all or substantially all of its property, (iv) makes a general assignment for the benefit of its creditors, or (v) generally is not paying its debts as they become due; or (h) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (i) is for relief against the Company or any of its Significant Subsidiaries or any group of Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary in an involuntary case; 48 54 (ii) appoints a custodian of the Company or any of its Significant Subsidiaries or any group of Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary or for all or substantially all of the property of the Company or any of its Significant Subsidiaries or any group of Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary; or (iii) orders the liquidation of the Company or any of its Significant Subsidiaries or any group of Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary; and the order or decree remains unstayed and in effect for 60 consecutive days; or (i) except as permitted by this Indenture, any Subsidiary 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 or any Guarantor, or any Person acting on behalf of any Guarantor, shall deny or disaffirm its obligations under its Subsidiary Guarantee. SECTION 6.02. ACCELERATION. If any Event of Default (other than an Event of Default specified in clause (g) or (h) of Section 6.01 hereof with respect to the Company or any of its Significant Subsidiaries or any group of Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary) occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the then outstanding Notes may declare all the Notes to be due and payable immediately. Notwithstanding the foregoing, if an Event of Default specified in clause (g) or (h) of Section 6.01 hereof occurs with respect to the Company, any of its Significant Subsidiaries or any group of Subsidiaries that, taken together, would constitute a Significant Subsidiary, all outstanding Notes will become due and payable without further action or notice. The Holders of a majority in principal amount of the then outstanding Notes by written notice to the Trustee may on behalf of all of the Holders rescind an acceleration and its consequences if the rescission would not conflict with any judgment or decree and if all existing Events or Default (except nonpayment of principal, interest or premium that has become due solely because of the acceleration) have been cured or waived. If an Event of Default occurs on or after July 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 payment of the premium that the Company would have had to pay if the Company then had elected to redeem the Notes pursuant to Section 3.07 hereof, then, upon acceleration of the Notes, an equivalent premium shall also become and be immediately due and payable, to the extent permitted by law, anything in this Indenture or in the Notes to the contrary notwithstanding. If an Event of Default occurs prior to July 15, 2002 by reason of any willful action (or inaction) taken (or not taken) by or on behalf of the Company with the intention of avoiding the prohibition on redemption of the Notes prior to such date, then, upon acceleration of the Notes, an additional premium shall also become and be immediately due and payable in an amount, for each of the years beginning on July 15th of the years set forth below, as set forth below (expressed as a percentage of the principal amount): YEAR PERCENTAGE ---- ---------- 1998.............................................. 116.125% 1999.............................................. 113.438% 2000.............................................. 110.750% 2001.............................................. 108.063% 49 55 SECTION 6.03. OTHER REMEDIES. If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy to collect the payment of principal, premium and Liquidated Damages, if any, and interest on the Notes or to enforce the performance of any provision of the Notes or this Indenture. The Trustee may maintain a proceeding even if it does not possess any of the Notes or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Holder of a Note in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. All remedies are cumulative to the extent permitted by law. SECTION 6.04. WAIVER OF PAST DEFAULTS. Holders of not less than a majority in aggregate principal amount of the then outstanding Notes by notice to the Trustee may on behalf of the Holders of all of the Notes waive an existing Default or Event of Default and its consequences hereunder, except a continuing Default or Event of Default in the payment of the principal of, premium and Liquidated Damages, if any, or interest on, the Notes (including in connection with an offer to purchase) (provided, however, that the Holders of a majority in aggregate principal amount of the then outstanding Notes may rescind an acceleration and its consequences, including any related payment default that resulted from such acceleration). Upon any such waiver, such Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other Default or impair any right consequent thereon. SECTION 6.05. CONTROL BY MAJORITY. Holders of a majority in principal amount of the then outstanding Notes may direct the time, method and place of conducting any proceeding for exercising any remedy available to the Trustee or exercising any trust or power conferred on it. However, the Trustee may refuse to follow any direction that conflicts with law or this Indenture that the Trustee determines may be unduly prejudicial to the rights of other Holders of Notes or that may involve the Trustee in personal liability. SECTION 6.06. LIMITATION ON SUITS. A Holder of a Note may pursue a remedy with respect to this Indenture or the Notes only if: (a) the Holder of a Note gives to the Trustee written notice of a continuing Event of Default; (b) the Holders of at least 25% in principal amount of the then outstanding Notes make a written request to the Trustee to pursue the remedy; (c) such Holder of a Note or Holders of Notes offer and, if requested, provide to the Trustee indemnity satisfactory to the Trustee against any loss, liability or expense; (d) the Trustee does not comply with the request within 60 days after receipt of the request and the offer and, if requested, the provision of indemnity; and 50 56 (e) during such 60-day period the Holders of a majority in principal amount of the then outstanding Notes do not give the Trustee a direction inconsistent with the request. A Holder of a Note may not use this Indenture to prejudice the rights of another Holder of a Note or to obtain a preference or priority over another Holder of a Note. SECTION 6.07. RIGHTS OF HOLDERS OF NOTES TO RECEIVE PAYMENT. Notwithstanding any other provision of this Indenture, the right of any Holder of a Note to receive payment of principal, premium and Liquidated Damages, if any, and interest on such Note, on or after the respective due dates expressed in the Note (including in connection with an offer to purchase), or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such Holder. SECTION 6.08. COLLECTION SUIT BY TRUSTEE. If an Event of Default specified in Section 6.01(a) or (b) hereof occurs and is continuing, the Trustee is authorized to recover judgment in its own name and as trustee of an express trust against the Company for the whole amount of principal of, premium and Liquidated Damages, if any, and interest remaining unpaid on the Notes and interest on overdue principal and, to the extent lawful, interest and such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. SECTION 6.09. TRUSTEE MAY FILE PROOFS OF CLAIM. The Trustee is authorized to file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and the Holders of the Notes allowed in any judicial proceedings relative to the Company (or any other obligor upon the Notes), its creditors or its property and shall be entitled and empowered to collect, receive and distribute any money or other property payable or deliverable on any such claims and any custodian in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee, and in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due to it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.07 hereof. To the extent that the payment of any such compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.07 hereof out of the estate in any such proceeding, shall be denied for any reason, payment of the same shall be secured by a Lien on, and shall be paid out of, any and all distributions, dividends, money, securities and other properties that the Holders may be entitled to receive in such proceeding whether in liquidation or under any plan of reorganization or arrangement or otherwise. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Notes or the rights of any Holder, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. 51 57 SECTION 6.10. PRIORITIES. If the Trustee collects any money pursuant to this Article 6, it shall pay out the money in the following order: First: to the Trustee, its agents and attorneys for amounts due under Section 7.07 hereof, including payment of all compensation, expense and liabilities incurred, and all advances made, by the Trustee and the costs and expenses of collection; Second: to Holders of Notes for amounts due and unpaid on the Notes for principal, premium and Liquidated Damages, if any, and interest, ratably, without preference or priority of any kind, according to the amounts due and payable on the Notes for principal, premium and Liquidated Damages, if any and interest, respectively; and Third: to the Company or to such party as a court of competent jurisdiction shall direct. The Trustee may fix a record date and payment date for any payment to Holders of Notes pursuant to this Section 6.10. SECTION 6.11. UNDERTAKING FOR COSTS. In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as a Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section does not apply to a suit by the Trustee, a suit by a Holder of a Note pursuant to Section 6.07 hereof, or a suit by Holders of more than 10% in principal amount of the then outstanding Notes. ARTICLE 7. TRUSTEE SECTION 7.01. DUTIES OF TRUSTEE. (a) If an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in its exercise, as a prudent person would exercise or use under the circumstances in the conduct of his or her own affairs. (b) Except during the continuance of an Event of Default: (i) the duties of the Trustee shall be determined solely by the express provisions of this Indenture and the Trustee need perform only those duties that are specifically set forth in this Indenture and no others, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (ii) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. However, the Trustee 52 58 shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture. (c) The Trustee may not be relieved from liabilities for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: (i) this paragraph does not limit the effect of paragraph (b) of this Section 7.01; (ii) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts; and (iii) the Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 6.05 hereof. (d) Whether or not therein expressly so provided, every provision of this Indenture that in any way relates to the Trustee is subject to paragraphs (a), (b), and (c) of this Section 7.01. (e) No provision of this Indenture shall require the Trustee to expend or risk its own funds or incur any liability. The Trustee shall be under no obligation to exercise any of its rights and powers under this Indenture at the request of any Holders, unless such Holder shall have offered to the Trustee security and indemnity satisfactory to it against any loss, liability or expense. (f) The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree in writing with the Company. Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law. SECTION 7.02. RIGHTS OF TRUSTEE. (a) The Trustee may conclusively rely upon any document believed by it to be genuine and to have been signed or presented by the proper Person. The Trustee need not investigate any fact or matter stated in the document. (b) Before the Trustee acts or refrains from acting, it may require an Officers' Certificate or an Opinion of Counsel or both. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such Officers' Certificate or Opinion of Counsel. The Trustee may consult with counsel and the written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection from liability in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon. (c) The Trustee may act through its attorneys and agents and shall not be responsible for the misconduct or negligence of any agent appointed with due care. (d) The Trustee shall not be liable for any action it takes or omits to take in good faith that it believes to be authorized or within the rights or powers conferred upon it by this Indenture. (e) Unless otherwise specifically provided in this Indenture, any demand, request, direction or notice from the Company shall be sufficient if signed by an Officer of the Company. 53 59 (f) The Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders unless such Holders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities that might be incurred by it in compliance with such request or direction. SECTION 7.03. INDIVIDUAL RIGHTS OF TRUSTEE. The Trustee in its individual or any other capacity may become the owner of Notes and may otherwise deal with the Company or any Affiliate of the Company with the same rights it would have if it were not Trustee. However, in the event that the Trustee acquires any conflicting interest it must eliminate such conflict within 90 days, apply to the SEC for permission to continue as trustee or resign. Any Agent may do the same with like rights and duties. The Trustee is also subject to Sections 7.10 and 7.11 hereof. SECTION 7.04. TRUSTEE'S DISCLAIMER. The Trustee shall not be responsible for and makes no representation as to the validity or adequacy of this Indenture, the Notes or the Subsidiary Guarantees, it shall not be accountable for the Company's use of the proceeds from the Notes or any money paid to the Company or upon the Company's direction under any provision of this Indenture, it shall not be responsible for the use or application of any money received by any Paying Agent other than the Trustee, and it shall not be responsible for any statement or recital herein or any statement in the Notes or any other document in connection with the sale of the Notes or pursuant to this Indenture other than its certificate of authentication. SECTION 7.05. NOTICE OF DEFAULTS. If a Default or Event of Default occurs and is continuing and if it is known actually to the Trustee, the Trustee shall mail to Holders of Notes a notice of the Default or Event of Default within 90 days after it becomes known to the Trustee. Except in the case of a Default or Event of Default in payment of principal of, premium or Liquidated Damages, if any, or interest on any Note, the Trustee may withhold the notice if and so long as a committee of its Responsible Officers in good faith determines that withholding the notice is in the interests of the Holders of the Notes. Notwithstanding anything to the contrary expressed in this Indenture, the Trustee shall not be deemed to have knowledge of any Default or Event of Default hereunder, except in the case of an Event of Default under Section 6.1(a) or (b) hereof (provided that the Trustee is the Paying Agent), unless and until a Responsible Officer shall have actual knowledge thereof or shall have received notice, at its Corporate Trust Office as specified in Section 11.02 hereof, from the Company or any Holder of Notes that such a Default or an Event of Default has occurred. SECTION 7.06. REPORTS BY TRUSTEE TO HOLDERS OF THE NOTES. Within 60 days after each May 15 beginning with the May 15 following the date of this Indenture, and for so long as Notes remain outstanding, the Trustee shall mail to the Holders of the Notes a brief report dated as of such reporting date that complies with TIA ss. 313(a) (but if no event described in TIA ss. 313(a) has occurred within the twelve months preceding the reporting date, no report need be transmitted). The Trustee also shall comply with TIA ss. 313(b)(2). The Trustee shall also transmit by mail all reports as required by TIA ss. 313(c). 54 60 A copy of each report at the time of its mailing to the Holders of Notes shall be mailed to the Company and filed with the SEC and each stock exchange on which the Notes are listed in accordance with TIA ss. 313(d). The Company shall promptly notify the Trustee when the Notes are listed on any stock exchange. SECTION 7.07. COMPENSATION AND INDEMNITY. The Company shall pay to the Trustee from time to time such compensation for its acceptance of this Indenture and services hereunder as the Company and the Trustee shall agree. The Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. The Company shall reimburse the Trustee promptly upon request for all reasonable disbursements, advances and expenses incurred or made by it in addition to the compensation for its services. Such expenses shall include the reasonable compensation, disbursements and expenses of the Trustee's agents and counsel. The Company shall indemnify the Trustee and its officers, directors, shareholders, agents and employees (each an "Indemnified Party") for and hold each Indemnified Party harmless against any and all losses, liabilities or expenses incurred by it arising out of or in connection with the acceptance or administration of its duties under this Indenture, including the costs and expenses of enforcing this Indenture against the Company and the Guarantors (including this Section 7.07) and defending itself against any claim (whether asserted by the Company and the Guarantors or any Holder or any other Person) or liability in connection with the exercise or performance of any of its powers or duties hereunder, except to the extent any such loss, liability or expense may be attributable to its negligence or bad faith. The Trustee and its officers, directors, shareholders, agents and employees, in its capacity as Paying Agent, Registrar and Custodian, and agent for services of notices shall have the full benefit of the foregoing indemnity. An Indemnified Party shall notify the Company promptly of any claim for which it may seek indemnity. Failure by an Indemnified Party to so notify the Company shall not relieve the Company of its obligations hereunder. The Company shall defend the claim and the Indemnified Party shall cooperate in the defense. An Indemnified Party may have separate counsel and the Company shall pay the reasonable fees and expenses of such counsel. The Company need not pay for any settlement made without its consent, which consent shall not be unreasonably withheld. The obligations of the Company under this Section 7.07 shall survive the satisfaction and discharge of this Indenture. To secure the Company's payment and indemnity obligations in this Section 7.07, the Trustee shall have a Lien prior to the Notes on all money or property held or collected by the Trustee, except that held in trust to pay principal and interest on particular Notes. Such Lien shall survive the satisfaction and discharge of this Indenture. When the Trustee incurs expenses or renders services after an Event of Default specified in Section 6.01(g) or (h) hereof occurs, the expenses and the compensation for the services (including the fees and expenses of its agents and counsel) are intended to constitute expenses of administration under any Bankruptcy Law. The Trustee shall comply with the provisions of TIA ss. 313(b)(2) to the extent applicable. 55 61 SECTION 7.08. REPLACEMENT OF TRUSTEE. A resignation or removal of the Trustee and appointment of a successor Trustee shall become effective only upon the successor Trustee's acceptance of appointment as provided in this Section 7.08. The Trustee may resign in writing at any time and be discharged from the trust hereby created by so notifying the Company. The Holders of Notes of a majority in principal amount of the then outstanding Notes may remove the Trustee by so notifying the Trustee and the Company in writing. The Company may remove the Trustee if: (a) the Trustee fails to comply with Section 7.10 hereof; (b) the Trustee is adjudged a bankrupt or an insolvent or an order for relief is entered with respect to the Trustee under any Bankruptcy Law; (c) a custodian or public officer takes charge of the Trustee or its property; or (d) the Trustee becomes incapable of acting. If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, the Company shall promptly appoint a successor Trustee. Within one year after the successor Trustee takes office, the Holders of a majority in principal amount of the then outstanding Notes may appoint a successor Trustee to replace the successor Trustee appointed by the Company. If a successor Trustee does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Company, or the Holders of Notes of at least 10% in principal amount of the then outstanding Notes may petition any court of competent jurisdiction for the appointment of a successor Trustee. If the Trustee, after written request by any Holder of a Note who has been a Holder of a Note for at least six months, fails to comply with Section 7.10 hereof, such Holder of a Note may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company. Thereupon, the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. The successor Trustee shall mail a notice of its succession to Holders of the Notes. The retiring Trustee shall promptly transfer all property held by it as Trustee to the successor Trustee, provided all sums owing to the Trustee hereunder have been paid and subject to the Lien provided for in Section 7.07 hereof. Notwithstanding replacement of the Trustee pursuant to this Section 7.08, the Company's obligations under Section 7.07 hereof shall continue for the benefit of the retiring Trustee. SECTION 7.09. SUCCESSOR TRUSTEE BY MERGER, ETC. If the Trustee consolidates, merges or converts into, or transfers all or substantially all of its corporate trust business to, another corporation, the successor corporation without any further act shall be the successor Trustee. 56 62 SECTION 7.10. ELIGIBILITY; DISQUALIFICATION. There shall at all times be a Trustee hereunder that is a corporation organized and doing business under the laws of the United States of America or of any state thereof that is authorized under such laws to exercise corporate trustee power, that is subject to supervision or examination by federal or state authorities and that has a combined capital and surplus of at least $100.0 million as set forth in its most recent published annual report of condition. This Indenture shall always have a Trustee who satisfies the requirements of TIA ss. 310(a)(1), (2) and (5). The Trustee is subject to TIA ss. 310(b). SECTION 7.11. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY. The Trustee is subject to TIA ss. 311(a), excluding any creditor relationship listed in TIA ss. 311(b). A Trustee who has resigned or been removed shall be subject to TIA ss. 311(a) to the extent indicated therein. ARTICLE 8. LEGAL DEFEASANCE AND COVENANT DEFEASANCE SECTION 8.01. OPTION TO EFFECT LEGAL DEFEASANCE OR COVENANT DEFEASANCE. The Company may, at the option of its Board of Directors evidenced by a resolution set forth in an Officers' Certificate, at any time, elect to have either Section 8.02 or 8.03 hereof be applied to all outstanding Notes upon compliance with the conditions set forth below in this Article 8. SECTION 8.02. LEGAL DEFEASANCE AND DISCHARGE. Upon the Company's exercise under Section 8.01 hereof of the option applicable to this Section 8.02, the Company and the Guarantors shall, subject to the satisfaction of the conditions set forth in Section 8.04 hereof, be deemed to have been discharged from their obligations with respect to all outstanding Notes and Subsidiary Guarantees on the date the conditions set forth below are satisfied (hereinafter, "Legal Defeasance"). For this purpose, Legal Defeasance means that the Company and each Guarantor shall be deemed to have paid and discharged the entire Indebtedness represented by the outstanding Notes and Subsidiary Guarantees, which shall thereafter be deemed to be "outstanding" only for the purposes of Section 8.05 hereof and the other Sections of this Indenture referred to in (a) and (b) below, and to have satisfied all its other obligations under such Notes, the Subsidiary Guarantees and this Indenture (and the Trustee, on demand of and at the expense of the Company, shall execute proper instruments acknowledging the same), except for the following provisions which shall survive until otherwise terminated or discharged hereunder: (a) the rights of Holders of outstanding Notes to receive payments in respect of the principal of, and premium, interest and Liquidated Damages, if any, on such Notes when such payments are due from the trust referred to below, (b) the Company's obligations with respect to the Notes under Article 2 and Section 4.02 hereof, (c) the rights, powers, trusts, duties and immunities of the Trustee, and the Company's obligations in connection therewith and (d) this Article 8. Subject to compliance with this Article 8, the Company may exercise its option under this Section 8.02 notwithstanding the prior exercise of its option under Section 8.03 hereof. 57 63 SECTION 8.03. COVENANT DEFEASANCE. Upon the Company's exercise under Section 8.01 hereof of the option applicable to this Section 8.03, the Company and each Guarantor shall, subject to the satisfaction of the conditions set forth in Section 8.04 hereof, be released from their obligations under the covenants contained in Sections 4.07, 4.08, 4.09, 4.10, 4.11, 4.12, 4.13, 4.15, 4.16, 4.17 and 4.18, hereof with respect to the outstanding Notes on and after the date the conditions set forth in Section 8.04 hereof are satisfied (hereinafter, "Covenant Defeasance"), and the Notes and Subsidiary Guarantees shall thereafter be deemed not "outstanding" for the purposes of any direction, waiver, consent or declaration or act of Holders (and the consequences of any thereof) in connection with such covenants, but shall continue to be deemed "outstanding" for all other purposes hereunder (it being understood that such Notes and Subsidiary Guarantees shall not be deemed outstanding for accounting purposes). For this purpose, Covenant Defeasance means that, with respect to the outstanding Notes and Subsidiary Guarantees, the Company and the Guarantors may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such covenant, whether directly or indirectly, by reason of any reference elsewhere herein to any such covenant or by reason of any reference in any such covenant to any other provision herein or in any other document and such omission to comply shall not constitute a Default or an Event of Default under Section 6.01 hereof, but, except as specified above, the remainder of this Indenture and such Notes and Subsidiary Guarantees shall be unaffected thereby. In addition, upon the Company's exercise under Section 8.01 hereof of the option applicable to this Section 8.03, subject to the satisfaction of the conditions set forth in Section 8.04 hereof, Sections 6.01(d) through 6.01(f) and Section 6.01(i) hereof shall not constitute Events of Default. SECTION 8.04. CONDITIONS TO LEGAL OR COVENANT DEFEASANCE. The following shall be the conditions to the application of either Section 8.02 or 8.03 hereof to the outstanding Notes and Subsidiary Guarantees: In order to exercise either Legal Defeasance or Covenant Defeasance: (a) the Company must irrevocably deposit with the Trustee, in trust, for the benefit of the Holders of the Notes, cash in U.S. dollars, non-callable Government Securities, or a combination 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, interest and Liquidated Damages, if any, on the outstanding Notes on the stated maturity or on the applicable redemption date, as the case may be, and the Company must specify whether the Notes are being defeased to maturity or to a particular redemption date; (b) in the case of Legal Defeasance under Section 8.02 hereof, the Company shall have delivered to the Trustee an Opinion of Counsel in the United States reasonably acceptable to the Trustee confirming that (i) the Company has received from, or there has been published by, the Internal Revenue Service a ruling or (ii) since the date of this Indenture, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such Opinion of Counsel shall confirm that, the Holders of the outstanding Notes will not recognize income, gain or loss for federal income tax purposes as a result of such Legal Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance had not occurred; 58 64 (c) in the case of Covenant Defeasance under Section 8.03 hereof, the Company shall have delivered to the Trustee an Opinion of Counsel in the United States reasonably acceptable to the Trustee confirming that the Holders of the outstanding Notes will not recognize income, gain or loss for federal income tax purposes as a result of such Covenant Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Covenant Defeasance had not occurred; (d) 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 under Section 6.01(g) or (h) hereof are concerned, at any time in the period ending on the 91st day after the date of deposit; (e) such Legal Defeasance or Covenant Defeasance shall not result in a breach or violation of, or constitute a default under any material agreement or instrument (other than this Indenture) to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries is bound; (f) the Company shall 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; (g) the Company shall have delivered to the Trustee an Officers' Certificate stating that the deposit was not made by the Company with the intent of preferring the Holders of Notes over the other creditors of the Company with the intent of defeating, hindering, delaying or defrauding creditors of the Company or others; and (h) the Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent provided for relating to the Legal Defeasance or the Covenant Defeasance have been complied with. SECTION 8.05. DEPOSITED MONEY AND GOVERNMENT SECURITIES TO BE HELD IN TRUST; OTHER MISCELLANEOUS PROVISIONS. Subject to Section 8.06 hereof, all money and non-callable Government Securities (including the proceeds thereof) deposited with the Trustee (or other qualifying trustee, collectively for purposes of this Section 8.05, the "Trustee") pursuant to Section 8.04 hereof in respect of the outstanding Notes shall be held in trust and applied by the Trustee, in accordance with the provisions of such Notes and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as Paying Agent) as the Trustee may determine, to the Holders of such Notes of all sums due and to become due thereon in respect of principal, premium, if any, and interest, but such money need not be segregated from other funds except to the extent required by law. The Company shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the cash or non-callable Government Securities deposited pursuant to Section 8.04 hereof or the principal and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders of the outstanding Notes. Anything in this Article 8 to the contrary notwithstanding, the Trustee shall deliver or pay to the Company from time to time upon the request of the Company any money or non-callable 59 65 Government Securities held by it as provided in Section 8.04 hereof which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee (which may be the opinion delivered under Section 8.04(a) hereof), are in excess of the amount thereof that would then be required to be deposited to effect an equivalent Legal Defeasance or Covenant Defeasance. SECTION 8.06. REPAYMENT TO COMPANY. Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of, and premium, interest and Liquidated Damages, if any, on any Note and remaining unclaimed for two years after such principal, and premium, interest and Liquidated Damages, if any, has become due and payable shall be paid to the Company on its request or (if then held by the Company) shall be discharged from such trust; and the Holder of such Note shall thereafter, as an unsecured creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once, in the New York Times (national edition) and The Wall Street Journal (national edition), notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such notification or publication, any unclaimed balance of such money then remaining will be repaid to the Company. SECTION 8.07. REINSTATEMENT. If the Trustee or Paying Agent is unable to apply any United States dollars or non-callable Government Securities in accordance with Section 8.02 or 8.03 hereof, as the case may be, by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then the Company's obligations under this Indenture and the Notes shall be revived and reinstated as though no deposit had occurred pursuant to Section 8.02 or 8.03 hereof until such time as the Trustee or Paying Agent is permitted to apply all such money in accordance with Section 8.02 or 8.03 hereof, as the case may be; provided, however, that, if the Company makes any payment of principal of, or premium, interest or Liquidated Damages, if any, on any Note following the reinstatement of its obligations, the Company shall be subrogated to the rights of the Holders of such Notes to receive such payment from the money held by the Trustee or Paying Agent. ARTICLE 9. AMENDMENT, SUPPLEMENT AND WAIVER SECTION 9.01. WITHOUT CONSENT OF HOLDERS OF NOTES. Notwithstanding Section 9.02 of this Indenture, the Company, the Guarantors (with respect to a Subsidiary Guarantee or the Indenture to which it is a party) and the Trustee may amend or supplement this Indenture, the Notes or any Subsidiary Guarantees without the consent of any Holder of a Note: (a) to cure any ambiguity, defect or inconsistency; (b) to provide for uncertificated Notes in addition to or in place of certificated Notes or to alter the provisions of Article 2 hereof (including the related definitions) in a manner that does not materially adversely affect any Holder; 60 66 (c) to provide for the assumption of the Company's obligations to Holders of Notes by a successor to the Company pursuant to Article 5 hereof or of a Guarantor's obligations by a successor to the Guarantor pursuant to Section 10.04 hereof; (d) to make any change that would provide any additional rights or benefits to the Holders of Notes or that does not adversely affect the legal rights under this Indenture of any such Holder; (e) to comply with requirements of the SEC in order to effect or maintain the qualification of this Indenture under the TIA; (f) to provide for the issuance of Additional Notes in accordance with the limitations set forth in this Indenture on the date hereof; or (g) to reflect the release of any Guarantor from its Subsidiary Guarantee pursuant to Section 10.05 hereof or to add a Domestic Subsidiary as a Guarantor pursuant to Section 4.18 hereof. Upon the request of the Company accompanied by a resolution of its Board of Directors authorizing the execution of any such amended or Supplemental Indenture, and upon receipt by the Trustee of the documents described in Section 7.02 hereof, the Trustee shall join with the Company and the Guarantors in the execution of any amended or Supplemental Indenture authorized or permitted by the terms of this Indenture and to make any further appropriate agreements and stipulations that may be therein contained, but the Trustee shall not be obligated to enter into such amended or Supplemental Indenture that affects its own rights, duties or immunities under this Indenture or otherwise. SECTION 9.02. WITH CONSENT OF HOLDERS OF NOTES. Except as provided below in this Section 9.02, this Indenture, the Notes or the Subsidiary Guarantees may be amended or supplemented with the consent of the Holders of at least a majority in principal amount of the Notes then outstanding (including, without limitation, consents obtained in connection with a purchase of, or tender offer or exchange offer for, Notes), and any existing default or compliance with any provision of this Indenture, the Notes or the Subsidiary Guarantees may be waived with the consent of the Holders of a majority in principal amount of the then outstanding Notes (including, without limitation, consents obtained in connection with a purchase of, or tender offer or exchange offer for, Notes). Upon the request of the Company accompanied by a resolution of its Board of Directors authorizing the execution of any such amended or Supplemental Indenture, and upon the filing with the Trustee of evidence satisfactory to the Trustee of the consent of the Holders of Notes as aforesaid, and upon receipt by the Trustee of the documents described in Section 7.02 hereof, the Trustee shall join with the Company in the execution of such amended or Supplemental Indenture unless such amended or Supplemental Indenture directly affects the Trustee's own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion, but shall not be obligated to, enter into such amended or Supplemental Indenture. It shall not be necessary for the consent of the Holders of Notes under this Section 9.02 to approve the particular form of any proposed amendment or waiver, but it shall be sufficient if such consent approves the substance thereof. After an amendment, supplement or waiver under this Section 9.02 becomes effective, the Company shall mail to the Holders of Notes affected thereby a notice briefly describing the 61 67 amendment, supplement or waiver. Any failure of the Company to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such amended or Supplemental Indenture or waiver. Subject to Sections 6.04 and 6.07 hereof, the Holders of a majority in aggregate principal amount of the Notes then outstanding voting as a single class may waive compliance in a particular instance by the Company or the Guarantors with any provision of this Indenture, the Notes or the Subsidiary Guarantees. However, without the consent of each Holder affected, an amendment or waiver under this Section 9.02 may not (with respect to any Notes held by a non-consenting Holder): (a) reduce the principal amount of Notes whose Holders must consent to an amendment, supplement or waiver; (b) reduce the principal of or change the fixed maturity of any Note or alter the provisions with respect to the redemption of the Notes except as provided with respect to Sections 4.10 and 4.14 hereof; (c) reduce the rate of or change the time for payment of interest on any Note; (d) waive a Default or Event of Default in the payment of principal of or premium, interest or Liquidated Damages, if any, on the Notes (except a rescission of acceleration of the Notes by the Holders of at least a majority in aggregate principal amount of the Notes and a waiver of the payment default that resulted from such acceleration); (e) make any Note payable in money other than that stated in the Notes; (f) make any change in the provisions of this Indenture relating to waivers of past Defaults or the rights of Holders of Notes to receive payments of principal of or premium, interest or Liquidated Damages, if any, on the Notes; (g) waive a redemption payment with respect to any Note (other than a payment required by Section 4.10 or 4.14 hereof); (h) release any Guarantor from any of its obligations under its Subsidiary Guarantee or this Indenture, except in accordance with the terms of this Indenture; or (i) make any change in the foregoing amendment and waiver provisions. SECTION 9.03. COMPLIANCE WITH TRUST INDENTURE ACT. Every amendment or supplement to this Indenture or the Notes shall be set forth in a amended or Supplemental Indenture that complies with the TIA as then in effect. SECTION 9.04. REVOCATION AND EFFECT OF CONSENTS. Until an amendment, supplement or waiver becomes effective, a consent to it by a Holder of a Note is a continuing consent by the Holder of a Note and every subsequent Holder of a Note or portion of a Note that evidences the same Indebtedness as the consenting Holder's Note, even if notation of the consent is not made on any Note. However, any such Holder of a Note or subsequent Holder of a Note may revoke the consent as to its Note if the Trustee receives written notice of revocation before the date the amendment, supplement or waiver becomes effective. An amendment, supplement or waiver becomes effective in accordance with its terms and thereafter binds every Holder. 62 68 SECTION 9.05. NOTATION ON OR EXCHANGE OF NOTES. The Trustee may place an appropriate notation about an amendment, supplement or waiver on any Note thereafter authenticated. The Company in exchange for all Notes may issue and the Trustee shall, upon receipt of an Authentication Order, authenticate new Notes that reflect the amendment, supplement or waiver. Failure to make the appropriate notation or issue a new Note shall not affect the validity and effect of such amendment, supplement or waiver. SECTION 9.06. TRUSTEE TO SIGN AMENDMENTS, ETC. The Trustee shall sign any amended or Supplemental Indenture authorized pursuant to this Article 9 if the amendment or supplement does not adversely affect the rights, duties, liabilities or immunities of the Trustee. The Company may not sign an amendment or Supplemental Indenture until the Board of Directors approves it. In executing any amended or Supplemental Indenture, the Trustee shall be entitled to receive and (subject to Section 7.01 hereof) shall be fully protected in relying upon, in addition to the documents required by Section 11.04 hereof, an Officer's Certificate and an Opinion of Counsel stating that the execution of such amended or Supplemental Indenture is authorized or permitted by this Indenture. ARTICLE 10. SUBSIDIARY GUARANTEES SECTION 10.01. GUARANTEE. Subject to this Article 10, each of the Guarantors hereby, jointly and severally, unconditionally guarantees to each Holder of a Note authenticated and delivered by the Trustee and to the Trustee and its successors and assigns, irrespective of the validity and enforceability of this Indenture, the Notes or the Obligations of the Company hereunder or thereunder, that: (a) the principal of and premium, interest and Liquidated Damages, if any, on the Notes, if lawful, and all other Obligations of the Company to the Holders or the Trustee hereunder or thereunder shall be promptly paid in full or performed, all in accordance with the terms hereof and thereof; and (b) in case of any extension of time of payment or renewal of any Notes or any of such other Obligations, the same will be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, whether at stated maturity, by acceleration or otherwise. Failing payment when due of any amount so guaranteed or any performance so guaranteed for whatever reason, the Guarantors shall be jointly and severally obligated to pay the same immediately. Each Guarantor agrees that this is a guarantee of payment and not a guarantee of collection. The Guarantors hereby agree that their Obligations hereunder shall be unconditional, irrespective of the validity, regularity or enforceability of the Notes or this Indenture, the absence of any action to enforce the same, any waiver or consent by any Holder of the Notes with respect to any provisions hereof or thereof, the recovery of any judgment against the Company, any action to enforce the same or any other circumstance which might otherwise constitute a legal or equitable discharge or defense of a Guarantor. Each Guarantor hereby waives diligence, presentment, demand of payment, filing of claims with a court in the event of insolvency or bankruptcy of the Company, any right to require a proceeding first against the Company, protest, notice and all demands whatsoever and covenant 63 69 that this Subsidiary Guarantee shall not be discharged except by complete performance of the Obligations contained in the Notes and this Indenture. If any Holder or the Trustee is required by any court or otherwise to return to the Company, the Guarantors or any custodian, trustee, liquidator or other similar official acting in relation to either the Company or the Guarantors, any amount paid by either to the Trustee or such Holder, this Subsidiary Guarantee, to the extent theretofore discharged, shall be reinstated in full force and effect. Each Guarantor agrees that it shall not be entitled to any right of subrogation in relation to the Holders in respect of any Obligations guaranteed hereby until payment in full of all Obligations guaranteed hereby. Each Guarantor further agrees that, as between the Guarantors, on the one hand, and the Holders and the Trustee, on the other hand, (x) the maturity of the Obligations guaranteed hereby may be accelerated as provided in Article 6 hereof for the purposes of this Subsidiary Guarantee, notwithstanding any stay, injunction or other prohibition preventing such acceleration in respect of the Obligations guaranteed hereby, and (y) in the event of any declaration of acceleration of such Obligations as provided in Article 6 hereof for the purposes of this Subsidiary Guarantee, such Obligations (whether or not due and payable) shall forthwith become due and payable by the Guarantors for the purpose of this Subsidiary Guarantee. The Guarantors shall have the right to seek contribution from any non-paying Guarantor so long as the exercise of such right does not impair the rights of the Holders under the Subsidiary Guarantee. SECTION 10.02. LIMITATION ON GUARANTOR LIABILITY. Each Guarantor, and by its acceptance of Notes, each Holder, hereby confirms that it is the intention of all such parties that the Subsidiary Guarantee of such Guarantor not constitute a fraudulent transfer or conveyance for purposes of Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar federal or state law to the extent applicable to any Subsidiary Guarantee. To effectuate the foregoing intention, the Trustee, the Holders and the Guarantors hereby irrevocably agree that the Obligations of such Guarantor under its Subsidiary Guarantee and this Article 10 shall be limited to the maximum amount as will, after giving effect to such maximum amount and all other contingent and fixed liabilities of such Guarantor that are relevant under such laws, and after giving effect to any collections from, rights to receive contribution from or payments made by or on behalf of any other Guarantor in respect of the Obligations of such other Guarantor under this Article 10, result in the Obligations of such Guarantor under its Subsidiary Guarantee not constituting a fraudulent transfer or conveyance. SECTION 10.03. EXECUTION AND DELIVERY OF SUBSIDIARY GUARANTEE. To evidence its Subsidiary Guarantee set forth in Section 10.01 hereof, each Guarantor hereby agrees that a notation of such Subsidiary Guarantee substantially in the form included in Exhibit E shall be endorsed by an Officer of such Guarantor on each Note authenticated and delivered by the Trustee and that this Indenture shall be executed on behalf of such Guarantor by an Officer of such Guarantor. Each Guarantor hereby agrees that its Subsidiary Guarantee set forth in Section 10.01 hereof shall remain in full force and effect notwithstanding any failure to endorse on each Note a notation of such Subsidiary Guarantee. 64 70 If an Officer whose signature is on this Indenture or on the Subsidiary Guarantee no longer holds that office at the time the Trustee authenticates the Note on which a Subsidiary Guarantee is endorsed, the Subsidiary Guarantee shall be valid nevertheless. The delivery of any Note by the Trustee, after the authentication thereof hereunder, shall constitute due delivery of the Subsidiary Guarantee set forth in this Indenture on behalf of the Guarantors. In the event that the Company or any of its Guarantors acquires or creates another Domestic Subsidiary subsequent to the date of this Indenture or if any Subsidiary of the Company shall become a Domestic Subsidiary, if required by Section 4.18 hereof, the Company shall cause such newly acquired or created Subsidiary to execute a Supplemental Indenture to this Indenture and a Subsidiary Guarantee in accordance with Section 4.18 hereof and this Article 10, to the extent applicable. SECTION 10.04. GUARANTORS MAY CONSOLIDATE, ETC., ON CERTAIN TERMS. No Guarantor may consolidate with or merge with or into (whether or not such Guarantor is the surviving Person) another corporation, Person or entity whether or not affiliated with such Guarantor unless: (i) subject to Section 10.05 hereof, 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 Notes, this Indenture and the Registration Rights Agreement; and (ii) immediately after giving effect to such transaction, no Default or Event of Default exists. In case of any such consolidation, merger, sale or conveyance and upon the assumption by the successor Person, by Supplemental Indenture, executed and delivered to the Trustee and satisfactory in form to the Trustee, of the Subsidiary Guarantee endorsed upon the Notes and the due and punctual performance of all of the covenants and conditions of this Indenture to be performed by the Guarantor, such successor Person shall succeed to and be substituted for the Guarantor with the same effect as if it had been named herein as a Guarantor. Such successor Person thereupon may cause to be signed any or all of the Subsidiary Guarantees to be endorsed upon all of the Notes issuable hereunder which theretofore shall not have been signed by the Company and delivered to the Trustee. All the Subsidiary Guarantees so issued shall in all respects have the same legal rank and benefit under this Indenture as the Subsidiary Guarantees theretofore and thereafter issued in accordance with the terms of this Indenture as though all of such Subsidiary Guarantees had been issued at the date of the execution hereof. Except as set forth in Articles 4 and 5 hereof, and notwithstanding clauses (a) and (b) above, nothing contained in this Indenture or in any of the Notes shall prevent any consolidation or merger of a Guarantor with or into the Company or another Guarantor, or shall prevent any sale or conveyance of the property of a Guarantor as an entirety or substantially as an entirety to the Company or another Guarantor. SECTION 10.05. RELEASES FOLLOWING SALE OF ASSETS. In the event of a sale or other disposition of all of the assets of any Guarantor, by way of merger, consolidation or otherwise, or a sale or other disposition of all of the capital stock of any Guarantor, 65 71 then such Guarantor (in the event of a sale or other disposition, by way of such a merger, consolidation or otherwise, of all of the capital stock of such Guarantor) or the corporation acquiring the property (in the event of a sale or other disposition of all of the assets of such Guarantor) shall be released and relieved of any Obligations under its Subsidiary Guarantee; provided that the Net Proceeds of such sale or other disposition are applied in accordance with the applicable provisions of this Indenture, including without limitation, Section 4.10 hereof. Upon delivery by the Company to the Trustee of an Officers' Certificate and an Opinion of Counsel to the effect that such sale or other disposition was made by the Company in accordance with the applicable provisions of this Indenture, including without limitation Section 4.10 hereof, the Trustee shall execute any documents reasonably required in order to evidence the release of any Guarantor from its Obligations under its Subsidiary Guarantee. Any Guarantor not released from its Obligations under its Subsidiary Guarantee shall remain liable for the full amount of principal of and interest on the Notes and for the other Obligations of any Guarantor under this Indenture as provided in this Article 10. ARTICLE 11. MISCELLANEOUS SECTION 11.01. TRUST INDENTURE ACT CONTROLS. If any provision of this Indenture limits, qualifies or conflicts with the duties imposed by TIA ss. 318(c), the imposed duties shall control. SECTION 11.02. NOTICES. Any notice or communication by the Company, any Guarantor or the Trustee to the others is duly given if in writing and delivered in Person or mailed by first class mail (registered or certified, return receipt requested), telex, telecopier or overnight air courier guaranteeing next day delivery, to the others' address If to the Company and/or any Guarantor: AAi.FosterGrant, Inc. 500 George Washington Hwy. Smithfield, RI 02917 Telecopier No.: (401) 231-3212 Attention: Chief Financial Officer With a copy to: Hinckley, Allen & Snyder 1500 Fleet Center Providence, RI Telecopier No.: (401) 277-9600 Attention: Stephen J. Carlotti If to the Trustee: IBJ Schroder Bank & Trust Company One State Street 66 72 New York, NY 10004 Telecopier No.: (212) 858-2952 Attention: Corporate Finance Department The Company, any Guarantor or the Trustee, by notice to the others may designate additional or different addresses for subsequent notices or communications. All notices and communications (other than those sent to Holders) shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five Business Days after being deposited in the mail, postage prepaid, if mailed; when answered back, if telexed; when receipt acknowledged, if telecopied; and the next Business Day after timely delivery to the courier, if sent by overnight air courier guaranteeing next day delivery. Any notice or communication to a Holder shall be mailed by first class mail, certified or registered, return receipt requested, or by overnight air courier guaranteeing next day delivery to its address shown on the register kept by the Registrar. Any notice or communication shall also be so mailed to any Person described in TIA ss. 313(c), to the extent required by the TIA. Failure to mail a notice or communication to a Holder or any defect in it shall not affect its sufficiency with respect to other Holders. If a notice or communication is mailed in the manner provided above within the time prescribed, it is duly given, whether or not the addressee receives it. If the Company mails a notice or communication to Holders, it shall mail a copy to the Trustee and each Agent at the same time. SECTION 11.03. COMMUNICATION BY HOLDERS OF NOTES WITH OTHER HOLDERS OF NOTES. Holders may communicate pursuant to TIA ss. 312(b) with other Holders with respect to their rights under this Indenture or the Notes. The Company, the Trustee, the Registrar and anyone else shall have the protection of TIA ss. 312(c). SECTION 11.04. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT. Upon any request or application by the Company to the Trustee to take any action under this Indenture, the Company shall furnish to the Trustee: (a) an Officers' Certificate in form and substance reasonably satisfactory to the Trustee (which shall include the statements set forth in Section 11.05 hereof) stating that, in the opinion of the signers, all conditions precedent and covenants, if any, provided for in this Indenture relating to the proposed action have been satisfied; and (b) an Opinion of Counsel in form and substance reasonably satisfactory to the Trustee (which shall include the statements set forth in Section 11.05 hereof) stating that, in the opinion of such counsel, all such conditions precedent and covenants have been satisfied. 67 73 SECTION 11.05. STATEMENTS REQUIRED IN CERTIFICATE OR OPINION. Each certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture (other than a certificate provided pursuant to TIA ss. 314(a)(4)) shall comply with the provisions of TIA ss. 314(e) and shall include: (a) a statement that the Person making such certificate or opinion has read such covenant or condition; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (c) a statement that, in the opinion of such Person, he or she has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been satisfied; and (d) a statement as to whether or not, in the opinion of such Person, such condition or covenant has been complied with. SECTION 11.06. RULES BY TRUSTEE AND AGENTS. The Trustee may make reasonable rules for action by or at a meeting of Holders. The Registrar or Paying Agent may make reasonable rules and set reasonable requirements for its functions. SECTION 11.07. NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND SHAREHOLDERS. No past, present or future director, officer, employee, incorporator or shareholder of the Company or any Guarantor, as such, shall have any liability for any Obligations of the Company or such Guarantor under the Notes, the Subsidiary Guarantees, this Indenture or for any claim based on, in respect of, or by reason of, such Obligations or their creation. Each Holder by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Notes. SECTION 11.08. GOVERNING LAW. THE INTERNAL LAW OF THE STATE OF NEW YORK SHALL GOVERN AND BE USED TO CONSTRUE THIS INDENTURE, THE NOTES AND THE SUBSIDIARY GUARANTEES WITHOUT GIVING EFFECT TO APPLICABLE PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY. SECTION 11.09. NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS. This Indenture may not be used to interpret any other indenture, loan or debt agreement of the Company or its Subsidiaries or of any other Person. Any such indenture, loan or debt agreement may not be used to interpret this Indenture. 68 74 SECTION 11.10. SUCCESSORS. All agreements of the Company in this Indenture and the Notes shall bind its successors. All agreements of the Trustee in this Indenture shall bind its successors. SECTION 11.11. SEVERABILITY. In case any provision in this Indenture, the Notes or the Subsidiary Guarantees shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 11.12. COUNTERPART ORIGINALS. The parties may sign any number of copies of this Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. SECTION 11.13. TABLE OF CONTENTS, HEADINGS, ETC. The Table of Contents, Cross-Reference Table and Headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part of this Indenture and shall in no way modify or restrict any of the terms or provisions hereof. [Signatures on following page] 69 75 SIGNATURES Dated as of July 21, 1998 AAI.FOSTERGRANT, INC. BY: /s/ Gerald F. Cerce --------------------------------- Name: Gerald F. Cerce Title: President and Chief Executive Officer GUARANTORS: FOSTER GRANT HOLDINGS, INC. BY: /s/ Gerald F. Cerce --------------------------------- Name: Gerald F. Cerce Title: President THE BONNEAU COMPANY BY: /s/ Gerald F. Cerce --------------------------------- Name: Gerald F. Cerce Title: President OPTI-RAY, INC. BY: /s/ Gerald F. Cerce --------------------------------- Name: Gerald F. Cerce Title: President BONNEAU GENERAL, INC. BY: /s/ Gerald F. Cerce --------------------------------- Name: Gerald F. Cerce Title: President BONNEAU HOLDINGS, INC. BY: /s/ Gerald F. Cerce --------------------------------- Name: Gerald F. Cerce Title: President 76 O-RAY HOLDINGS, INC. BY: /s/ Gerald F. Cerce --------------------------------- Name: Gerald F. Cerce Title: President F.G.G. INVESTMENTS, INC. BY: /s/ Gerald F. Cerce --------------------------------- Name: Gerald F. Cerce Title: President FOSTER GRANT GROUP, L.P. BY: /s/ Gerald F. Cerce --------------------------------- Name: Gerald F. Cerce Title: President and Chief Executive Officer FANTASMA, LLC BY: /s/ Gerald F. Cerce --------------------------------- Name: Gerald F. Cerce Title: Chairman 77 IBJ SCHRODER BANK & TRUST COMPANY By: /s/ Terence Rawlins -------------------------------- Name: TERENCE RAWLINS Title: ASSISTANT VICE PRESIDENT 78 EXHIBIT A-1 (Face of Note) ================================================================================ CUSIP/CINS _________ 10 3/4 % Series A Senior Notes due 2006 No. ___ $____________ AAI.FOSTERGRANT, INC. promises to pay to _________________________________________________________ or registered assigns, the principal sum of ________________________________________________________ on July 15, 2006. Interest Payment Dates: January 15, and July 15 Record Dates: January 1, and July 1 DATED: JULY 21, 1998 AAI.FOSTERGRANT, INC. BY: ------------------------------ Name: Title: BY: ------------------------------ Name: Title: (SEAL) This is one of the Global Notes referred to in the Indenture: IBJ SCHRODER BANK & TRUST COMPANY, as Trustee By: ------------------------------- ================================================================================ A1-1 79 (Back of Note) 10 3/4 % Series A Senior Notes due 2006 THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND THIS NOTE MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OR IN ACCORDANCE WITH AN APPLICABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (SUBJECT TO THE DELIVERY OF SUCH EVIDENCE, IF REQUIRED UNDER THE INDENTURE PURSUANT TO WHICH THIS NOTE IS ISSUED) AND IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER JURISDICTION. EACH PURCHASER OF THE SECURITY EVIDENCED HEREBY IS HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER OR ANOTHER EXEMPTION UNDER THE SECURITIES ACT. THE HOLDER OF THE SECURITY EVIDENCED HEREBY AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) SUCH SECURITY MAY BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY (1) (a) TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (b) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (c) OUTSIDE THE UNITED STATES TO A FOREIGN PERSON IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 904 UNDER THE SECURITIES ACT OR (d) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND BASED UPON AN OPINION OF COUNSEL IF THE COMPANY SO REQUESTS), SUBJECT TO THE RECEIPT BY THE REGISTRAR OF A CERTIFICATION OF THE TRANSFEROR AND AN OPINION OF COUNSEL TO THE EFFECT THAT SUCH TRANSFER IS IN COMPLIANCE WITH THE SECURITIES ACT, (2) TO THE COMPANY OR (3) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (B) THE HOLDER WILL AND EACH SUBSEQUENT HOLDER IS REQUIRED TO NOTIFY ANY PURCHASER FROM IT OF THE SECURITY EVIDENCED HEREBY OF THE RESALE RESTRICTION SET FORTH IN (A) ABOVE. THIS GLOBAL NOTE IS HELD BY THE DEPOSITARY (AS DEFINED IN THE INDENTURE GOVERNING THIS NOTE) OR ITS NOMINEE IN CUSTODY FOR THE BENEFIT OF THE BENEFICIAL OWNERS HEREOF, AND IS NOT TRANSFERABLE TO ANY PERSON UNDER ANY CIRCUMSTANCES EXCEPT THAT (I) THE TRUSTEE MAY MAKE SUCH NOTATIONS HEREON AS MAY BE REQUIRED PURSUANT TO SECTION 2.07 OF THE INDENTURE, (II) THIS GLOBAL NOTE MAY BE EXCHANGED IN WHOLE BUT NOT IN PART PURSUANT TO SECTION 2.06(a) OF THE INDENTURE, (III) THIS GLOBAL NOTE MAY BE DELIVERED TO THE TRUSTEE FOR CANCELLATION PURSUANT TO SECTION 2.11 OF THE INDENTURE AND (IV) THIS GLOBAL NOTE MAY BE TRANSFERRED TO A SUCCESSOR DEPOSITARY WITH THE PRIOR WRITTEN CONSENT OF AAI.FOSTERGRANT, INC. Capitalized terms used herein shall have the meanings assigned to them in the Indenture referred to below unless otherwise indicated. A1-2 80 1. INTEREST. AAi.FosterGrant, Inc., a Rhode Island corporation (the "Company"), promises to pay interest on the principal amount of this Note at 10 3/4 % per annum from July 21, 1998 until maturity and shall pay the Liquidated Damages payable pursuant to Section 5 of the Registration Rights Agreement referred to below. The Company will pay interest and Liquidated Damages semi-annually on January 15 and July 15 of each year, or if any such day is not a Business Day, on the next succeeding Business Day (each an "Interest Payment Date"). Interest on the Notes will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from the date of issuance; provided that if there is no existing Default in the payment of interest, and if this Note is authenticated between a record date referred to on the face hereof and the next succeeding Interest Payment Date, interest shall accrue from such next succeeding Interest Payment Date; provided, further, that the first Interest Payment Date shall be January 15, 1999. The Company shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue principal and premium, if any, from time to time on demand at a rate that is 1% per annum in excess of the rate then in effect; it shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue installments of interest and Liquidated Damages (without regard to any applicable grace periods) from time to time on demand at the same rate to the extent lawful. Interest will be computed on the basis of a 360-day year of twelve 30-day months. 2. METHOD OF PAYMENT. The Company will pay interest on the Notes (except defaulted interest) and Liquidated Damages to the Persons who are registered Holders of Notes at the close of business on the January 1st or July 1st next preceding the Interest Payment Date, even if such Notes are canceled after such record date and on or before such Interest Payment Date, except as provided in Section 2.12 of the Indenture with respect to defaulted interest. The Notes will be payable as to principal, premium and Liquidated Damages, if any, and interest at the office or agency of the Company maintained for such purpose within or without the City and State of New York, or, at the option of the Company, payment of interest and Liquidated Damages may be made by check mailed to the Holders at their addresses set forth in the register of Holders, and provided that payment by wire transfer of immediately available funds will be required with respect to principal of and interest, premium and Liquidated Damages on, all Global Notes and all other Notes the Holders of which shall have provided wire transfer instructions to the Company or the Paying Agent. Such payment shall be in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. 3. PAYING AGENT AND REGISTRAR. Initially, IBJ Schroder Bank & Trust Company, the Trustee under the Indenture, will act as Paying Agent and Registrar. The Company may change any Paying Agent or Registrar without notice to any Holder. The Company or any of its Subsidiaries may act in any such capacity. 4. INDENTURE. The Company issued the Notes under an Indenture dated as of July 21, 1998 (the "Indenture") among the Company, the Guarantors named therein and the Trustee. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939, as amended (15 U.S. Code secs. 77aaa-77bbbb). The Notes are subject to all such terms, and Holders are referred to the Indenture and such Act for a statement of such terms. To the extent any provision of this Note conflicts with the express provisions of the Indenture, the provisions of the indenture shall govern and be controlling. The Notes are obligations of the Company limited to $150.0 million in aggregate principal amount. A1-3 81 5. OPTIONAL REDEMPTION. (a) Except as set forth in subparagraph (b) of this Paragraph 5, the Notes will not be redeemable at the Company's option prior to July 15, 2002. Thereafter, the Notes will be subject to redemption, in whole or in part, upon not less than 30 nor more than 60 days' notice, at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the applicable redemption date, if redeemed during the twelve-month period beginning on July 15th of the years indicated below: YEAR PERCENTAGE ---- ---------- 2002.................................................. 105.375% 2003.................................................. 102.688% 2004 and thereafter................................... 100.000% (b) Notwithstanding the provisions of subparagraph (a) of this Paragraph 5, at any time on or before July 15, 2001, the Company may redeem up to 35% of the aggregate principal amount of Notes originally issued under the Indenture at a redemption price of 110.750% of the principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the redemption date, with the net cash proceeds of a public sale of common stock of the Company; provided that at least 65% of the aggregate principal amount of Notes originally issued under the Indenture remains outstanding immediately after the occurrence of such redemption (excluding Notes held by the Company or any of its Subsidiaries) and that such redemption shall occur within 45 days of the date of the closing of such public sale. 6. MANDATORY REDEMPTION. Except as set forth in paragraph 7 below, the Company shall not be required to make mandatory redemption or sinking fund payments with respect to the Notes. 7. REPURCHASE AT OPTION OF HOLDER. (a) Upon the occurrence of a Change of Control, the Company shall be required to make an offer (a "Change of Control Offer") to repurchase all or any part (equal to $1,000 or an integral multiple thereof) of each Holder's Notes at a purchase price in cash equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the date of purchase (the "Change of Control Payment"). Within 10 days following any Change of Control, the Company shall mail a notice to each Holder setting forth the procedures governing the Change of Control Offer as required by the Indenture. (b) If the Company or a Subsidiary consummates any Asset Sale, within five days of each date on which the aggregate amount of Excess Proceeds exceeds $5.0 million, the Company shall commence an offer to all Holders of Notes and all holders of other Indebtedness that is pari passu with the Notes containing provisions similar to those set forth in the Indenture with respect to offers to purchase or redeem with the proceeds of sales of assets (an "Asset Sale Offer") pursuant to Section 3.09 of the Indenture and such other pari passu Indebtedness to purchase the maximum principal amount of Notes (including any Additional Notes) and such other pari passu Indebtedness that may be purchased out of the Excess Proceeds, at an offer price in cash in an amount equal to 100% of the principal amount A1-4 82 thereof plus accrued and unpaid interest and Liquidated Damages, if any, thereon, to the date of purchase. To the extent that the aggregate amount of Notes (including any Additional Notes) and such other pari passu Indebtedness tendered pursuant to an Asset Sale Offer is less than the Excess Proceeds, the Company may use such Excess Proceeds for any purpose not otherwise prohibited by the Indenture. If the aggregate principal amount of Notes and other pari passu Indebtedness tendered into such Asset Sale Offer surrendered by Holders thereof exceeds the amount of Excess Proceeds, the Trustee shall select the Notes and such other pari passu Indebtedness to be purchased on a pro rata basis. Holders of Notes that are the subject of an offer to purchase will receive an Asset Sale Offer from the Company prior to any related purchase date and may elect to have such Notes purchased by completing the form entitled "Option of Holder to Elect Purchase" on the reverse of the Notes. 8. NOTICE OF REDEMPTION. Notice of redemption will be mailed at least 30 days but not more than 60 days before the redemption date to each Holder whose Notes are to be redeemed at its registered address. Notes in denominations larger than $1,000 may be redeemed in part but only in whole multiples of $1,000, unless all of the Notes held by a Holder are to be redeemed. On and after the redemption date interest ceases to accrue on Notes or portions thereof called for redemption. 9. DENOMINATIONS, TRANSFER, EXCHANGE. The Notes are in registered form without coupons in denominations of $1,000 and integral multiples of $1,000. The transfer of Notes may be registered and Notes may be exchanged as provided in 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 need not exchange or register the transfer of any Note or portion of a Note selected for redemption, except for the unredeemed portion of any Note being redeemed in part. Also, the Company need not exchange or register the transfer of any Notes for a period of 15 days before a selection of Notes to be redeemed or during the period between a record date and the corresponding Interest Payment Date. 10. PERSONS DEEMED OWNERS. The registered Holder of a Note may be treated as its owner for all purposes. 11. AMENDMENT, SUPPLEMENT AND WAIVER. Subject to certain exceptions, the Indenture, the Notes or the Subsidiary Guarantees may be amended or supplemented with the consent of the Holders of at least a majority in principal amount of the then outstanding Notes and Additional Notes, if any, voting as a single class, and any existing default or compliance with any provision of the Indenture, the Notes or the Subsidiary Guarantees may be waived with the consent of the Holders of a majority in principal amount of the then outstanding Notes and Additional Notes, if any, voting as a single class. Without the consent of any Holder of Notes, the Company, the Guarantors (with respect to a Subsidiary Guarantee or the Indenture to which it is a party) may amend or supplement the Indenture, the Notes or any Subsidiary Guarantee to cure any ambiguity, defect or inconsistency, to provide for uncertificated Notes in addition to or in place of certificated Notes, to provide for the assumption of the Company's or any Guarantor's obligations to Holders of the Notes in case of a merger or consolidation or sale of all or substantially all of the Company's Assets, to provide for the issuance of Additional Notes in accordance with the limitations set forth in the Indenture on the date thereof, to make any change that would provide any additional rights or benefits to the Holders of the Notes or that does not adversely affect the legal rights under the Indenture of any such Holder, to comply with the requirements of the SEC in order to effect or maintain the qualification of the Indenture under the Trust Indenture Act or to reflect the release or addition of a Guarantor in accordance with the terms of the Indenture. A1-5 83 12. DEFAULTS AND REMEDIES. Events of Default include: (i) default for 30 days in the payment when due of interest on, or Liquidated Damages, if any, with respect to, the Notes (whether or not prohibited by the subordination provisions of the Indenture); (ii) default in payment when due of the principal of or premium, if any, on the Notes; (iii) failure by the Company or any of its Subsidiaries to comply with Sections 4.07, 4.09, 4.10, 4.14 and 5.01 of the Indenture; (iv) failure by the Company or any of its Subsidiaries for 60 days after notice by the Trustee or the Holders of at least 25% in principal amount of the then outstanding Notes to comply with any of its other agreements in the Indenture or the Notes; (v) default under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by the Company or any of its Subsidiaries (or the payment of which is guaranteed by the Company or any of its Subsidiaries) whether such Indebtedness or guarantee now exists, or is created after the date of the Indenture, which default (a) is caused by a failure to pay principal of or premium, if any, or interest on such Indebtedness prior to the expiration of the grace period provided in such Indebtedness on the date of such default (a "Payment Default") or (b) results in the acceleration of such Indebtedness prior to its express maturity and, in each case, the principal amount of any such Indebtedness, together with the principal amount of any other such Indebtedness under which there has been a Payment Default or the maturity of which has been so accelerated, aggregates $5.0 million or more; (vi) failure by the Company or any of its Subsidiaries to pay final judgments aggregating in excess of $5.0 million, which judgments are not paid, discharged or stayed for a period of 60 days; (vii) except as permitted by the Indenture, any Subsidiary 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 or any Guarantor, or any Person acting on behalf of any Guarantor, shall deny or disaffirm its obligations under its Subsidiary Guarantee; and (viii) certain events of bankruptcy or insolvency with respect to the Company or any of its Subsidiaries. If any Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the then outstanding Notes may declare all the Notes to be due and payable immediately. 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 of its Subsidiaries that would constitute a Significant Subsidiary or any group of Subsidiaries that, taken together, would constitute a Significant Subsidiary, all outstanding Notes will become due and payable without further action or notice. Holders of the Notes may not enforce the Indenture or the Notes except as provided in the Indenture. The Holders of a majority in aggregate principal amount of the Notes then outstanding by notice to the Trustee may on behalf of the Holders of all of the Notes waive any existing Default or Event of Default and its consequences under the Indenture except a continuing Default or Event of Default in the payment of interest on, or the principal of, the Notes. The Company is required to deliver to the Trustee annually a statement regarding compliance with the Indenture, and the Company is required upon becoming aware of any Default or Event of Default, to deliver to the Trustee a statement specifying such Default or Event of Default. 13. TRUSTEE DEALINGS WITH COMPANY. The Trustee, in its individual or any other capacity, may make loans to, accept deposits from, and perform services for the Company or its Affiliates, and may otherwise deal with the Company or its Affiliates, as if it were not the Trustee. 14. NO RECOURSE AGAINST OTHERS. A director, officer, employee, incorporator or shareholder of the Company or any Guarantor as such, shall not have any liability for any obligations of the Company or any Guarantor under the Notes, the Subsidiary Guarantees or the Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder of Notes by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for the issuance of the Notes. A1-6 84 15. AUTHENTICATION. This Note shall not be valid until authenticated by the manual signature of the Trustee or an authenticating agent. 16. ABBREVIATIONS. Customary abbreviations may be used in the name of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). 17. ADDITIONAL RIGHTS OF HOLDERS OF RESTRICTED GLOBAL NOTES AND RESTRICTED DEFINITIVE NOTES. In addition to the rights provided to Holders of Notes under the Indenture, Holders of Restricted Global Notes and Restricted Definitive Notes shall have all the rights set forth in the Registration Rights Agreement dated as of July 21, 1998, among the Company and the parties named on the signature pages thereof (the "Registration Rights Agreement"). 18. CUSIP NUMBERS. Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, the Company has caused CUSIP numbers to be printed on the Notes and the Trustee may use CUSIP numbers in notices of redemption as a convenience to Holders. No representation is made as to the accuracy of such numbers either as printed on the Notes or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon. The Company will furnish to any Holder upon written request and without charge a copy of the Indenture and/or the Registration Rights Agreement. Requests may be made to: AAi.FosterGrant, Inc. 500 George Washington Highway Smithfield, Rhode Island 02917 Attention: Chief Financial Officer A1-7 85 ASSIGNMENT FORM To assign this Note, fill in the form below: (I) or (we) assign and transfer this Note to ________________________________________________________________________________ (Insert assignee's soc. sec. or tax I.D. no.) ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ (Print or type assignee's name, address and zip code) and irrevocably appoint_________________________________________________________ to transfer this Note on the books of the Company. The agent may substitute another to act for him. ________________________________________________________________________________ Date: ___________ Your Signature: _________________________ (Sign exactly as your name appears on the face of this Note) SIGNATURE GUARANTEE. A1-8 86 OPTION OF HOLDER TO ELECT PURCHASE If you want to elect to have this Note purchased by the Company pursuant to Section 4.10 or 4.14 of the Indenture, check the box below: [ ] Section 4.10 [ ] Section 4.14 If you want to elect to have only part of the Note purchased by the Company pursuant to Section 4.10 or Section 4.14 of the Indenture, state the amount you elect to have purchased: $________ Date: Your Signature: ___________________ (Sign exactly as your name appears on the Note) Tax Identification No: ____________ Signature Guarantee. A1-9 87 SCHEDULE OF EXCHANGES OF INTERESTS IN THE GLOBAL NOTE(1) The following exchanges of a part of this Global Note for an interest in another Global Note or for a Definitive Note, or exchanges of a part of another Global Note or Definitive Note for an interest in this Global Note, have been made:
Principal Amount Signature of Amount of decrease Amount of increase of this Global Note authorized officer in Principal Amount in Principal Amount following such of Trustee or Date of Exchange of this Global Note of this Global Note decrease (or increase) Note Custodian - ---------------- ------------------- ------------------- --------------------- ------------------
- ---------- (1) This should be included only if the Note is issued in global form. A1-10 88 EXHIBIT A-2 (Face of Regulation S Temporary Global Note) ================================================================================ CUSIP/CINS _________ 10 3/4 % Series A Senior Notes due 2006 No. ____ $__________ AAi.FosterGrant, Inc. promises to pay to _____________________________________________________________ or registered assigns, the principal sum of ___________________________________________________________ on July 15, 2006. Interest Payment Dates: January 15, and July 15 Record Dates: January 1, and July 1 Dated: July 21, 1998 AAi.FosterGrant, Inc. By: ---------------------------------- Name: Title: By: ---------------------------------- Name: Title: (SEAL) This is one of the Global Note referred to in the Indenture: IBJ Schroder Bank & Trust Company, as Trustee By: ---------------------------------- ================================================================================ A2-1 89 (Back of Regulation S Temporary Global Note) 10 3/4% Series A Senior Notes due 2006 THE RIGHTS ATTACHING TO THIS REGULATION S TEMPORARY GLOBAL NOTE, AND THE CONDITIONS AND PROCEDURES GOVERNING ITS EXCHANGE FOR CERTIFICATED NOTES, ARE AS SPECIFIED IN THE INDENTURE (AS DEFINED HEREIN). NEITHER THE HOLDER NOR THE BENEFICIAL OWNERS OF THIS REGULATION S TEMPORARY GLOBAL NOTE SHALL BE ENTITLED TO RECEIVE PAYMENT OF INTEREST HEREON. THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND THIS NOTE MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OR IN ACCORDANCE WITH AN APPLICABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (SUBJECT TO THE DELIVERY OF SUCH EVIDENCE, IF REQUIRED UNDER THE INDENTURE PURSUANT TO WHICH THIS NOTE IS ISSUED) AND IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER JURISDICTION. EACH PURCHASER OF THE SECURITY EVIDENCED HEREBY IS HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER OR ANOTHER EXEMPTION UNDER THE SECURITIES ACT. THE HOLDER OF THE SECURITY EVIDENCED HEREBY AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) SUCH SECURITY MAY BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY (1) (a) TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (b) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (c) OUTSIDE THE UNITED STATES TO A FOREIGN PERSON IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 904 UNDER THE SECURITIES ACT OR (d) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND BASED UPON AN OPINION OF COUNSEL IF THE COMPANY SO REQUESTS), SUBJECT TO THE RECEIPT BY THE REGISTRAR OF A CERTIFICATION OF THE TRANSFEROR AND AN OPINION OF COUNSEL TO THE EFFECT THAT SUCH TRANSFER IS IN COMPLIANCE WITH THE SECURITIES ACT, (2) TO THE COMPANY OR (3) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (B) THE HOLDER WILL AND EACH SUBSEQUENT HOLDER IS REQUIRED TO NOTIFY ANY PURCHASER FROM IT OF THE SECURITY EVIDENCED HEREBY OF THE RESALE RESTRICTION SET FORTH IN (A) ABOVE. THIS GLOBAL NOTE IS HELD BY THE DEPOSITARY (AS DEFINED IN THE INDENTURE GOVERNING THIS NOTE) OR ITS NOMINEE IN CUSTODY FOR THE BENEFIT OF THE BENEFICIAL OWNERS HEREOF, AND IS NOT TRANSFERABLE TO ANY PERSON UNDER ANY CIRCUMSTANCES EXCEPT THAT (I) THE TRUSTEE MAY MAKE SUCH NOTATIONS HEREON AS MAY BE REQUIRED PURSUANT TO SECTION 2.07 OF THE INDENTURE, (II) THIS GLOBAL NOTE MAY BE EXCHANGED IN WHOLE BUT NOT IN PART PURSUANT TO SECTION 2.06(a) OF THE INDENTURE, (III) THIS GLOBAL NOTE MAY BE DELIVERED TO A2-2 90 THE TRUSTEE FOR CANCELLATION PURSUANT TO SECTION 2.11 OF THE INDENTURE AND (IV) THIS GLOBAL NOTE MAY BE TRANSFERRED TO A SUCCESSOR DEPOSITARY WITH THE PRIOR WRITTEN CONSENT OF AAI.FOSTERGRANT, INC. Capitalized terms used herein shall have the meanings assigned to them in the Indenture referred to below unless otherwise indicated. 1. INTEREST. AAi.FosterGrant, Inc., a Rhode Island corporation (the "Company"), promises to pay interest on the principal amount of this Note at 10 3/4 % per annum from July 21, 1998 until maturity and shall pay the Liquidated Damages payable pursuant to Section 5 of the Registration Rights Agreement referred to below. The Company will pay interest and Liquidated Damages semi-annually on January 15 and July 15 of each year, or if any such day is not a Business Day, on the next succeeding Business Day (each an "Interest Payment Date"). Interest on the Notes will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from the date of issuance; provided that if there is no existing Default in the payment of interest, and if this Note is authenticated between a record date referred to on the face hereof and the next succeeding Interest Payment Date, interest shall accrue from such next succeeding Interest Payment Date; provided, further, that the first Interest Payment Date shall be January 15, 1999. The Company shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue principal and premium, if any, from time to time on demand at a rate that is 1% per annum in excess of the rate then in effect; it shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue installments of interest and Liquidated Damages (without regard to any applicable grace periods) from time to time on demand at the same rate to the extent lawful. Interest will be computed on the basis of a 360-day year of twelve 30-day months. Until this Regulation S Temporary Global Note is exchanged for one or more Regulation S Permanent Global Notes, the Holder hereof shall not be entitled to receive payments of interest hereon; until so exchanged in full, this Regulation S Temporary Global Note shall in all other respects be entitled to the same benefits as other Notes under the Indenture. 2. METHOD OF PAYMENT. The Company will pay interest on the Notes (except defaulted interest) and Liquidated Damages to the Persons who are registered Holders of Notes at the close of business on the January 1st or July 1st next preceding the Interest Payment Date, even if such Notes are canceled after such record date and on or before such Interest Payment Date, except as provided in Section 2.12 of the Indenture with respect to defaulted interest. The Notes will be payable as to principal, premium and Liquidated Damages, if any, and interest at the office or agency of the Company maintained for such purpose within or without the City and State of New York, or, at the option of the Company, payment of interest and Liquidated Damages may be made by check mailed to the Holders at their addresses set forth in the register of Holders, and provided that payment by wire transfer of immediately available funds will be required with respect to principal of and interest, premium and Liquidated Damages on, all Global Notes and all other Notes the Holders of which shall have provided wire transfer instructions to the Company or the Paying Agent. Such payment shall be in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. 3. PAYING AGENT AND REGISTRAR. Initially, IBJ Schroder Bank & Trust Company, the Trustee under the Indenture, will act as Paying Agent and Registrar. The Company may change any Paying Agent or Registrar without notice to any Holder. The Company or any of its Subsidiaries may act in any such capacity. A2-3 91 4. INDENTURE. The Company issued the Notes under an Indenture dated as of July 21, 1998 (the "Indenture") among the Company, the Guarantors named therein and the Trustee. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939, as amended (15 U.S. Code ss.ss. 77aaa-77bbbb). The Notes are subject to all such terms, and Holders are referred to the Indenture and such Act for a statement of such terms. To the extent any provision of this Note conflicts with the express provisions of the Indenture, the provisions of the indenture shall govern and be controlling. The Notes are obligations of the Company limited to $150.0 million in aggregate principal amount. 5. OPTIONAL REDEMPTION. (a) Except as set forth in subparagraph (b) of this Paragraph 5, the Notes will not be redeemable at the Company's option prior to July 15, 2002. Thereafter, the Notes will be subject to redemption, in whole or in part, upon not less than 30 nor more than 60 days' notice, at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the applicable redemption date, if redeemed during the twelve-month period beginning on July 15th of the years indicated below: YEAR PERCENTAGE ---- ---------- 2002.................................................. 105.375% 2003.................................................. 102.688% 2004 and thereafter................................... 100.000% (b) Notwithstanding the provisions of subparagraph (a) of this Paragraph 5, at any time on or before July 15, 2001, the Company may redeem up to 35% of the aggregate principal amount of Notes originally issued under the Indenture at a redemption price of 110.750% of the principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the redemption date, with the net cash proceeds of a public sale of common stock of the Company; provided that at least 65% of the aggregate principal amount of Notes originally issued under the Indenture remains outstanding immediately after the occurrence of such redemption (excluding Notes held by the Company or any of its Subsidiaries) and that such redemption shall occur within 45 days of the date of the closing of such public sale. 6. MANDATORY REDEMPTION. Except as set forth in paragraph 7 below, the Company shall not be required to make mandatory redemption or sinking fund payments with respect to the Notes. 7. REPURCHASE AT OPTION OF HOLDER. (a) Upon the occurrence of a Change of Control, the Company shall be required to make an offer (a "Change of Control Offer") to repurchase all or any part (equal to $1,000 or an integral multiple thereof) of each Holder's Notes at a purchase price in cash equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the date of purchase (the "Change of Control Payment"). Within 10 days following any Change of Control, the Company shall mail a notice to each Holder setting forth the procedures governing the Change of Control Offer as required by the Indenture. A2-4 92 (b) If the Company or a Subsidiary consummates any Asset Sale, within five days of each date on which the aggregate amount of Excess Proceeds exceeds $5.0 million, the Company shall commence an offer to all Holders of Notes and all holders of other Indebtedness that is pari passu with the Notes containing provisions similar to those set forth in the Indenture with respect to offers to purchase or redeem with the proceeds of sales of assets (an "Asset Sale Offer") pursuant to Section 3.09 of the Indenture and such other pari passu Indebtedness to purchase the maximum principal amount of Notes (including any Additional Notes) and such other pari passu Indebtedness that may be purchased out of the Excess Proceeds, at an offer price in cash in an amount equal to 100% of the principal amount thereof plus accrued and unpaid interest and Liquidated Damages, if any, thereon, to the date of purchase. To the extent that the aggregate amount of Notes (including any Additional Notes) and such other pari passu Indebtedness tendered pursuant to an Asset Sale Offer is less than the Excess Proceeds, the Company may use such Excess Proceeds for any purpose not otherwise prohibited by the Indenture. If the aggregate principal amount of Notes and other pari passu Indebtedness tendered into such Asset Sale Offer surrendered by Holders thereof exceeds the amount of Excess Proceeds, the Trustee shall select the Notes and such other pari passu Indebtedness to be purchased on a pro rata basis. Holders of Notes that are the subject of an offer to purchase will receive an Asset Sale Offer from the Company prior to any related purchase date and may elect to have such Notes purchased by completing the form entitled "Option of Holder to Elect Purchase" on the reverse of the Notes. 8. NOTICE OF REDEMPTION. Notice of redemption will be mailed at least 30 days but not more than 60 days before the redemption date to each Holder whose Notes are to be redeemed at its registered address. Notes in denominations larger than $1,000 may be redeemed in part but only in whole multiples of $1,000, unless all of the Notes held by a Holder are to be redeemed. On and after the redemption date interest ceases to accrue on Notes or portions thereof called for redemption. 9. DENOMINATIONS, TRANSFER, EXCHANGE. The Notes are in registered form without coupons in denominations of $1,000 and integral multiples of $1,000. The transfer of Notes may be registered and Notes may be exchanged as provided in 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 need not exchange or register the transfer of any Note or portion of a Note selected for redemption, except for the unredeemed portion of any Note being redeemed in part. Also, the Company need not exchange or register the transfer of any Notes for a period of 15 days before a selection of Notes to be redeemed or during the period between a record date and the corresponding Interest Payment Date. This Regulation S Temporary Global Note is exchangeable in whole or in part for one or more Global Notes only (i) on or after the termination of the 40-day restricted period (as defined in Regulation S) and (ii) upon presentation of certificates (accompanied by an Opinion of Counsel, if applicable) required by Article 2 of the Indenture. Upon exchange of this Regulation S Temporary Global Note for one or more Global Notes, the Trustee shall cancel this Regulation S Temporary Global Note. 10. PERSONS DEEMED OWNERS. The registered Holder of a Note may be treated as its owner for all purposes. 11. AMENDMENT, SUPPLEMENT AND WAIVER. Subject to certain exceptions, the Indenture, the Notes or the Subsidiary Guarantees may be amended or supplemented with the consent of the Holders of at least a majority in principal amount of the then outstanding Notes and Additional A2-5 93 Notes, if any, voting as a single class, and any existing default or compliance with any provision of the Indenture, the Notes or the Subsidiary Guarantees may be waived with the consent of the Holders of a majority in principal amount of the then outstanding Notes and Additional Notes, if any, voting as a single class. Without the consent of any Holder of Notes, the Company, the Guarantors (with respect to a Subsidiary Guarantee or the Indenture to which it is a party) may amend or supplement the Indenture, the Notes or any Subsidiary Guarantee to cure any ambiguity, defect or inconsistency, to provide for uncertificated Notes in addition to or in place of certificated Notes, to provide for the assumption of the Company's or any Guarantor's obligations to Holders of the Notes in case of a merger or consolidation or sale of all or substantially all of the Company's Assets, to provide for the issuance of Additional Notes in accordance with the limitations set forth in the Indenture on the date thereof, to make any change that would provide any additional rights or benefits to the Holders of the Notes or that does not adversely affect the legal rights under the Indenture of any such Holder, to comply with the requirements of the SEC in order to effect or maintain the qualification of the Indenture under the Trust Indenture Act or to reflect the release or addition of a Guarantor in accordance with the terms of the Indenture. 12. DEFAULTS AND REMEDIES. Events of Default include: (i) default for 30 days in the payment when due of interest on, or Liquidated Damages, if any, with respect to, the Notes (whether or not prohibited by the subordination provisions of the Indenture); (ii) default in payment when due of the principal of or premium, if any, on the Notes; (iii) failure by the Company or any of its Subsidiaries to comply with Sections 4.07, 4.09, 4.10, 4.14 and 5.01 of the Indenture; (iv) failure by the Company or any of its Subsidiaries for 60 days after notice by the Trustee or the Holders of at least 25% in principal amount of the then outstanding Notes to comply with any of its other agreements in the Indenture or the Notes; (v) default under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by the Company or any of its Subsidiaries (or the payment of which is guaranteed by the Company or any of its Subsidiaries) whether such Indebtedness or guarantee now exists, or is created after the date of the Indenture, which default (a) is caused by a failure to pay principal of or premium, if any, or interest on such Indebtedness prior to the expiration of the grace period provided in such Indebtedness on the date of such default (a "Payment Default") or (b) results in the acceleration of such Indebtedness prior to its express maturity and, in each case, the principal amount of any such Indebtedness, together with the principal amount of any other such Indebtedness under which there has been a Payment Default or the maturity of which has been so accelerated, aggregates $5.0 million or more; (vi) failure by the Company or any of its Subsidiaries to pay final judgments aggregating in excess of $5.0 million, which judgments are not paid, discharged or stayed for a period of 60 days; (vii) except as permitted by the Indenture, any Subsidiary 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 or any Guarantor, or any Person acting on behalf of any Guarantor, shall deny or disaffirm its obligations under its Subsidiary Guarantee; and (viii) certain events of bankruptcy or insolvency with respect to the Company or any of its Subsidiaries. If any Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the then outstanding Notes may declare all the Notes to be due and payable immediately. 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 of its Subsidiaries that would constitute a Significant Subsidiary or any group of Subsidiaries that, taken together, would constitute a Significant Subsidiary, all outstanding Notes will become due and payable without further action or notice. Holders of the Notes may not enforce the Indenture or the Notes except as provided in the Indenture. The Holders of a majority in aggregate principal amount of the Notes then outstanding by notice to the Trustee may on behalf of the Holders of all of the Notes waive any existing Default or Event of Default and its consequences under the Indenture except a continuing Default or Event of Default in the payment of interest on, or the principal of, the Notes. The Company is required to deliver to the Trustee annually a statement regarding compliance with the Indenture, and the Company is required upon becoming A2-6 94 aware of any Default or Event of Default, to deliver to the Trustee a statement specifying such Default or Event of Default. 13. TRUSTEE DEALINGS WITH COMPANY. The Trustee, in its individual or any other capacity, may make loans to, accept deposits from, and perform services for the Company or its Affiliates, and may otherwise deal with the Company or its Affiliates, as if it were not the Trustee. 14. NO RECOURSE AGAINST OTHERS. A director, officer, employee, incorporator or shareholder of the Company or any Guarantor as such, shall not have any liability for any obligations of the Company or any Guarantor under the Notes, the Subsidiary Guarantees or the Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder of Notes by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for the issuance of the Notes. 15. AUTHENTICATION. This Note shall not be valid until authenticated by the manual signature of the Trustee or an authenticating agent. 16. ABBREVIATIONS. Customary abbreviations may be used in the name of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). 17. ADDITIONAL RIGHTS OF HOLDERS OF RESTRICTED GLOBAL NOTES AND RESTRICTED DEFINITIVE NOTES. In addition to the rights provided to Holders of Notes under the Indenture, Holders of Restricted Global Notes and Restricted Definitive Notes shall have all the rights set forth in the Registration Rights Agreement dated as of July 21, 1998, among the Company and the parties named on the signature pages thereof (the "Registration Rights Agreement"). 18. CUSIP NUMBERS. Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, the Company has caused CUSIP numbers to be printed on the Notes and the Trustee may use CUSIP numbers in notices of redemption as a convenience to Holders. No representation is made as to the accuracy of such numbers either as printed on the Notes or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon. The Company will furnish to any Holder upon written request and without charge a copy of the Indenture and/or the Registration Rights Agreement. Requests may be made to: AAi.FosterGrant, Inc. 500 George Washington Highway Smithfield, Rhode Island 02917 Attention: Chief Financial Officer A2-7 95 ASSIGNMENT FORM To assign this Note, fill in the form below: (I) or (we) assign and transfer this Note to ________________________________________________________________________________ (Insert assignee's soc. sec. or tax I.D. no.) ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ (Print or type assignee's name, address and zip code) and irrevocably appoint_________________________________________________________ to transfer this Note on the books of the Company. The agent may substitute another to act for him. ________________________________________________________________________________ Date: ___________ Your Signature: _________________________ (Sign exactly as your name appears on the face of this Note) SIGNATURE GUARANTEE. A2-8 96 OPTION OF HOLDER TO ELECT PURCHASE If you want to elect to have this Note purchased by the Company pursuant to Section 4.10 or 4.14 of the Indenture, check the box below: [ ] Section 4.10 [ ] Section 4.14 If you want to elect to have only part of the Note purchased by the Company pursuant to Section 4.10 or Section 4.14 of the Indenture, state the amount you elect to have purchased: $________ Date: Your Signature: ___________________ (Sign exactly as your name appears on the Note) Tax Identification No: ____________ Signature Guarantee. A2-9 97 SCHEDULE OF EXCHANGES OF INTERESTS IN THE GLOBAL NOTE1/ The following exchanges of a part of this Global Note for an interest in another Global Note or for a Definitive Note, or exchanges of a part of another Global Note or Definitive Note for an interest in this Global Note, have been made:
Principal Amount Signature of Amount of decrease Amount of increase of this Global Note authorized officer in Principal Amount in Principal Amount following such of Trustee or Date of Exchange of this Global Note of this Global Note decrease (or increase) Note Custodian - ---------------- ------------------- ------------------- --------------------- ------------------
- ---------- (1) This should be included only if the Note is issued in global form. A2-10 98 EXHIBIT B FORM OF CERTIFICATE OF TRANSFER AAi.FosterGrant, Inc. 500 George Washington Highway Smithfield, Rhode Island 02917 IBJ Schroder Bank & Trust Company Re: 10 3/4 % Series A Senior Notes ------------------------------ Reference is hereby made to the Indenture, dated as of July 21, 1998 (the "INDENTURE"), among AAi.FosterGrant, Inc., as issuer (the "COMPANY"), the Guarantors named therein and IBJ Schroder Bank & Trust Company, as trustee. Capitalized terms used but not defined herein shall have the meanings given to them in the Indenture. ______________, (the "TRANSFEROR") owns and proposes to transfer the Note[s] or interest in such Note[s] specified in Annex A hereto, in the principal amount of $___________ in such Note[s] or interests (the "TRANSFER"), to __________ (the "TRANSFEREE"), as further specified in Annex A hereto. In connection with the Transfer, the Transferor hereby certifies that: [CHECK ALL THAT APPLY] 1. [ ] CHECK IF TRANSFEREE WILL TAKE DELIVERY OF A BENEFICIAL INTEREST IN THE 144A GLOBAL NOTE OR A DEFINITIVE NOTE PURSUANT TO RULE 144A. The Transfer is being effected pursuant to and in accordance with Rule 144A under the United States Securities Act of 1933, as amended (the "SECURITIES ACT"), and, accordingly, the Transferor hereby further certifies that the beneficial interest or Definitive Note is being transferred to a Person that the Transferor reasonably believed and believes is purchasing the beneficial interest or Definitive Note for its own account, or for one or more accounts with respect to which such Person exercises sole investment discretion, and such Person and each such account is a "qualified institutional buyer" within the meaning of Rule 144A in a transaction meeting the requirements of Rule 144A and such Transfer is in compliance with any applicable blue sky securities laws of any state of the United States. Upon consummation of the proposed Transfer in accordance with the terms of the Indenture, the transferred beneficial interest or Definitive Note will be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the 144A Global Note and/or the Definitive Note and in the Indenture and the Securities Act. 2. [ ] CHECK IF TRANSFEREE WILL TAKE DELIVERY OF A BENEFICIAL INTEREST IN THE TEMPORARY REGULATION S GLOBAL NOTE, THE REGULATION S GLOBAL NOTE OR A DEFINITIVE NOTE PURSUANT TO REGULATION S. The Transfer is being effected pursuant to and in accordance with Rule 903 or Rule 904 under the Securities Act and, accordingly, the Transferor hereby further certifies that (i) the Transfer is not being made to a person in the United States and (x) at the time the buy order was originated, the Transferee was outside the United States or such Transferor and any Person acting on its behalf reasonably believed and believes that the Transferee was outside the United States or (y) the transaction was executed in, on or through the facilities of a designated offshore securities market and neither such Transferor nor any Person acting on its behalf knows that the transaction was prearranged with a buyer in the United States, (ii) no directed selling efforts have been made in contravention of the requirements of Rule 903(b) or Rule 904(b) of Regulation S under the Securities Act , (iii) the transaction is not part of a plan or scheme to evade the B-1 99 registration requirements of the Securities Act and (iv) if the proposed transfer is being made prior to the expiration of the Restricted Period, the transfer is not being made to a U.S. Person or for the account or benefit of a U.S. Person (other than an Initial Purchaser). Upon consummation of the proposed transfer in accordance with the terms of the Indenture, the transferred beneficial interest or Definitive Note will be subject to the restrictions on Transfer enumerated in the Private Placement Legend printed on the Regulation S Global Note, the Temporary Regulation S Global Note and/or the Definitive Note and in the Indenture and the Securities Act. 3. [ ] CHECK AND COMPLETE IF TRANSFEREE WILL TAKE DELIVERY OF A BENEFICIAL INTEREST IN THE IAI GLOBAL NOTE OR A DEFINITIVE NOTE PURSUANT TO ANY PROVISION OF THE SECURITIES ACT OTHER THAN RULE 144A OR REGULATION S. The Transfer is being effected in compliance with the transfer restrictions applicable to beneficial interests in Restricted Global Notes and Restricted Definitive Notes and pursuant to and in accordance with the Securities Act and any applicable blue sky securities laws of any state of the United States, and accordingly the Transferor hereby further certifies that (check one): (a) [ ] such Transfer is being effected pursuant to and in accordance with Rule 144 under the Securities Act; or (b) [ ] such Transfer is being effected to the Company or a subsidiary thereof; or (c) [ ] such Transfer is being effected pursuant to an effective registration statement under the Securities Act and in compliance with the prospectus delivery requirements of the Securities Act; or (d) [ ] such Transfer is being effected to an Institutional Accredited Investor and pursuant to an exemption from the registration requirements of the Securities Act other than Rule 144A, Rule 144 or Rule 904, and the Transferor hereby further certifies that it has not engaged in any general solicitation within the meaning of Regulation D under the Securities Act and the Transfer complies with the transfer restrictions applicable to beneficial interests in a Restricted Global Note or Restricted Definitive Notes and the requirements of the exemption claimed, which certification is supported by (1) a certificate executed by the Transferee in the form of Exhibit D to the Indenture and (2) if such Transfer is in respect of a principal amount of Notes at the time of transfer of less than $250,000, an Opinion of Counsel provided by the Transferor or the Transferee (a copy of which the Transferor has attached to this certification), to the effect that such Transfer is in compliance with the Securities Act. Upon consummation of the proposed transfer in accordance with the terms of the Indenture, the transferred beneficial interest or Definitive Note will be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the IAI Global Note and/or the Definitive Notes and in the Indenture and the Securities Act. 4. [ ] Check if Transferee will take delivery of a beneficial interest in an Unrestricted Global Note or of an Unrestricted Definitive Note. B-2 100 (a) [ ] CHECK IF TRANSFER IS PURSUANT TO RULE 144. (i) The Transfer is being effected pursuant to and in accordance with Rule 144 under the Securities Act and in compliance with the transfer restrictions contained in the Indenture and any applicable blue sky securities laws of any state of the United States and (ii) the restrictions on transfer contained in the Indenture and the Private Placement Legend are not required in order to maintain compliance with the Securities Act. Upon consummation of the proposed Transfer in accordance with the terms of the Indenture, the transferred beneficial interest or Definitive Note will no longer be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the Restricted Global Notes, on Restricted Definitive Notes and in the Indenture. (b) [ ] CHECK IF TRANSFER IS PURSUANT TO REGULATION S. (i) The Transfer is being effected pursuant to and in accordance with Rule 903 or Rule 904 under the Securities Act and in compliance with the transfer restrictions contained in the Indenture and any applicable blue sky securities laws of any state of the United States and (ii) the restrictions on transfer contained in the Indenture and the Private Placement Legend are not required in order to maintain compliance with the Securities Act. Upon consummation of the proposed Transfer in accordance with the terms of the Indenture, the transferred beneficial interest or Definitive Note will no longer be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the Restricted Global Notes, on Restricted Definitive Notes and in the Indenture. (c) [ ] CHECK IF TRANSFER IS PURSUANT TO OTHER EXEMPTION. (i) The Transfer is being effected pursuant to and in compliance with an exemption from the registration requirements of the Securities Act other than Rule 144, Rule 903 or Rule 904 and in compliance with the transfer restrictions contained in the Indenture and any applicable blue sky securities laws of any State of the United States and (ii) the restrictions on transfer contained in the Indenture and the Private Placement Legend are not required in order to maintain compliance with the Securities Act. Upon consummation of the proposed Transfer in accordance with the terms of the Indenture, the transferred beneficial interest or Definitive Note will not be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the Restricted Global Notes or Restricted Definitive Notes and in the Indenture. This certificate and the statements contained herein are made for your benefit and the benefit of the Company. ---------------------------------- [Insert Name of Transferor] By: ------------------------------ Name: Title: Dated: ___, _____ B-3 101 ANNEX A TO CERTIFICATE OF TRANSFER 1. The Transferor owns and proposes to transfer the following: [CHECK ONE OF (a) OR (b)] (a) [ ] a beneficial interest in the: (i) 144A Global Note (CUSIP ), or (ii) Regulation S Global Note (CUSIP ), or (iii) IAI Global Note (CUSIP ); or (b) [ ] a Restricted Definitive Note. 2. After the Transfer the Transferee will hold: [CHECK ONE] (a) [ ] a beneficial interest in the: (i) 144A Global Note (CUSIP _________), or (ii) Regulation S Global Note (CUSIP _________), or (iii) IAI Global Note (CUSIP _________), or (iv) Unrestricted Global Note (CUSIP _________), or (b) [ ] a Restricted Definitive Note; or (c) [ ] an Unrestricted Definitive Note, in accordance with the terms of the Indenture. B-4 102 EXHIBIT C FORM OF CERTIFICATE OF EXCHANGE AAi.FosterGrant, Inc. 500 George Washington Highway Smithfield, Rhode Island 02917 IBJ Schroder Bank & Trust Company Re: 10 3/4 % Series A Senior Notes ------------------------------ Reference is hereby made to the Indenture, dated as of July 21, 1998 (the "INDENTURE"), among AAi.FosterGrant, Inc., as issuer (the "COMPANY"), the Guarantors named therein and IBJ Schroder Bank & Trust Company, as trustee. Capitalized terms used but not defined herein shall have the meanings given to them in the Indenture. ____________, (the "OWNER") owns and proposes to exchange the Note[s] or interest in such Note[s] specified herein, in the principal amount of $____________ in such Note[s] or interests (the "EXCHANGE"). In connection with the Exchange, the Owner hereby certifies that: 1. EXCHANGE OF RESTRICTED DEFINITIVE NOTES OR BENEFICIAL INTERESTS IN A RESTRICTED GLOBAL NOTE FOR UNRESTRICTED DEFINITIVE NOTES OR BENEFICIAL INTERESTS IN AN UNRESTRICTED GLOBAL NOTE. (a) [ ] CHECK IF EXCHANGE IS FROM BENEFICIAL INTEREST IN A RESTRICTED GLOBAL NOTE TO BENEFICIAL INTEREST IN AN UNRESTRICTED GLOBAL NOTE. In connection with the Exchange of the Owner's beneficial interest in a Restricted Global Note for a beneficial interest in an Unrestricted Global Note in an equal principal amount, the Owner hereby certifies (i) the beneficial interest is being acquired for the Owner's own account without transfer, (ii) such Exchange has been effected in compliance with the transfer restrictions applicable to the Global Notes and pursuant to and in accordance with the United States Securities Act of 1933, as amended (the "SECURITIES ACT"), (iii) the restrictions on transfer contained in the Indenture and the Private Placement Legend are not required in order to maintain compliance with the Securities Act and (iv) the beneficial interest in an Unrestricted Global Note is being acquired in compliance with any applicable blue sky securities laws of any state of the United States. (b) [ ] CHECK IF EXCHANGE IS FROM BENEFICIAL INTEREST IN A RESTRICTED GLOBAL NOTE TO UNRESTRICTED DEFINITIVE NOTE. In connection with the Exchange of the Owner's beneficial interest in a Restricted Global Note for an Unrestricted Definitive Note, the Owner hereby certifies (i) the Definitive Note is being acquired for the Owner's own account without transfer, (ii) such Exchange has been effected in compliance with the transfer restrictions applicable to the Restricted Global Notes and pursuant to and in accordance with the Securities Act, (iii) the restrictions on transfer contained in the Indenture and the Private Placement Legend are not required in order to maintain compliance with the Securities Act and (iv) the Definitive Note is being acquired in compliance with any applicable blue sky securities laws of any state of the United States. (c) [ ] CHECK IF EXCHANGE IS FROM RESTRICTED DEFINITIVE NOTE TO BENEFICIAL INTEREST IN AN UNRESTRICTED GLOBAL NOTE. In connection with the Owner's Exchange of a Restricted Definitive Note for a beneficial interest in an Unrestricted Global Note, the Owner hereby certifies (i) the beneficial interest is being acquired for the Owner's own account without transfer, (ii) such Exchange has been effected in compliance with the transfer restrictions applicable to Restricted Definitive Notes and C-1 103 pursuant to and in accordance with the Securities Act, (iii) the restrictions on transfer contained in the Indenture and the Private Placement Legend are not required in order to maintain compliance with the Securities Act and (iv) the beneficial interest is being acquired in compliance with any applicable blue sky securities laws of any state of the United States. (d) [ ] CHECK IF EXCHANGE IS FROM RESTRICTED DEFINITIVE NOTE TO UNRESTRICTED DEFINITIVE NOTE. In connection with the Owner's Exchange of a Restricted Definitive Note for an Unrestricted Definitive Note, the Owner hereby certifies (i) the Unrestricted Definitive Note is being acquired for the Owner's own account without transfer, (ii) such Exchange has been effected in compliance with the transfer restrictions applicable to Restricted Definitive Notes and pursuant to and in accordance with the Securities Act, (iii) the restrictions on transfer contained in the Indenture and the Private Placement Legend are not required in order to maintain compliance with the Securities Act and (iv) the Unrestricted Definitive Note is being acquired in compliance with any applicable blue sky securities laws of any state of the United States. 2. EXCHANGE OF RESTRICTED DEFINITIVE NOTES OR BENEFICIAL INTERESTS IN RESTRICTED GLOBAL NOTES FOR RESTRICTED DEFINITIVE NOTES OR BENEFICIAL INTERESTS IN RESTRICTED GLOBAL NOTES (a) [ ] CHECK IF EXCHANGE IS FROM BENEFICIAL INTEREST IN A RESTRICTED GLOBAL NOTE TO RESTRICTED DEFINITIVE NOTE. In connection with the Exchange of the Owner's beneficial interest in a Restricted Global Note for a Restricted Definitive Note with an equal principal amount, the Owner hereby certifies that the Restricted Definitive Note is being acquired for the Owner's own account without transfer. Upon consummation of the proposed Exchange in accordance with the terms of the Indenture, the Restricted Definitive Note issued will continue to be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the Restricted Definitive Note and in the Indenture and the Securities Act. (b) [ ] CHECK IF EXCHANGE IS FROM RESTRICTED DEFINITIVE NOTE TO BENEFICIAL INTEREST IN A RESTRICTED GLOBAL NOTE. In connection with the Exchange of the Owner's Restricted Definitive Note for a beneficial interest in the [CHECK ONE] 144A Global Note, Regulation S Global Note, IAI Global Note with an equal principal amount, the Owner hereby certifies (i) the beneficial interest is being acquired for the Owner's own account without transfer and (ii) such Exchange has been effected in compliance with the transfer restrictions applicable to the Restricted Global Notes and pursuant to and in accordance with the Securities Act, and in compliance with any applicable blue sky securities laws of any state of the United States. Upon consummation of the proposed Exchange in accordance with the terms of the Indenture, the beneficial interest issued will be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the relevant Restricted Global Note and in the Indenture and the Securities Act. C-2 104 This certificate and the statements contained herein are made for your benefit and the benefit of the Company. ----------------------------------- [Insert Name of Owner] By: ------------------------------- Name: Title: Dated: ______________, ____ C-3 105 EXHIBIT D FORM OF CERTIFICATE FROM ACQUIRING INSTITUTIONAL ACCREDITED INVESTOR AAi.FosterGrant, Inc. 500 George Washington Highway Smithfield, Rhode Island 02917 IBJ Schroder Bank & Trust Company Re: 10 3/4% Series A Senior Notes ------------------------------ Reference is hereby made to the Indenture, dated as of July 21, 1998 (the "INDENTURE"), among AAi.FosterGrant, Inc., as issuer (the "COMPANY"), the Guarantors named therein and IBJ Schroder Bank & Trust Company, as trustee. Capitalized terms used but not defined herein shall have the meanings given to them in the Indenture. In connection with our proposed purchase of $____________ aggregate principal amount of: (a) a beneficial interest in a Global Note, or (b) a Definitive Note, we confirm that: 1. We understand that any subsequent transfer of the Notes or any interest therein is subject to certain restrictions and conditions set forth in the Indenture and the undersigned agrees to be bound by, and not to resell, pledge or otherwise transfer the Notes or any interest therein except in compliance with, such restrictions and conditions and the United States Securities Act of 1933, as amended (the "SECURITIES ACT"). 2. We understand that the offer and sale of the Notes have not been registered under the Securities Act, and that the Notes and any interest therein may not be offered or sold except as permitted in the following sentence. We agree, on our own behalf and on behalf of any accounts for which we are acting as hereinafter stated, that if we should sell the Notes or any interest therein, we will do so only (A) to the Company or any subsidiary thereof, (B) in accordance with Rule 144A under the Securities Act to a "qualified institutional buyer" (as defined therein), (c) to an institutional "accredited investor" (as defined below) that, prior to such transfer, furnishes (or has furnished on its behalf by a U.S. broker-dealer) to you and to the Company a signed letter substantially in the form of this letter and, if such transfer is in respect of a principal amount of Notes, at the time of transfer of less than $250,000, an Opinion of Counsel in form reasonably acceptable to the Company to the effect that such transfer is in compliance with the Securities Act, (D) outside the United States in accordance with Rule 904 of Regulation S under the Securities Act, (E) pursuant to the provisions of Rule 144(k) under the Securities Act or (F) pursuant to an effective registration statement under the Securities Act, and we further agree to provide to any person purchasing the Definitive Note or beneficial D-1 106 interest in a Global Note from us in a transaction meeting the requirements of clauses (A) through (E) of this paragraph a notice advising such purchaser that resales thereof are restricted as stated herein. 3. We understand that, on any proposed resale of the Notes or beneficial interest therein, we will be required to furnish to you and the Company such certifications, legal opinions and other information as you and the Company may reasonably require to confirm that the proposed sale complies with the foregoing restrictions. We further understand that the Notes purchased by us will bear a legend to the foregoing effect. We further understand that any subsequent transfer by us of the Notes or beneficial interest therein acquired by us must be effected through one of the Initial Purchasers. 4. We are an institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act) and have such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of our investment in the Notes, and we and any accounts for which we are acting are each able to bear the economic risk of our or its investment. 5. We are acquiring the Notes or beneficial interest therein purchased by us for our own account or for one or more accounts (each of which is an institutional "accredited investor") as to each of which we exercise sole investment discretion. You and the Company are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceedings or official inquiry with respect to the matters covered hereby. ----------------------------------- [Insert Name of Owner] By: ------------------------------- Name: Title: Dated: ______________, ____ D-2 107 EXHIBIT E FORM OF NOTATION OF SUBSIDIARY GUARANTEE For value received, each Guarantor (which term includes any successor Person under the Indenture) has, jointly and severally, unconditionally guaranteed, to the extent set forth in the Indenture and subject to the provisions in the Indenture dated as of July 21, 1998 (the "Indenture") among AAi.FosterGrant, Inc., the Guarantors listed on Schedule I thereto and IBJ Schroder Bank & Trust Company, as trustee (the "Trustee"), (a) the due and punctual payment of the principal of and premium, interest and Liquidated Damages, if any, on the Notes (as defined in the Indenture), whether at maturity, by acceleration, redemption or otherwise, the due and punctual payment of interest on overdue principal and premium, and, to the extent permitted by law, interest and Liquidated Damages, if any, and the due and punctual performance of all other obligations of the Company to the Holders or the Trustee all in accordance with the terms of the Indenture and (b) in case of any extension of time of payment or renewal of any Notes or any of such other obligations, that the same will be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, whether at stated maturity, by acceleration or otherwise. The obligations of the Guarantors to the Holders of Notes and to the Trustee pursuant to this Subsidiary Guarantee and the Indenture are expressly set forth in Article 10 of the Indenture and reference is hereby made to the Indenture for the precise terms of the Subsidiary Guarantee. Each Holder of a Note, by accepting the same, (a) agrees to and shall be bound by such provisions and (b) appoints the Trustee attorney-in-fact of such Holder for such purpose; provided, however, that the Indebtedness evidenced by this Subsidiary Guarantee shall cease to be subject in right of payment upon any defeasance of this Note in accordance with the provisions of the Indenture. [Name of Guarantor(s)] By: ------------------------------------ Name: Title: E-1 108 EXHIBIT F FORM OF SUPPLEMENTAL INDENTURE TO BE DELIVERED BY SUBSEQUENT GUARANTORS SUPPLEMENTAL INDENTURE (this "Supplemental Indenture"), dated as of ________________, among __________________ (the "Guaranteeing Subsidiary"), a subsidiary of (or its permitted successor) AAi.FosterGrant, Inc., a Rhode Island corporation (the "Company"), the Company, the other Guarantors (as defined in the Indenture referred to herein) and IBJ Schroder Bank & Trust Company, as trustee under the indenture referred to below (the "Trustee"). W I T N E S S E T H WHEREAS, the Company has heretofore executed and delivered to the Trustee an indenture (the "Indenture"), dated as of July 21, 1998 providing for the issuance of an aggregate principal amount of up to $150.0 million of 10 3/4 % Senior Notes due 2006 (the "Notes"); WHEREAS, the Indenture provides that under certain circumstances the Guaranteeing Subsidiary shall execute and deliver to the Trustee a Supplemental Indenture pursuant to which the Guaranteeing Subsidiary shall unconditionally guarantee all of the Company's Obligations under the Notes and the Indenture on the terms and conditions set forth herein (the "Subsidiary Guarantee"); and WHEREAS, pursuant to Section 9.01 of the Indenture, the Trustee is authorized to execute and deliver this Supplemental Indenture. NOW THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt of which is hereby acknowledged, the Guaranteeing Subsidiary and the Trustee mutually covenant and agree for the equal and ratable benefit of the Holders of the Notes as follows: 1. CAPITALIZED TERMS. Capitalized terms used herein without definition shall have the meanings assigned to them in the Indenture. 2. AGREEMENT TO GUARANTEE. The Guaranteeing Subsidiary hereby agrees to be bound by the terms of the Indenture as a Guarantor and agrees to be subject to the provisions of the Indenture applicable to Guarantors as though originally a signatory and party to the Indenture. 3 EXECUTION AND DELIVERY. Each Guaranteeing Subsidiary agrees that the Subsidiary Guarantees shall remain in full force and effect notwithstanding any failure to endorse on each Note a notation of such Subsidiary Guarantee. 4. NO RECOURSE AGAINST OTHERS. No past, present or future director, officer, employee, incorporator, or shareholder of the Guaranteeing Subsidiary, as such, shall have any liability for any obligations of the Company or any Guaranteeing Subsidiary under the Notes, any Subsidiary Guarantees, the Indenture or this Supplemental Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder of the Notes by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Notes. Such waiver may not be effective to waive liabilities under the federal securities laws and it is the view of the SEC that such a waiver is against public policy. F-1 109 5. NEW YORK LAW TO GOVERN. THE INTERNAL LAW OF THE STATE OF NEW YORK SHALL GOVERN AND BE USED TO CONSTRUE THIS SUPPLEMENTAL INDENTURE BUT WITHOUT GIVING EFFECT TO APPLICABLE PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY. 6. COUNTERPARTS The parties may sign any number of copies of this Supplemental Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. 7. EFFECT OF HEADINGS. The Section headings herein are for convenience only and shall not affect the construction hereof. 8. THE TRUSTEE. The Trustee shall not be responsible in any manner whatsoever for or in respect of the validity or sufficiency of this Supplemental Indenture or for or in respect of the recitals contained herein, all of which recitals are made solely by the Guaranteeing Subsidiary and the Company. F-2 110 IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Indenture to be duly executed and attested, all as of the date first above written. Dated: _______________, ____ [Guaranteeing Subsidiary] By: ------------------------------- Name: Title: AAi.FosterGrant, Inc. By: ------------------------------- Name: Title: [EXISTING GUARANTORS] By: ------------------------------- Name: Title: IBJ SCHRODER BANK & TRUST COMPANY as Trustee By: ------------------------------- Name: Title: 111 SCHEDULE I SCHEDULE OF GUARANTORS The following schedule lists each Guarantor under the Indenture as of the Closing Date: 1. Foster Grant Holdings, Inc. 2. The Bonneau Company 3. Opti-Ray, Inc. 4. Bonneau General, Inc. 5. Bonneau Holdings, Inc. 6. O-Ray Holdings, Inc. 7. F.G.G. Investments, Inc. 8. Foster Grant Group, L.P. 9. Fantasma, LLC F-2 EX-4.2 22 PURCHASE AGREEMENT DATED JULY 16, 1998 1 Exhibit 4.2 EXECUTION COPY AAI.FOSTERGRANT, INC. $75,000,000 10 3/4% SENIOR NOTES DUE 2006 PURCHASE AGREEMENT July 16, 1998 NationsBanc Montgomery Securities LLC Prudential Securities Incorporated BancBoston Securities Inc. c/o NationsBanc Montgomery Securities LLC 100 North Tryon Street Charlotte, North Carolina 28255 Ladies and Gentlemen: AAi.FosterGrant, Inc., a Rhode Island corporation (the "Company"), proposes to issue and sell to you (the "Initial Purchasers") $75,000,000 in aggregate principal amount of its 10 3/4% Senior Notes due 2006 (the "Notes"). The Notes will be fully and unconditionally guaranteed (the "Subsidiary Guarantees" and, collectively with the Notes, the "Securities") on a senior unsecured basis, jointly and severally, by each domestic subsidiary of the Company listed on the signature page hereto (the "Subsidiary Guarantors" and, together with the Company, the "Issuers"). The Securities are to be issued pursuant to an indenture, dated as of July 21, 1998 (the "Indenture"), by and among the Company, the Subsidiary Guarantors and IBJ Schroder Bank & Trust Company, as Trustee (the "Trustee"). The sale of the Securities to the Initial Purchasers will be made without registration of the Securities under the Securities Act of 1933, as amended (the "Securities Act"), in reliance upon exemptions from the registration requirements of the Securities Act. You have advised the Issuers that you will offer and sell the Securities purchased by you hereunder in accordance with Section 3 hereof as soon as you deem advisable. 2 In connection with the sale of the Securities, the Issuers have prepared a preliminary offering memorandum, dated June 24, 1998 (the "Preliminary Memorandum") and a final offering memorandum, dated July 16, 1998 (the "Final Memorandum"). Each of the Preliminary Memorandum and the Final Memorandum sets forth certain information concerning the Issuers and the Securities. The Issuers hereby confirm that they have authorized the use of the Preliminary Memorandum and the Final Memorandum, and any amendment or supplement thereto, in connection with the offer and sale of the Securities by the Initial Purchasers. Unless stated to the contrary, all references herein to the Final Memorandum are to the Final Memorandum at the time of execution and delivery of this Agreement (the "Execution Time") and are not meant to include any amendment or supplement subsequent to the Execution Time. The Initial Purchasers and their direct and indirect transferees will be entitled to the benefits of the Registration Rights Agreement, substantially in the form attached hereto as EXHIBIT A (the "Registration Rights Agreement"), pursuant to which the Issuers will agree to use their best efforts to commence an offer to exchange (the "Exchange Offer") the Securities for Exchange Securities (the "Exchange Securities") that have been registered under the Securities Act, and that otherwise are identical in all respects to the Securities, or to cause a shelf registration statement to become effective under the Securities Act and to remain effective for the period designated in such Registration Rights Agreement. 1. REPRESENTATIONS AND WARRANTIES. All representations and warranties of the Company and its subsidiaries are made on the date hereof. The Company and the Subsidiary Guarantors, jointly and severally, represent and warrant to the Initial Purchasers that (it being understood that representations made on the date hereof as to parties other than the Company and its subsidiaries as of such date shall be made to the best knowledge of the Issuers and the Subsidiary Guarantors): (a) The Preliminary Memorandum, at the date thereof, did not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. The Final Memorandum, at the date hereof, does not, and at the Closing Date will not (and any amendment or supplement thereto, at the date thereof and at the Closing Date, will not), contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however that the Issuers make no representation or warranty as to the information relating to the Initial Purchasers contained in or omitted from the Preliminary Memorandum or the Final Memorandum, or any amendment or supplement thereto, in reliance upon and in 2 3 conformity with information furnished in writing to the Issuers by or on behalf of the Initial Purchasers specifically for inclusion therein. No stop order preventing the use of the Preliminary Memorandum or the Final Memorandum, or any amendment or supplement thereto, or any order asserting that any of the transactions contemplated by this Agreement are subject to the registration requirements of the Securities Act, has been issued. (b) Neither the Issuers, nor any of their "Affiliates" (as defined in Rule 501(b) of Regulation D under the Securities Act ("Regulation D")), nor any person acting on their behalf has, directly or indirectly, made offers or sales of any security, or solicited offers to buy any security, under circumstances that would require the registration of the Securities under the Securities Act. Neither the Issuers, nor any of their Affiliates, nor any person acting on their behalf has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D) in connection with any offer or sale of the Securities, provided, that the Issuers make no representation in this sentence regarding the Initial Purchasers. The Securities satisfy the eligibility requirements of Rule 144A(d)(3) under the Securities Act. The Final Memorandum and each amendment or supplement thereto, as of its date, contains the information specified in Rule 144A(d)(4) under the Act. The Issuers have been advised by the National Association of Securities Dealers, Inc. ("NASD") Private Offerings, Resales and Trading through the Automated Linkages Market ("PORTAL") that the Securities have been designated PORTAL eligible securities in accordance with the rules and regulations of the NASD. (c) None of the Issuers nor any of their respective Affiliates or any person acting on its or their behalf (other than the Initial Purchasers, as to whom the Issuers make no representation) has engaged or will engage in any directed selling efforts within the meaning of Regulation S under the Securities Act ("Regulation S") with respect to the Securities. The Securities offered and sold in reliance on Regulation S have been and will be offered and sold only in offshore transactions. The sale of the Securities pursuant to Regulation S is not part of a plan or scheme to evade the registration provisions of the Securities Act. No registration under the Securities Act of the Securities is required for the sale of the Securities to the Initial Purchasers as contemplated hereby or for the Exempt Resales (as defined below) assuming the accuracy of, and compliance with, the Initial Purchasers' representations, warranties and agreements set forth in Section 3 of this Agreement. The Securities sold pursuant to Regulation S will initially be represented by a temporary global security as required by Rule 903 of Regulation S. (d) Neither the Company nor any of its subsidiaries is, or will be after giving effect to the offering and sale of the Securities and the application of the proceeds therefrom as 3 4 described in the Final Memorandum, an "investment company" within the meaning of the Investment Company Act of 1940, as amended (the "Investment Company Act"). (e) Assuming (i) that the representations and warranties and covenants of the Initial Purchasers contained in Section 3 hereof are true and correct and (ii) that the Initial Purchasers comply with their agreements contained in Section 3 hereof, (A) registration under the Securities Act of the Securities or qualification of the Indenture under the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"), is not required in connection with the offer and sale of the Securities to the Initial Purchasers in the manner contemplated by the Final Memorandum or this Agreement and (B) initial resales of the Securities by the Initial Purchasers on the terms and in the manner set forth in the Final Memorandum and Section 3 hereof are exempt from the registration requirements of the Securities Act. (f) Since the respective dates as of which information is given in the Preliminary Memorandum and the Final Memorandum, except as otherwise stated therein, (i) there has been no material adverse change in the condition (financial or otherwise), results of operations, affairs or business prospects of the Company and its subsidiaries considered as a whole, whether or not arising in the ordinary course of business and (ii) there have been no material transactions entered into by the Company or any of its subsidiaries (collectively, a "Material Adverse Change"). (g) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of Rhode Island with corporate power and authority to own, lease and operate its properties and conduct its business as described in the Preliminary Memorandum and the Final Memorandum; and the Company is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which the conduct of its business requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not, singly or in the aggregate, reasonably be expected to have a material adverse effect on the condition (financial or otherwise), results of operations, affairs or business prospects of the Company and its subsidiaries considered as a whole (a "Material Adverse Effect"). (h) All of the outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable. (i) Except as set forth in the Final Memorandum and except for rights or options held by the Company to acquire capital stock or other equity interests of subsidiaries, there are not currently, and will not be as a result of the Offering, any outstanding subscriptions, 4 5 rights, warrants, calls, commitments of sale or options to acquire, or instruments convertible into or exchangeable for, any capital stock or other equity interest of the Company or any subsidiary. (j) Attached as SCHEDULE A hereto is a complete and accurate list of each subsidiary of the Company. Each of the subsidiaries of the Company has been duly organized and is validly existing and in good standing under the laws of the jurisdiction of its organization, has the requisite power and authority to own, lease and operate its properties and conduct its business as described in the Preliminary Memorandum and the Final Memorandum and is duly qualified as a foreign organization to transact business and is in good standing in each jurisdiction in which the conduct of its business requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not, singly or in the aggregate, reasonably be expected to have a Material Adverse Effect. All of the issued and outstanding capital stock of each subsidiary of the Company owned by the Company has been duly authorized and validly issued and is fully paid and nonassessable, and, except as described in the Preliminary Memorandum and the Final Memorandum or pursuant to the Senior Credit Facility (as defined in the Final Memorandum), all shares of capital stock of each such subsidiary which are owned by the Issuers, directly or through subsidiaries, are free and clear of any mortgage, pledge, lien, encumbrance, claim or equity. (k) Each of the Issuers has all requisite corporate power and authority to execute, deliver and perform its obligations under this Agreement and each of the Registration Rights Agreement, the Indenture and the Senior Credit Facility to which it is a party and to consummate the transactions contemplated hereby and thereby, including, without limitation, the corporate power and authority to issue, sell and deliver the Securities as provided herein. (l) This Agreement has been duly authorized, executed and delivered by each of the Issuers and constitutes the valid and binding agreement of each of the Issuers, enforceable against each of the Issuers in accordance with its terms, except that (i) enforcement thereof may be subject to (A) bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws now or hereafter in effect relating to or affecting creditors' rights generally and (B) general principles of equity (regardless of whether enforceability is considered in a proceeding in equity or at law) and (ii) the enforceability of any indemnification or contribution provisions thereof may be limited under applicable securities laws or the public policies underlying such laws. (m) The Notes have been duly authorized by the Company, and, when executed and authenticated in accordance with the provisions of the Indenture and delivered to and paid for by the Initial Purchasers in accordance with this Agreement, will constitute the valid 5 6 and binding obligations of the Company enforceable against the Company in accordance with their terms, and will be entitled to the benefits, of the Indenture, except that enforcement thereof may be subject to (A) bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws now or hereafter in effect relating to or affecting creditors' rights generally and (B) general principles of equity (regardless of whether enforceability is considered in a proceeding in equity or at law). (n) The Subsidiary Guarantees endorsed on the Notes have been duly authorized by each Subsidiary Guarantor and when the Notes are executed and authenticated in accordance with the provisions of the Indenture and delivered to the Initial Purchasers in accordance with this Agreement, the Subsidiary Guarantees will constitute the valid and binding obligation of each of the Subsidiary Guarantors enforceable against each of the Subsidiary Guarantors in accordance with their terms and will be entitled to the benefits of the Indenture except that enforcement thereof may be subject to (A) bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws now or hereafter in effect relating to or affecting creditors' rights generally and (B) general principles of equity (regardless of whether enforceability is considered in a proceeding in equity or at law). (o) The Indenture has been duly authorized by each of the Issuers. When the Securities are delivered and paid for pursuant to this Agreement on the Closing Date, the Indenture will have been duly executed and delivered by each of the Issuers and, assuming the due execution and delivery thereof by the Trustee, will constitute a valid and binding agreement of each of the Issuers, enforceable against each of the Issuers in accordance with its terms, except that enforcement thereof may be subject to (A) bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws now or hereafter in effect relating to or affecting creditors' rights generally and (B) general principles of equity (regardless of whether enforceability is considered in a proceeding in equity or at law). (p) The Exchange Securities have been duly authorized by each of the Issuers and, when duly executed, authenticated, issued and delivered, will be validly issued and outstanding, and will constitute the valid and binding obligations of each of the Issuers, entitled to the benefits of the Indenture and enforceable against each of the Issuers in accordance with their terms except that enforcement thereof may be subject to (A) bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws now or hereafter in effect relating to or affecting creditors' rights generally and (B) general principles of equity (regardless of whether enforceability is considered in a proceeding in equity or at law). 6 7 (q) The Registration Rights Agreement has been duly authorized by each of the Issuers and, when duly executed and delivered by each of the Issuers (assuming the due execution and delivery by the Initial Purchasers), will constitute a valid and binding agreement of each of the Issuers, enforceable against each of the Issuers in accordance with its terms except that (i) enforcement thereof may be subject to (A) bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws now or hereafter in effect relating to or affecting creditors' rights generally and (B) general principles of equity (regardless of whether enforceability is considered in a proceeding in equity or at law) and (ii) the enforceability of any indemnification or contribution provisions thereof may be limited under applicable securities laws or the public policies underlying such laws. (r) On the Closing Date, the Senior Credit Facility and the guarantee of the obligations thereunder by the Subsidiary Guarantors (a) shall have been duly authorized, executed and delivered by the Company and each Subsidiary Guarantor and will constitute the valid and binding agreement of the Company and each Subsidiary Guarantor, enforceable against the Company and each Subsidiary Guarantor, as applicable, in accordance with their terms except that (i) enforcement thereof may be subject to (A) bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws now or hereafter in effect relating to or affecting creditors' rights generally and (B) general principles of equity (regardless of whether enforceability is considered in a proceeding in equity or at law) and (ii) the enforceability of any indemnification or contribution provisions thereof may be limited under applicable securities laws or public policies; and (b) shall be in full force and effect. On the Closing Date, no event of default or event which, with the giving of notice or passage of time or both, would constitute an event of default shall have occurred under the Senior Credit Facility or the guarantees thereof by the Subsidiary Guarantors and all conditions to the extension of credit thereunder still have been satisfied without waiver. (s) The industry and market-related data included in the Final Memorandum are based on or derived from sources which the Company believes to be reliable and accurate in all material respects. (t) Neither the Company nor any of its subsidiaries is in breach or violation of any of the terms or provisions of any bond, debenture, note, indenture, mortgage, deed of trust or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which any of them or their property is or may be bound or to which any of the properties or assets of the Company or any of its subsidiaries are subject, nor is the Company or any of its subsidiaries in violation of the provisions of its respective charter, by-laws or other organizational documents or any statute or any judgment, order, rule or regulation of any court or 7 8 governmental agency or body having jurisdiction over the Company, any of its subsidiaries or any of their properties or assets (except to the extent any such conflict, breach, violation or default is cured at or prior to the Closing Date and within the grace period applicable thereto or would not, singly or in the aggregate, reasonably be expected to have a Material Adverse Effect). To the best knowledge of the Issuers, there exists no condition that, with notice, the passage of time or otherwise, would constitute a default under (i) any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries is bound or to which any of the properties or assets of the Company or any of its subsidiaries are subject, except for such defaults which would not, singly or in the aggregate, have a Material Adverse Effect or (ii) the respective charter, by-laws or other organizational documents of the Company or any of its subsidiaries. (u) The execution, delivery and performance of this Agreement, the Indenture, the Registration Rights Agreement and the Senior Credit Facility by the Issuers (to the extent each is a party thereto), and the consummation of the transactions contemplated hereby and thereby (including, without limitation, the issuance and sale of the Securities) does not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any bond, debenture, note, indenture, mortgage, deed of trust or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which any of them or their property is or may be bound or to which any of the properties or assets of the Company or any of its subsidiaries are subject, nor will such actions result in any violation of the provisions of the charter, by-laws or other organizational documents of the Company or any of its subsidiaries or any statute to which they may be subject or any order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company or any of its subsidiaries or any of their properties or assets (except to the extent any such conflict, breach, violation or default singly or in the aggregate, would not reasonably be expected to have a Material Adverse Effect); and except for such consents, approvals, authorizations, orders, filings or registrations as may be required under applicable state securities and Blue Sky laws in connection with the purchase and distribution of the Securities by the Initial Purchasers or as set forth in the Registration Rights Agreement, no consent, approval, authorization or order of, or filing or registration with, any such court or governmental agency or body is required for the execution, delivery and performance of this Agreement, the Indenture, the Registration Rights Agreement and the Senior Credit Facility by the Issuers (to the extent each is a party thereto), the consummation of the transactions contemplated hereby and thereby, and the issuance and sale of the Securities and Exchange Securities by the Issuers, except such as have been or will be obtained and made on or prior to the Closing Date or such the failure to obtain would not, singly or in the aggregate, have a Material Adverse Effect. 8 9 (v) As of the Closing Date, the Securities and the Indenture will conform in all material respects to the descriptions thereof contained in the Final Memorandum. As of the Closing Date, the provisions of the Registration Rights Agreement and the Senior Credit Facility, to the extent that such provisions are summarized in the Final Memorandum, will conform in all material respects to the descriptions thereof contained in the Final Memorandum. (w) Except as set forth in the Preliminary Memorandum and the Final Memorandum, there is no action, suit or proceeding before or by any court or governmental agency or body, domestic or foreign, now pending or, to the knowledge of the Issuers, threatened against or affecting the Company or any of its subsidiaries, which would reasonably be expected to result in a Material Adverse Change or, singly or in the aggregate, would reasonably be expected to have a Material Adverse Effect or materially and adversely affect the offering of the Securities. (x) The Company and each of its subsidiaries has good and marketable title to all real property and all personal property owned by it and used in the conduct of the business of the Company or such subsidiary, in each case free and clear of all liens, encumbrances and defects except as are described in the Preliminary Memorandum and Final Memorandum or do not materially and adversely affect the value of such property to the Company or such subsidiary, and do not interfere with the use made and proposed to be made of such property by the Company or such subsidiary to an extent that such interference would, singly or in the aggregate, reasonably be expected to have a Material Adverse Effect. All leases to which the Company or any of its subsidiaries is a party material to the business of the Company and its subsidiaries, taken as a whole, and described in the Final Memorandum are in full force and effect, and to the knowledge of the Issuers no default has occurred or is continuing thereunder which could, singly or in the aggregate, reasonably be expected to have a Material Adverse Effect or materially and adversely affect the offering of the Securities, and the Company and its subsidiaries enjoy peaceful and undisturbed possession under all such leases to which any of them is a party as lessee (with such exceptions as do not materially interfere with the use made by the Company or such subsidiary). The Company and its subsidiaries possess adequate certificates, authorizations or permits issued by the appropriate state, federal or foreign regulatory agencies or bodies necessary to conduct the business now operated by them, and neither the Company nor any of its subsidiaries has received any notice of proceedings relating to the revocation or modification of any such certificate, authority or permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would, singly or in the aggregate, reasonably be expected to have a Material Adverse Effect. 9 10 (y) Each of the accountants who have certified or will certify the financial statements of the Company and its subsidiaries included in the Final Memorandum are independent public accountants within the meaning of the Securities Act and the rules and regulations thereunder. The financial statements included in the Preliminary Memorandum and the Final Memorandum present fairly in all material respects the consolidated financial position of the Company and its subsidiaries, on a consolidated basis, and Foster Grant Group L.P. as at the dates indicated and the results of their respective operations and the changes in their consolidated financial position for the periods specified subject, in the case of interim period financial statements, to normal year-end adjustments; said financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis during the periods involved, except as indicated therein and except, in the case of interim period financial statements, for the absence of certain footnotes required by such accounting principles, and comply as to form in all material respects with the requirements applicable to such financial statements included in registration statements on Form S-1 under the Securities Act. The Company and each of its subsidiaries maintains a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. The pro forma financial statements included in the Preliminary Memorandum and the Final Memorandum have been prepared on a basis consistent with the historical financial statements of (i) the Company and its subsidiaries, (ii) Fantasma. LLC ("Fantasma") , (iii) Superior Jewelry Company ("Superior") and (iv) Eyecare Products UK Ltd. ("Foster Grant UK") and give effect to assumptions used in the preparation thereof on a reasonable basis and in good faith and present fairly the historical and proposed transactions contemplated by the Preliminary Memorandum and the Final Memorandum; and such pro forma financial statements comply as to form in all material respects with the requirements applicable to pro forma financial statements included in registration statements on Form S-1 under the Act. The other pro forma financial and statistical information and data included in the Preliminary Memorandum and the Final Memorandum are, in all material respects, accurately presented and prepared on a basis consistent with the pro forma financial statements. 10 11 The historical and pro forma financial statements included in the Preliminary Memorandum and the Final Memorandum constitute all of the financial statements that would be required to be included in a registration statement on Form S-1 under the Securities Act. (z) Neither the Company nor any of its subsidiaries is now or, after giving effect to the issuance of the Securities and the application of the proceeds thereof, will be (i) insolvent, (ii) left with unreasonably small capital with which to engage in its anticipated businesses or (iii) incurring debts beyond its ability to pay such debts as they become due. (aa) Except as would not reasonably be expected to have a Material Adverse Effect, the Company and its subsidiaries own, or otherwise possess the right to use, all patents, trademarks, service marks, trade names and copyrights, all applications and registrations for each of the foregoing, and all other proprietary rights and confidential information used in the conduct of their respective businesses as currently conducted; and neither the Company nor any of its subsidiaries has received any notice or is otherwise aware, of any infringement of or conflict with the rights of any third party with respect to any of the foregoing which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would reasonably be expected to have a Material Adverse Effect. (bb) The Company and its subsidiaries are (i) in compliance with any and all applicable foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("Environmental Laws"), (ii) have received all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses and (iii) are in compliance with all terms and conditions of any such permit, license or approval, except where such noncompliance with Environmental Laws, failure to receive required permits, licenses or other approvals or failure to comply with the terms and conditions of such permits, licenses or approvals would not, singly or in the aggregate, reasonably be expected to have a Material Adverse Effect. (cc) There is (i) no significant unfair labor practice complaint pending against the Company or any of its subsidiaries nor, to the best knowledge of the Issuers, threatened against any of them, before the National Labor Relations Board, any state or local labor relations board or any foreign labor relations board, and no significant grievance or significant arbitration proceeding arising out of or under any collective bargaining agreement is so pending against the Company or any of its subsidiaries or, to the best knowledge of the Issuers, threatened against any of them, (ii) no significant strike, labor dispute, slowdown or stoppage pending against the Company or any of its subsidiaries nor, to the best knowledge of the Issuers, threatened against 11 12 the Company or any of its subsidiaries and (iii) to the best knowledge of the Issuers, no union representation question existing with respect to the employees of the Company or any of its subsidiaries. To the best knowledge of the Issuers, no collective bargaining organizing activities are taking place with respect to the Company or any of its subsidiaries. None of the Company or any of its subsidiaries has violated (i) any federal, state or local law or foreign law relating to discrimination in hiring, promotion or pay of employees, (ii) any applicable wage or hour laws or (iii) any provision of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or the rules and regulations thereunder, except those violations that could not reasonably be expected to have a Material Adverse Effect. (dd) The Company has filed all material tax returns required to be filed by the Company or any of its subsidiaries in all jurisdictions and paid all taxes shown due thereon, including withholding taxes, penalties and interest, assessments, fees and other charges due or claimed to be due from such entities other than those being contested in good faith and for which adequate reserves have been provided or those currently payable without penalty or interest. To the knowledge of the Issuers, there are no material proposed additional tax assessments against the Company or any of its subsidiaries, or the assets or property of the Company or any of its subsidiaries, except those tax assessments for which adequate reserves have been established. (ee) Each of the Company and its subsidiaries maintains or is entitled to the benefits of insurance covering its properties, operations, personnel and businesses, insuring against such losses and risks as are consistent with industry practice. None of the Company or any of its subsidiaries has received notice from any insurer or agent of such insurer that substantial capital improvements or other expenditures will have to be made in order to continue such insurance. (ff) The Company has (i) initiated a review and assessment of all areas within its and each of its subsidiaries' business and operations (including those affected by suppliers, vendors and customers) that could be adversely affected by the "Year 2000 Problem" (that is, the risk that computer applications used by the Company or any of its subsidiaries (or suppliers, vendors and customers) may be unable to recognize and perform properly date-sensitive functions involving certain dates prior to and any date after December 31, 1999), (ii) developed a plan and timeline for addressing the Year 2000 Problem on a timely basis, and (iii) to date, implemented that plan in accordance with that timetable. Based on the foregoing, the Company believes that all computer applications (including those of its suppliers, vendors and customers) that are material to its or any of its subsidiaries' business and operations are reasonably expected on a timely basis to be able to perform properly date-sensitive functions for all dates before and 12 13 after January 1, 2000 (that is, be "Year 2000 Compliant"), except to the extent that a failure to do so could not reasonably be expected to have Material Adverse Effect. (gg) Neither the Company nor any of its subsidiaries, nor, to any Issuers' knowledge, any director, officer, agent, employee, shareholder or other person, in any such case, acting on behalf of the Company or any of its subsidiaries, has used any corporate funds during the last five years for any unlawful contribution, gift, entertainment or other unlawful expense relating to political activity; made any unlawful payment to any foreign or domestic government official or employee from corporate funds; violated or is in violation of any provision of the Foreign Corrupt Practices Act of 1977, as amended; or made any bribe, payoff, influence payment, kickback or other payment that is unlawful. (hh) The execution and delivery of this Agreement, the Registration Rights Agreement, the Indenture and the Senior Credit Facility and the sale of the Securities to be purchased by Eligible Purchasers will not involve any prohibited transaction within the meaning of Section 406 of ERISA or Section 4975 of the Internal Revenue Code of 1986. The representation made by the Company in the preceding sentence is made in reliance upon and subject to the accuracy of, and compliance with, the representations and covenants made or deemed made by Eligible Purchasers as set forth in the Final Memorandum under the caption "Notice to Investors." (ii) Neither the Company nor any of its subsidiaries has taken, and none of them will take, any action that would cause this Agreement or the issuance or sale of the Securities and Exchange Securities to violate Regulation G, T, U or X of the Board of Governors of the Federal Reserve System or analogous foreign laws and regulations. (jj) The Company and its subsidiaries have complied with all provisions of Section 517.075, Florida Statutes (Chapter 92-198, Laws of Florida) relating to doing business with the Government of Cuba or with persons or Affiliates located in Cuba. (kk) Other than as set forth on SCHEDULE B hereto, neither the Company nor any subsidiary is a party to any contract or agreement that would be required to be filed with the SEC (as defined below) as an exhibit to a registration statement on Form S-1 pursuant to entries (2), (4) and (10) of the Exhibit Table of Item 601 of Regulation S-K under the Securities Act. (ll) Neither the Company nor any subsidiary is a "public utility" or a "holding company" within the meaning of the Public Utility Holding Company Act of 1935, as amended (the "Public Utility Holding Company Act"). 13 14 2. PURCHASE AND SALE. On the basis of the representations and warranties contained in, and subject to the terms and conditions of, this Agreement, the Issuers agree to sell to each of the Initial Purchasers and each of the Initial Purchasers agrees to purchase the aggregate principal amount of Securities set forth opposite its name as shown in SCHEDULE C hereto, at a purchase price equal to 97% of the principal amount thereof. The Issuers shall not be obligated to deliver any of the Securities to be delivered except upon payment for all the Securities to be purchased as provided herein. 3. SALE AND RESALE OF THE SECURITIES BY THE INITIAL PURCHASER. Each of the Initial Purchasers represents and warrants to the Issuers that: (a) It is a qualified institutional buyer ("QIB") as defined in Rule 144A under the Securities Act, as such may be amended from time to time ("Rule 144A") and it will offer the Securities to be purchased hereunder for resale only upon the terms and conditions set forth in this Agreement and in the Final Memorandum. (b) It (i) will not solicit offers for, or offer or sell, the Securities by means of any form of general solicitation or general advertising within the meaning of Regulation D or in any manner involving a public offering within the meaning of Section 4(2) of the Securities Act, and (ii) will solicit offers for the Securities only from, and will offer, sell or deliver (the "Exempt Resales") the Securities, as part of its initial offering, only to the following persons (each an "Eligible Purchaser") (A) persons whom such Initial Purchaser reasonably believes to be QIBs or, if any such person is buying for one or more institutional accounts for which such person is acting as fiduciary or agent, only when such person has represented to such Initial Purchaser that each such account is a QIB, to whom notice has been given that such sale or delivery is being made in reliance on Rule 144A, and (B) persons outside the United States in offshore transactions in reliance on and in compliance with Regulation S. (c) With respect to Securities sold in reliance on Regulation S, (i) neither such Initial Purchaser nor any of its Affiliates nor anyone acting on its behalf has offered or sold, or will offer or sell, any Securities by means of any directed selling efforts (as defined in Rule 902 of Regulation S) in the United States and any such persons has complied and will comply with the offering restrictions requirements of Regulation S in connection with the offering and (ii) at or prior to confirmation of all sales of Securities made in reliance on Regulation S, it will have sent to each distributor, dealer or person receiving a selling concession, fee or other remuneration that purchases the Securities from it during the restricted period a confirmation or notice to substantially the following effect: 14 15 "The Securities covered hereby have not been registered under the U.S. Securities Act of 1933 (the "Securities Act") and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons (i) as part of a distribution thereof at any time or (ii) otherwise until 40 days after the later of the date of the commencement of the offering and the closing date, except in either case in accordance with an exemption from or in a transaction not subject to the Securities Act. Terms used above have the meanings given them by Regulation S." The sale of the Securities to non-U.S. persons in offshore transactions is not part of a plan or scheme to avoid the registration requirements of the Securities Act. (d) (i) It has not solicited, and will not solicit, offers to purchase any of the Securities from, (ii) it has not sold, and will not sell, any of the Securities to, and (iii) it has not distributed, and will not distribute, the Preliminary Memorandum or the Final Memorandum to, any person or entity in any jurisdiction outside of the United States except, in each case, in compliance in all material respects with all applicable laws of such jurisdiction. For purposes of this Agreement, "United States" means the United States of America, its territories, its possessions (including the Commonwealth of Puerto Rico), and other areas subject to its jurisdiction. (e) Unless prohibited by applicable law, (i) it will furnish to each person to whom it offers any Securities, a copy of the Preliminary Memorandum (as amended or supplemented) or Final Memorandum or (unless delivery of such Preliminary Memorandum is required by applicable law) shall inform each such person that a copy of such Preliminary Memorandum or the Final Memorandum will be available upon request and (ii) it will furnish to each person to whom it sells Securities a copy of the Final Memorandum (as then amended or supplemented by applicable law) and shall inform each such person that a copy of such Final Memorandum will be available upon request. (f) It will comply in all material respects with the advice contained in the Blue Sky Memorandum related to the state securities laws. 4. DELIVERY OF AND PAYMENT FOR THE NOTES. Delivery of and payment for the Securities shall be made at the office of Latham & Watkins, 885 Third Avenue, New York, New York at 9:00 A.M., New York City time, on July 21, 1998, or at such other date or place as shall be determined by agreement between the Initial Purchasers and the Company. This date and time are sometimes referred to as the "Closing Date." On the Closing Date, the Issuers shall 15 16 deliver or cause to be delivered the Securities to the Initial Purchasers for the account of the Initial Purchasers against payment to or upon the order of the Company of the purchase price by wire transfer in federal (same-day) funds. Time shall be of the essence, and delivery at the time and place specified pursuant to this Agreement is a further condition of the obligation of the Initial Purchasers hereunder. Upon delivery, the Securities shall be in definitive fully registered form and registered in the name of Cede & Co., as nominee of the Depository Trust Company ("DTC"), or such other name or names and in such denominations as the Initial Purchasers shall request in writing not less than one business day prior to the Closing Date. For the purpose of expediting the checking and packaging of the Securities, the Issuers shall make the Securities available for inspection by the Initial Purchasers in New York, New York, not later than 2:00 P.M., New York City time, on the business day prior to the Closing Date. 5. FURTHER AGREEMENTS OF THE ISSUERS. The Issuers jointly and severally agree with each Initial Purchaser as set forth below in this Section 5: (a) The Issuers will furnish to the Initial Purchasers, and those persons identified by the Initial Purchasers to the Issuers, without charge, as many copies of the Preliminary Memorandum and the Final Memorandum and any supplements and amendments thereto as they may reasonably request. (b) Prior to making any amendment or supplement to the Preliminary Memorandum or the Final Memorandum, the Issuers shall furnish a copy thereof to the Initial Purchasers and counsel to the Initial Purchasers and will not effect any such amendment or supplement to which the Initial Purchasers shall reasonably object by notice to the Company after a reasonable period to review. The Issuers consent to the use of the Preliminary Memorandum and the Final Memorandum, and any amendments and supplements thereto required pursuant hereto, by the Initial Purchaser in connection with Exempt Resales. (c) If, at any time prior to completion of the distribution of the Securities by the Initial Purchasers, any event shall occur or condition exist as a result of which it is necessary, in the opinion of counsel for the Initial Purchasers or counsel for the Issuers, to amend or supplement the Final Memorandum in order that the Final Memorandum will not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading in light of the circumstances existing at the time it is delivered to an Eligible Purchaser, or if it is necessary to amend or supplement the Final Memorandum to comply with applicable law, the Issuers will (i) notify the Initial Purchasers, (ii) promptly prepare such amendment or supplement as may be necessary to correct such untrue statement or omission or so that the Final Memorandum, as so amended or supplemented, will comply with applicable 16 17 law and (iii) furnish to the Initial Purchasers such number of copies of such amendment or supplement as they may reasonably request. (d) So long as any Securities are outstanding and are "Restricted Securities" within the meaning of Rule 144(a)(3) under the Securities Act and during any period in which the Issuers are not subject to Section 13 or 15(d) of the Exchange Act of 1934, as amended (the "Exchange Act"), the Issuers will furnish to holders of the Securities and prospective purchasers of Securities designated by such holders, upon request of such holders or such prospective purchasers, the information, if any, required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act. (e) So long as the Securities and Exchange Securities are outstanding, the Issuers will furnish to the Initial Purchasers copies of any annual reports, quarterly reports and current reports filed with the Securities and Exchange Commission ("SEC") on Forms 10-K, 10-Q and 8-K, or such other similar forms as may be designated by the SEC, and such other documents, reports and information as shall be furnished by the Issuers to the Trustee or to the holders of the Securities and Exchange Securities pursuant to the Indenture. (f) The Issuers will use their best efforts to qualify the Securities for sale under the securities or Blue Sky laws of such jurisdictions as the Initial Purchasers reasonably designate and to continue such qualifications in effect so long as reasonably required for the distribution of the Securities. The Issuers will also arrange for the determination of the eligibility for investment of the Securities under the laws of such jurisdictions as the Initial Purchasers reasonably request. Notwithstanding the foregoing, the Issuers shall not be obligated to qualify as a foreign corporation in any jurisdiction in which they are not so qualified or to file a general consent to service of process or to subject themselves to taxation in respect of doing business in any jurisdiction in which they are not otherwise subject. (g) The Issuers will use their best efforts to permit the Securities to be designated PORTAL securities in accordance with the rules and regulations adopted by the NASD relating to trading in the PORTAL market and to permit the Securities to be eligible for clearance and settlement through DTC. (h) Except following the effectiveness of any Registration Statement (as defined in the Registration Rights Agreement) and except for such offers as may be made as a result of, or subsequent to, filing such Registration Statement or amendments thereto prior to the effectiveness thereof, the Issuers will not, and will cause their Affiliates not to, solicit any offer to buy or offer to sell the Securities by means of any form of general solicitation or general 17 18 advertising (as those terms are used in Regulation D under the Securities Act) or in any manner involving a public offering within the meaning of Section 4(2) of the Securities Act. (i) The Company will apply the net proceeds from the sale of the Securities as set forth in the Final Memorandum under "Use of Proceeds." (j) The Issuers will take such steps as shall be necessary to ensure that neither the Company nor any of its subsidiaries shall become (i) an "investment company" within the meaning of the Investment Company Act or (ii) a "holding company" or a "subsidiary company" or an "affiliate" of a holding company within the meaning of the Public Utility Holding Company Act. (k) The Company and its subsidiaries will not, and will cause their Affiliates not to, take any action that would require the registration under the Securities Act of the Securities (other than pursuant to the Registration Rights Agreement) including, without limitation, (i) engaging in any directed selling efforts (within the meaning of Regulation S) during any applicable restricted period or (ii) offering any other securities in a manner that would be integrated with the transactions contemplated hereby. (l) Prior to the consummation of the Exchange Offer or the effectiveness of an applicable shelf registration statement if, in the reasonable judgment of the Initial Purchasers, the Initial Purchasers or any of their Affiliates are required to deliver an offering memorandum in connection with sales of, or market-making activities with respect to, the Securities, (A) the Issuers will periodically amend or supplement the Final Memorandum so that the information contained in the Final Memorandum complies with the requirements of Rule 144A of the Securities Act, (B) the Issuers will amend or supplement the Final Memorandum when necessary to reflect any material changes in the information provided therein so that the Final Memorandum will not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in light of the circumstances existing as of the date the Final Memorandum is so delivered, not misleading and (C) the Issuers will provide the Initial Purchasers with copies of each such amended or supplemented Final Memorandum, as the Initial Purchasers may reasonably request. The Issuers hereby expressly acknowledge that the indemnification and contribution provisions of Section 8 hereof are specifically applicable and relate to each offering memorandum, registration statement, prospectus, amendment or supplement referred to in this Section 5(l). 18 19 (m) Not to voluntarily claim, and to resist actively any attempts to claim, the benefit of any usury laws against the holders of any Securities. (n) To cause the Exchange Offer to be made in the appropriate form to permit registered Exchange Securities to be offered in exchange for the Securities and to comply with all applicable federal and state securities laws in connection with the Exchange Offer. (o) To comply with all of their agreements set forth in the Registration Rights Agreement and all agreements set forth in the representation letters of the Issuers to DTC relating to the approval of the Notes by DTC for "book-entry" transfer. (p) The Issuers will do all things reasonably necessary to satisfy the closing conditions set forth in Section 7 hereof. 6. EXPENSES. The Issuers, jointly and severally, agree to pay (a) the costs incident to the authorization, issuance, sale and delivery of the Securities and Exchange Securities and any issue or stamp taxes payable in that connection; (b) the costs incident to the preparation and printing of the Preliminary Memorandum, the Final Memorandum and any amendments, supplements and exhibits thereto; (c) the costs of distributing the Preliminary Memorandum, the Final Memorandum and any amendment or supplement thereto; (d) the fees and expenses of qualifying the Securities and Exchange Securities under the securities laws of the several jurisdictions as provided in Section 5(f) and of preparing, printing and distributing a Blue Sky Memorandum (including reasonable related fees and expenses of counsel to the Initial Purchasers, which will be $5,000); (e) the cost of printing the Securities and the Exchange Securities; (f) the fees and expenses of the Trustee and any agent of the Trustee and the fees and disbursements of any counsel for the Trustee in connection with the Indenture and the Securities and Exchange Securities; (g) any fees paid to rating agencies in connection with the rating of the Securities and Exchange Securities; (h) the costs and expenses of DTC and its nominee, including its book-entry system; (i) all expenses and listing fees incurred in connection with the application for quotation of the Securities on the PORTAL market; and (j) all other costs and expenses incident to the performance of the obligations of the Issuers under this Agreement. 7. CONDITIONS OF INITIAL PURCHASER'S OBLIGATIONS. The obligations of the Initial Purchasers to purchase the Securities shall be subject to the satisfaction of the following conditions: (a) The representations and warranties on the part of the Issuers contained herein at the Execution Time and the Closing Date and the statements of the Issuers made in any 19 20 certificates pursuant to the provisions hereof shall be accurate, and the Issuers shall have performed all of their obligations hereunder in all material respects. (b) The Initial Purchasers shall not have discovered and disclosed to the Company on or prior to the Closing Date that the Final Memorandum or any amendment or supplement thereto contains an untrue statement of a fact which, in the opinion of Latham & Watkins, counsel for the Initial Purchasers, is material or omits to state a fact which, in the opinion of such counsel, is material and is necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (c) The Final Memorandum shall have been printed and copies distributed to the Initial Purchasers as soon as practicable but in no event later than on the Business Day following the date of this Agreement or at such later date and time as to which the Initial Purchasers may agree, and no stop order suspending the qualification or exemption from qualification of the Securities in any jurisdiction referred to in Section 5(f) shall have been issued and no proceeding for that purpose shall have been commenced or shall be pending or threatened. (d) No action shall have been taken and no statute, rule, regulation or order shall have been enacted, adopted or issued by any governmental agency which would, as of the Closing Date, prevent the issuance of the Securities; no action, suit or proceeding shall have been commenced and be pending against or affecting or, to the knowledge of the Company, threatened against, the Company or any of its subsidiaries before any court or arbitrator or any governmental body, agency or official that, singly or in the aggregate, if adversely determined, would reasonably be expected to result in a Material Adverse Effect; and no stop order shall have been issued by the SEC or any governmental agency of any jurisdiction referred to in Section 5(f) preventing the use of the Final Memorandum, or any amendment or supplement thereto, or which would reasonably be expected to have a Material Adverse Effect. (e) Since the dates as of which information is given in the Final Memorandum and other than as set forth in the Final Memorandum, (i) there shall not have been any Material Adverse Change, or any development that is reasonably likely to result in a Material Adverse Change, or any material change in the long-term debt, or material increase in the short-term debt, from that set forth in the Final Memorandum; (ii) no dividend or distribution of any kind shall have been declared, paid or made by the Company on any class of its capital stock; (iii) the Company and its subsidiaries shall not have incurred any liabilities or obligations, direct or contingent, that are material, individually or in the aggregate, to the Company and its subsidiaries, taken as a whole, and that are required to be disclosed on a balance sheet or notes 20 21 thereto in accordance with generally accepted accounting principles and are not disclosed on the latest balance sheet or notes thereto included in the Final Memorandum. (f) The Initial Purchasers shall have received a certificate, dated the Closing Date, signed on behalf of the Company by (i) Gerald F. Cerce, Chairman, and (ii) Duane M. DeSisto, Chief Financial Officer, confirming that (A) such officers have participated in conferences with other officers and representatives of the Issuers, representatives of the independent public accountants of the Issuers and representatives of counsel to the Issuers at which the contents of the Final Memorandum and related matters were discussed and (B) the matters set forth in paragraphs (a), (c) (d) and (e) of this Section 7 are true and correct as of the Closing Date. (g) All corporate proceedings and other legal matters incident to the authorization, form and validity of this Agreement, the Securities, the Exchange Securities, the Indenture, the Registration Rights Agreement, the Final Memorandum, the Senior Credit Facility and all other legal matters relating to this Agreement and the transactions contemplated hereby and thereby, shall be reasonably satisfactory in all material respects to counsel for the Initial Purchasers, and the Issuers shall have furnished to such counsel all documents and information that they may reasonably request to enable them to pass upon such matters. (h) Hinckley, Allen & Snyder, counsel for the Issuers, shall have furnished to the Initial Purchasers its written opinion (containing customary limitations and approvals that shall be reasonably satisfactory in all material respects to the Initial Purchasers' counsel), addressed to the Initial Purchasers and dated the Closing Date, in form and substance reasonably satisfactory to the Initial Purchasers, to the effect that: (i) The Company and each Subsidiary Guarantor is validly existing and in good standing under the laws of its jurisdiction of organization. The Company and each of the Subsidiary Guarantors is duly qualified to do business and in good standing as foreign organization in each U.S. jurisdiction with respect to which it has certified to us that they own property, maintain business or have employees (except where failure to so qualify would not, singly or in the aggregate, reasonably be expected to have a Material Adverse Effect). (ii) Assuming, (A) the accuracy of and compliance with the representations, warranties and covenants of the Issuers set forth in Section 1 of this Agreement, (B) the accuracy of and compliance with the Initial Purchasers' representations, warranties and covenants set forth in Section 3 of this Agreement, (C) the accuracy of the representations and warranties of each of the purchasers to whom the Initial Purchasers initially resell the Securities, 21 22 as specified under the caption "Notice to Investors" in the Preliminary Memorandum and the Final Memorandum, (D) the compliance by the Initial Purchasers with the offering and transfer procedures and restrictions described in the Final Memorandum and (E) if required by applicable law, receipt by the purchasers to whom the Initial Purchasers initially resell the Securities of a copy of the Final Memorandum prior to such sale, it is not necessary in connection with the offer, issuance, sale and delivery of the Securities to the Initial Purchasers, and the initial reoffer, resale and delivery of the Securities by the Initial Purchasers, as contemplated by this Agreement and the Final Memorandum, to register the Securities under the Securities Act, or to qualify the Indenture under the Trust Indenture Act, it being understood that no opinion is expressed as to any subsequent resale of Securities or any resale of Securities by any person other than the Initial Purchasers. (iii) Each of the Company and the Subsidiary Guarantors has the corporate power and authority to execute and deliver, and to consummate the transactions contemplated by, this Agreement, the Registration Rights Agreement, the Indenture and the Senior Credit Facility; the Company has the corporate power and authority to issue and deliver the Notes as contemplated by this Agreement; and the Subsidiary Guarantors have the corporate power and authority to issue and deliver the Subsidiary Guarantees as contemplated by this Agreement. (iv) The execution and delivery of this Agreement have been duly authorized by all requisite corporate action of the Company and each Subsidiary Guarantor, and this Agreement has been duly executed and delivered by the Company and each Subsidiary Guarantor. (v) The execution and delivery of the Indenture have been duly authorized by all requisite corporate action of the Company and each Subsidiary Guarantor; and the Indenture has been duly executed and delivered by the Company and each Subsidiary Guarantor, and assuming due authorization, execution and delivery by the Trustee, is a valid and binding agreement of the Company and each Subsidiary Guarantor, enforceable against the Company and each Subsidiary Guarantor in accordance with its terms, except that enforcement thereof may be subject to (A) bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws now or hereafter in effect relating to or affecting creditors' rights generally and (B) general principles of equity (regardless of whether enforceability is considered in a proceeding in equity or at law) and the exercise of discretionary authority of any court before which a proceeding may be brought. 22 23 (vi) The execution and delivery of the Securities have been duly authorized by all requisite corporate action of the Company and each of the Subsidiary Guarantors; the Notes have been duly executed by the Company and the Subsidiary Guarantees have been duly executed by each of the Subsidiary Guarantors and assuming due authentication by the Trustee, when delivered by the Company and the Subsidiary Guarantors and paid for by the Initial Purchasers in accordance with the terms of this Agreement, the Notes and the Subsidiary Guarantees will be valid and binding obligations of the Company and each of the Subsidiary Guarantors respectively, entitled to the benefits of the Indenture, enforceable against the Company and each of the Subsidiary Guarantors in accordance with their terms, except that enforcement thereof may be subject to (A) bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws now or hereafter in effect relating to or affecting creditors' rights generally and (B) general principles of equity (regardless of whether enforceability is considered in a proceeding in equity or at law) and the exercise of discretionary authority of any court before which a proceeding may be brought. (vii) The execution and delivery of the Exchange Securities have been duly authorized by all requisite corporate action of the Company and each of the Subsidiary Guarantors. (viii) The execution and delivery of the Registration Rights Agreement have been duly authorized by all requisite corporate action of the Company and each of the Subsidiary Guarantors; the Registration Rights Agreement has been duly executed and delivered by the Company and each of the Subsidiary Guarantors and, assuming due authorization, execution and delivery by the Initial Purchasers, the Registration Rights Agreement is a valid and binding agreement of the Company and each of the Subsidiary Guarantors enforceable against the Company and each of the Subsidiary Guarantors in accordance with its terms, except that (i) enforcement thereof may be subject to (A) bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws now or hereafter in effect relating to or affecting creditors' rights generally and (B) general principles of equity (regardless of whether enforceability is considered in a proceeding in equity or at law) and the exercise of discretionary authority of any court before which a proceeding may be brought and (ii) the validity and enforceability of any indemnification or contribution provisions thereof may be limited under applicable securities laws or public policies. (ix) The execution and delivery of the Senior Credit Facility have been duly authorized by all requisite corporate action of the Company and each of the Subsidiary Guarantors; the Senior Credit Facility has been duly executed and delivered by the Company and each of the Subsidiary Guarantors and, assuming due authorization, execution and 23 24 delivery by the other parties thereto, the Senior Credit Facility is a valid and binding agreement of the Company and each of the Subsidiary Guarantors enforceable against the Company and each of the Subsidiary Guarantors in accordance with its terms, except that enforcement thereof may be subject to (A) bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws now or hereafter in effect relating to or affecting creditors' rights generally and (B) general principles of equity (regardless of whether enforceability is considered in a proceeding in equity or at law) and the exercise of discretionary authority of any court before which a proceeding may be brought. (x) The execution and delivery by the Company and each of the Subsidiary Guarantors of this Agreement, the Indenture, the Registration Rights Agreement and the Senior Credit Facility, the consummation by the Company and the Subsidiary Guarantors of the transactions contemplated hereby and thereby (including, without limitation, the issuance and sale of the Securities and the Exchange Securities) and by the Final Memorandum will not (A) to the knowledge of such counsel, result in a breach or violation of any of the terms or provisions of, or constitute a default under, any bond, debenture, note, indenture, mortgage, deed of trust or other agreement or instrument set forth on Schedule B except any breach or violation or default which would not, singly or in the aggregate, have a Material Adverse Effect or (B) result in any violation of the provisions of the (1) charter, bylaws or other organizational documents of the Company or any of its subsidiaries, (2) to the knowledge of such counsel, any applicable law, rule or regulation (other than Securities Laws (as defined below) as to which an opinion is given in paragraph (ii) above) with respect to the Company or any of its subsidiaries or (3) to the knowledge of such counsel, any rule or regulation (other than Securities Laws (as defined below) as to which an opinion is given in paragraph (ii) above) or order of any court or governmental agency having jurisdiction over the Company or any of its subsidiaries except, in the case of (2) and (3), a violation which would not, singly or in the aggregate, have a Material Adverse Effect; and, to the knowledge of such counsel, except for such consents, approvals or authorizations of, or filings, registrations or qualifications with, governmental authorities as may be required under the Securities Act and the rules and regulations thereunder, the Trust Indenture Act and the rules and regulations thereunder or applicable states securities or Blue Sky laws, rules or regulations (all of such laws, rules and regulations are collectively referred to herein as "Securities Laws") in connection with the purchase and distribution of the Securities by the Initial Purchasers and as set forth in, and in order to consummate the transactions contemplated by, the Registration Rights Agreement, no consent, approval, authorization or order of, or filing or registration with, any such court or governmental agency or body is required in connection with the execution and delivery by the Company and the Subsidiary Guarantors of this Agreement, the Indenture, the Registration Rights Agreement or the Senior Credit Facility, the 24 25 consummation by the Company and the Subsidiary Guarantors of the transactions contemplated hereby and thereby (including, without limitation, the issuance and sale of the Securities and Exchange Securities) by the Company and the Subsidiary Guarantors, except such as have been obtained and made or have been disclosed in the Final Memorandum or such the failure to obtain would not, singly or in the aggregate, have a Material Adverse Effect. (xi) The descriptions in the Final Memorandum of the Indenture, the Securities, the Registration Rights Agreement and the Senior Credit Facility are accurate summaries of such documents in all material respects. The statements under the captions "Business -- Intellectual Property and Licenses," "Description of Notes" and "Plan of Distribution" in the Final Memorandum, to the extent they constitute a summary of the legal matters, documents or proceedings referred to therein, have been reviewed by such counsel and fairly present in all material respects such legal matters, documents and proceedings. (xii) Trademarks of the Company and its subsidiaries which are registered in the United States and/or Canada in the name of the Company or its subsidiaries are set forth in Exhibit 1, a copy of which is attached hereto and incorporated herein by reference. To the knowledge of such counsel, neither the Company nor any of its subsidiaries has received any notice of any infringement of or claim of any conflict with the rights of any third party with respect to any of such registered trademarks which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would result in a Material Adverse Effect on the Company. (xiii) To such counsel's knowledge, no legal or governmental proceedings are pending to which the Company or any of its subsidiaries is a party that would be required under the Securities Act to be described in a registration statement on Form S-1 or a prospectus contained therein delivered at the time of the confirmation of the sale of an offering of securities registered under the Securities Act that are not described in the Final Memorandum, or, to such counsel's knowledge, that seek to restrain, enjoin, prevent the consummation of or otherwise challenge the issuance or sale of the Securities to the Initial Purchasers or the consummation of the transactions described in the Final Memorandum under the caption "Use of Proceeds." (xiv) Neither the Company nor any of its subsidiaries is (i) subject to registration and regulation as an "investment company" within the meaning of the Investment Company Act, or (ii) a "holding company" or a "subsidiary company" or an "affiliate" of a holding company within the meaning of the Public Utility Holding Company Act. 25 26 (xv) When the Securities are issued and delivered pursuant to this Agreement, such Securities will not be of the same class (within the meaning of Rule 144A(d)(3) under the Securities Act) as securities of the Company or any of its subsidiaries that are listed on a national securities exchange registered under Section 6 of the Exchange Act or quoted on an automated inter-dealer quotation system. (xvi) Assuming the Initial Purchasers purchase the Securities in accordance with Rule 144A under the Securities Act, neither the issuance or sale of the Securities nor the application by the Company of the net proceeds thereof as set forth in the Final Memorandum will violate Regulation G, T, U or X of the Board of Governors of the Federal Reserve System. (xvii) To the best of such counsel's knowledge, no stop order preventing the use of the Preliminary Memorandum or the Final Memorandum, or any amendment or supplement thereto, or any order asserting that any of the transactions contemplated by this Agreement are subject to the registration requirements of the Securities Act, has been issued. In rendering such opinion, such counsel may state that its opinion (i) as to the laws of the State of New York is made in reliance on the opinion of Latham & Watkins and (ii) is otherwise limited to matters governed by the Federal laws of the United States of America, the laws of the State of Rhode Island, the laws of the Commonwealth of Massachusetts and the General Corporation Law of the State of Delaware. In addition, such counsel shall also state that such counsel has participated in conferences with officers and representatives of the Issuers, representatives of the independent public accountants for the Issuers and the Initial Purchasers and its counsel at which the contents of the Final Memorandum and related matters were discussed and, although such counsel is not passing upon and does not assume any responsibility for, the accuracy, completeness or fairness of the statements contained in the Final Memorandum, and has not made any independent check or verification thereof, on the basis of the foregoing, no facts have come to the attention of such counsel that lead such counsel to believe that the Final Memorandum, as of its date or the Closing Date, contained an untrue statement of a material fact or omitted to state any material fact necessary to make the statements therein, in the light of the circumstances under which there were made, not misleading (it being understood that such counsel need express no belief or opinion with respect to the financial statements or other financial data included therein). 26 27 (i) The Initial Purchasers shall have received on the Closing Date an opinion of Latham & Watkins, counsel for the Initial Purchasers, dated the Closing Date and addressed to the Initial Purchasers, in form and substance reasonably satisfactory to the Initial Purchasers. (j) The Issuers and the Trustee shall have entered into the Indenture and the Initial Purchasers shall have received counterparts, conformed as executed, thereof. (k) The Issuers and the Initial Purchasers shall have entered into the Registration Rights Agreement and the Initial Purchasers shall have received counterparts, conformed as executed, thereof. (l) Prior to or concurrently with the issue and sale of the Securities, the Issuers shall have entered into the Senior Credit Facility (the form and substance of which shall be reasonably acceptable to the Initial Purchasers) and the Initial Purchasers shall have received counterparts, conformed as executed, thereof and of all other documents and agreements entered into in connection therewith. There shall exist at and as of the Closing Date no conditions that would constitute a default (or an event that with notice or the lapse of time, or both, would constitute a default) under the Senior Credit Facility. On the Closing Date, the Senior Credit Facility shall be in full force and effect and shall not have been modified except as contemplated by the Final Memorandum. (m) At the Execution Time and at the Closing Date, Arthur Andersen LLP, independent accountants for the Company, and Price Waterhouse LLP, independent accountants for Foster Grant Group L.P., shall have each furnished to the Initial Purchasers customary comfort letters, dated respectively as of the Execution Time and as of the Closing Date, in form and substance reasonably satisfactory to the Initial Purchasers, confirming that they are independent accountants within the meaning of the Securities Act and the Exchange Act and the applicable rules and regulations thereunder and Rule 101 of the Code of Professional Conduct of the American Institute of Certified Public Accountants (the "AICPA"), with respect to the financial statements and certain financial information of the Company and its subsidiaries, and Foster Grant Group L.P. (n) (i) None of the Company or any of its subsidiaries shall have sustained since the date of the latest financial statements included in the Final Memorandum losses or interferences with their businesses, taken as a whole, from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth or contemplated in the Final Memorandum and (ii) since such date there shall not have been any change in the capital stock or 27 28 long-term debt of the Company or any of its subsidiaries, other than immaterial changes in short-term borrowings to finance working capital in the ordinary course of business, or any change, or any development involving a prospective change, in or affecting the general affairs, management, financial position, shareholders' equity or results of operations of the Company or its subsidiaries, taken as a whole, otherwise than as set forth or contemplated in the Final Memorandum, the effect of which, in any such case described in clause (i) or (ii), is, in the reasonable judgment of the Initial Purchasers, so material and adverse as to make it impracticable or inadvisable to proceed with the offering or the delivery of the Securities being delivered on the Closing Date on the terms and in the manner contemplated herein and in the Final Memorandum. (o) Subsequent to the execution and delivery of this Agreement there shall not have occurred any of the following: (i) trading in securities generally on the New York Stock Exchange or The NASDAQ Stock Market's National Market or in the over-the-counter market shall have been suspended or materially limited, or minimum prices shall have been established on such exchange by the SEC, or by such exchange or by any other regulatory body or governmental authority having jurisdiction, (ii) a banking moratorium shall have been declared by Federal or state authorities, (iii) the United States shall have become engaged in hostilities, there shall have been an escalation in hostilities involving the United States or there shall have been a declaration of a national emergency or war by the United States or (iv) there shall have occurred such a material adverse change in general economic, political or financial conditions (or the effect of international conditions on the financial markets in the United States shall be such) as to make it, in the reasonable judgment of the Initial Purchasers, impracticable or inadvisable to proceed with the offering or delivery of the Securities being delivered on the Closing Date on the terms and in the manner contemplated herein and in the Final Memorandum. (p) As of the Closing Date, no "nationally recognized statistical rating organization" as such term is defined for purposes of Rule 436(g)(2) under the Securities Act (i) will have imposed (or will have informed the Company or any Subsidiary Guarantor that it is considering imposing) any condition (financial or otherwise) on the Company's or any Subsidiary Guarantor's retaining any rating assigned to the Company or any Subsidiary Guarantor, any securities of the Company or any Subsidiary Guarantor or (ii) will have indicated to the Company or any Subsidiary Guarantor that it is considering (a) the downgrading, suspension, or withdrawal of, or any review for a possible change that does not indicate the direction of the possible change in, any rating so assigned or (b) any change in the outlook for any rating of the Company, any Subsidiary Guarantor or any securities of the Company or any Subsidiary Guarantor. 28 29 (q) Prior to or concurrently with the issue and sale of the Securities, the amendment to the relative powers, preferences and rights and the qualifications, limitations and restrictions thereof, granted to or imposed on the Company's Series A Redeemable Convertible Preferred Stock as set forth on Exhibit 2 hereto (the "Amendment") shall have been duly and validly approved by the shareholders of the Company and the Initial Purchasers shall have received evidence reasonably satisfactory to the Initial Purchasers and their legal counsel of the filing of the Amendment with the Rhode Island Secretary of State and its effectiveness. (r) Latham & Watkins shall have been furnished with such documents, in addition to those set forth above, as they may reasonably require for the purpose of enabling them to review or pass upon the matters referred to in this Section 7 and in order to evidence the accuracy, completeness or satisfaction in all material respects of any of the representations, warranties or conditions herein contained. (s) Prior to the Closing Date, the Issuers shall have furnished to the Initial Purchasers such further information, certificates and documents as the Initial Purchasers may reasonably request. All opinions, letters, evidence and certificates mentioned above or elsewhere in this Agreement shall be deemed to be in compliance with the provisions hereof only if they are in form and substance reasonably satisfactory to counsel for the Initial Purchasers. 8. INDEMNIFICATION AND CONTRIBUTION. (a) The Issuers jointly and severally agree to indemnify and hold harmless the Initial Purchasers, the directors, officers, employees and agents (including, without limitation, attorneys) of the Initial Purchasers and each person who controls any Initial Purchaser within the meaning of either the Securities Act or the Exchange Act against any and all losses, claims, damages or liabilities, joint or several, to which they or any of them may become subject under the Securities Act, the Exchange Act or other Federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the Preliminary Memorandum, the Final Memorandum or any information provided by the Issuers to any holder or prospective purchaser of the Securities pursuant to Section 5(e), or in any amendment thereof or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, and agree to reimburse each such indemnified party, as 29 30 incurred, for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action: provided, however, that the Issuers will not be liable in any such case to any Initial Purchaser to the extent that any such loss, claim, damage, liability or action arises out of or is based upon any such untrue statement or alleged untrue statement or omission or alleged omission relating to such Initial Purchaser made in the Preliminary Memorandum or the Final Memorandum, or in any amendment thereof or supplement thereto, in reliance upon and in conformity with written information furnished to the Issuers by or on behalf of such Initial Purchaser specifically for inclusion therein; provided that the indemnification contained in this paragraph (a) with respect to the Preliminary Memorandum shall not inure to the benefit of the Initial Purchasers (or to the benefit of any person controlling the Initial Purchasers) on account of any such loss, claim, damage, liability or expense arising from the sale of the Securities by the Initial Purchasers to any person if a copy of the Final Memorandum (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) shall not have been delivered or sent to such person and each untrue statement of a material fact contained in, and each omission or alleged omission of a material fact from, such Preliminary Memorandum was corrected in the Final Memorandum (as so amended or supplemented) and it shall have been determined that any Initial Purchaser and each person, if any, who controls such Initial Purchasers would not have incurred such losses, claims, damages, liabilities and expenses had the Final Memorandum been delivered or sent. (b) Each Initial Purchaser agrees severally and not jointly to indemnify and hold harmless the Issuers, their directors, officers, employees and agents (including, without limitation, attorneys), and each person who controls the Issuers within the meaning of either the Securities Act or the Exchange Act, to the same extent as the foregoing indemnity from the Issuers to each Initial Purchaser, but only with reference to written information relating to such Initial Purchaser furnished to the Issuers by or on behalf of the Initial Purchaser specifically for inclusion in the Preliminary Memorandum or the Final Memorandum (or in any amendment or supplement thereto). This indemnity agreement will be in addition to any liability which any Initial Purchaser may otherwise have. The Issuers and the Initial Purchasers acknowledge that the statements set forth in the last paragraph of the cover page, the statements that the Initial Purchasers intend to make a market in the Notes, the statement preceding the caption "Note Regarding Forward-Looking Statements" regarding transactions that stabilize the price of the Notes and the statements under the headings "Plan of Distribution" in the Preliminary Memorandum and the Final Memorandum constitute the only information furnished in writing by or on behalf of the Initial Purchasers for inclusion in the Preliminary Memorandum or the Final Memorandum (or any amendment or supplement thereto). 30 31 (c) Promptly after receipt by an indemnified party under this Section 8 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section 8, notify the indemnifying party in writing of the commencement thereof, but the failure so to notify the indemnifying party (i) will not relieve it from liability under paragraph (a) or (b) above unless and to the extent it did not otherwise learn of such action and such failure results in the forfeiture by the indemnifying party of substantial rights and defenses and (ii) will not, in any event, relieve the indemnifying party from any obligations to any indemnified party other than the indemnification obligation provided in paragraph (a) or (b) above. The indemnifying party shall be entitled to appoint counsel of the indemnifying party's choice at the indemnifying party's expense to represent the indemnified party in any action for which indemnification is sought (in which case the indemnifying party shall not thereafter be responsible for the fees and expenses of any separate counsel retained by the indemnified party or parties except as set forth below); provided, however that such counsel shall be reasonably satisfactory to the indemnified party. Notwithstanding the indemnifying party's election to appoint counsel to represent the indemnified party in an action, the indemnified party shall have the right to employ separate counsel (including local counsel), and the indemnifying party shall bear the reasonable fees, costs and expenses of such separate counsel if (i) the use of counsel chosen by the indemnifying party to represent the indemnified party would, in the opinion of legal counsel to the indemnified party, present such counsel with a conflict of interest, (ii) the actual or potential defendants in, or targets of, any such action include both the indemnified party and the indemnifying party and the indemnified party shall have been informed in writing by legal counsel that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, (iii) the indemnifying party shall not have employed counsel reasonably satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of the institution of such action or (iv) the indemnifying party shall authorize the indemnified party to employ separate counsel at the expense of the indemnifying party. It is understood that the indemnifying party shall not, in respect of the legal expenses of any indemnified party in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the fees and expenses of more than one separate firm (in addition to any local counsel) for (i) all Initial Purchasers and all persons, if any, who control any Initial Purchaser within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act and (ii) all Issuers, their directors and officers and each person, if any, who controls any Issuer within the meaning of either such Section, and that all such fees and expenses shall be reimbursed as they are incurred. In the case of any such separate firm for the Initial Purchasers and such control persons of the Initial Purchasers, such firm shall be designated in writing by NationsBanc Montgomery Securities LLC. An indemnifying party will not, without 31 32 the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified parties are actual or potential parties to such claim or action) unless such settlement, compromise or consent includes an unconditional release of each indemnified party from all liability arising out of such claim, action, suit or proceeding. (d) In the event that the indemnity provided in paragraph (a) or (b) of this Section 8 is unavailable to or insufficient to hold harmless an indemnified party for any reason, the Issuers, on the one hand, and the Initial Purchasers, on the other hand, agree to contribute to the aggregate losses, claims, damages and liabilities (including legal or other expenses reasonably incurred in connection with investigating or defending same) (collectively "Losses") to which the Issuers and one or more of the Initial Purchasers may be subject in such proportion as is appropriate to reflect the relative benefits received by the Issuers, on the one hand, and by such Initial Purchaser, on the other hand, from the offering of the Securities; provided, however, that in no case shall any Initial Purchaser be responsible for any amount in excess of the purchase discount or commission applicable to the Securities purchased by the such Initial Purchaser hereunder. If the allocation provided by the immediately preceding sentence is unavailable for any reason, the Issuers and the Initial Purchasers shall contribute in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Issuers, on the one hand, and of such Initial Purchaser, on the other hand, in connection with the statements or omissions which resulted in such Losses as well as any other relevant equitable considerations. Benefits received by the Issuers shall be deemed to be equal to the total net proceeds from the offering (before deducting expenses) of the Securities, and benefits received by any Initial Purchaser shall be deemed to be equal to the total purchase discounts and commissions received by such Initial Purchaser from the Issuers in connection with the purchase of the Securities hereunder. Relative fault shall be determined by reference to whether any alleged untrue statement or omission relates to information provided by the Issuers or the Initial Purchasers. The Issuers and the Initial Purchasers agree that it would not be just and equitable if contribution were determined by pro rata allocation or any other method of allocation that does not take account of the equitable considerations referred to above. Notwithstanding the provisions of this paragraph (d), 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. For purposes of this Section 8, each person who controls an Initial Purchaser within the meaning of either the Securities Act or the Exchange Act and each partner, director, officer, employee and agent of an Initial Purchaser shall have the same rights to contribution as such Initial Purchaser, and each person who controls the 32 33 Issuers within the meaning of either the Securities Act or the Exchange Act and each director, officer, employee and agent of the Issuers shall have the same rights to contribution as the Issuers, subject in each case to the applicable terms and conditions of this paragraph (d). 9. TERMINATION. The obligations of the Initial Purchasers hereunder may be terminated by the Initial Purchasers by notice given to and received by the Company prior to delivery of and payment for the Securities if, prior to that time, any of the events described in Sections 7(o) or 7(p) shall have occurred or if the Initial Purchasers shall decline to purchase the Securities for any reason permitted under this Agreement. 10. REIMBURSEMENT OF INITIAL PURCHASER'S EXPENSES. If (a) the Issuers shall fail to tender the Securities for delivery to the Initial Purchasers otherwise than for any reason permitted under this Agreement or (b) the Initial Purchasers shall decline to purchase the Securities for any reason permitted under this Agreement (except the occurrence of any of the events described in Section 7(o) hereof), the Issuers shall reimburse the Initial Purchasers for the reasonable fees and expenses of their counsel and for such other reasonable out-of-pocket expenses as shall have been incurred by them in connection with this Agreement and the proposed purchase of the Securities, and upon demand the Issuers shall pay the full amount thereof to the Initial Purchasers. 11. NOTICES, ETC. All statements, requests, notices and agreements hereunder shall be in writing, and: (a) if to the Initial Purchasers, shall be delivered or sent by mail, telex or facsimile transmission to NationsBanc Montgomery Securities LLC, 100 North Tryon Street, 20th Floor, Charlotte, North Carolina 28255, Attention: Scott Holmes, with a copy to Latham & Watkins, 885 Third Avenue, New York, New York 10022, Attention: Kirk A. Davenport; (b) if to the Issuers, shall be delivered or sent by mail, telex or facsimile transmission to the address of the Company set forth in the Final Memorandum, Attention: Duane M. DeSisto, with a copy to Hinckley, Allen & Snyder, 1500 Fleet Center, Providence, Rhode Island 02903-2393, Attention: Stephen J. Carlotti. Any such statements, requests, notices or agreements shall take effect at the time of receipt thereof. The Issuers shall be entitled to act and rely upon any request, consent, notice or agreement given or made on behalf of the Initial Purchasers. 12. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall inure to 33 34 the benefit of and be binding upon the Initial Purchasers, the Issuers and their respective successors. This Agreement and the terms and provisions hereof are for the sole benefit of only those persons, except that the representations, warranties, indemnities and agreements of the Issuers contained in this Agreement shall also be deemed to be for the benefit of directors, officers, employees and agents (including, without limitation, attorneys) of the Initial Purchasers and the person or persons, if any, who control an Initial Purchasers within the meaning of Section 15 of the Securities Act and the representations, warranties, indemnities and agreements of the Initial Purchasers contained herein shall also be deemed to be for the benefit of directors, officers, employees and agents (including without limitation, attorneys) of the Issuers and the person or persons who control any of the Issuers within the meaning of Section 15 of the Securities Act. Nothing in this Agreement is intended or shall be construed to give any person, other than the persons referred to in this Section 12, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision contained herein. 13. SURVIVAL. The respective indemnities, representations, warranties and agreements of the Issuers and the Initial Purchasers contained in this Agreement or made by or on behalf on them, respectively, pursuant to this Agreement, shall survive the delivery of and payment for the Securities and shall remain in full force and effect, regardless of any investigation made by or on behalf of any of them or any person controlling any of them. 14. DEFINITION OF "BUSINESS DAY." For purposes of this Agreement, "business day" means each Monday, Tuesday, Wednesday, Thursday and Friday that is not a day on which banking institutions in The City of New York, New York or The City of Charlotte, North Carolina are authorized or obligated by law, executive order or regulation to close. 15. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE CONFLICT OF LAW RULES THEREOF. 16. COUNTERPARTS. This Agreement may be executed in one or more counterparts and, if executed in more than one counterpart, the executed counterparts shall each be deemed to be an original but all such counterparts shall together constitute one and the same instrument. 17. HEADINGS. The headings herein are inserted for convenience of reference only and are not intended to be part of, or to affect the meaning or interpretation of, this Agreement. 34 35 [Signature page follows] 35 36 If the foregoing correctly sets forth the agreement between the Issuers and the Initial Purchasers, please indicate your acceptance in the space provided for that purpose below. Very truly yours, AAI.FOSTERGRANT, INC. By: /s/ Gerald F. Cerce -------------------------------------------- Name: Gerald F. Cerce Title: President and Chief Executive Officer GUARANTORS: FOSTER GRANT HOLDINGS, INC. By: /s/ Gerald F. Cerce -------------------------------------------- Name: Gerald F. Cerce Title: President THE BONNEAU COMPANY By: /s/ Gerald F. Cerce -------------------------------------------- Name: Gerald F. Cerce Title: President OPTI-RAY, INC. By: /s/ Gerald F. Cerce -------------------------------------------- Name: Gerald F. Cerce Title: President BONNEAU GENERAL, INC. By: /s/ Gerald F. Cerce -------------------------------------------- Name: Gerald F. Cerce Title: President 37 BONNEAU HOLDINGS, INC. By: /s/ Gerald F. Cerce -------------------------------------------- Name: Gerald F. Cerce Title: President O-RAY HOLDINGS, INC. By: /s/ Gerald F. Cerce -------------------------------------------- Name: Gerald F. Cerce Title: President F.G.G. INVESTMENTS, INC. By: /s/ Gerald F. Cerce -------------------------------------------- Name: Gerald F. Cerce Title: President FOSTER GRANT GROUP, L.P. By: /s/ Gerald F. Cerce -------------------------------------------- Name: Gerald F. Cerce Title: President and Chief Executive Officer FANTASMA, LLC By: /s/ Gerald F. Cerce -------------------------------------------- Name: Gerald F. Cerce Title: Chairman 38 The foregoing Purchase Agreement is hereby confirmed and accepted as of the date first above written. NATIONSBANC MONTGOMERY SECURITIES LLC By: /s/ J. Scott Holmes ----------------------------- Name: J. Scott Holmes Title: Principal PRUDENTIAL SECURITIES INCORPORATED By: ----------------------------- Name: Title: BANCBOSTON SECURITIES INC. By: ----------------------------- Name: Title: 39 The foregoing Purchase Agreement is hereby confirmed and accepted as of the date first above written. NATIONSBANC MONTGOMERY SECURITIES LLC By: ----------------------------- Name: Title: PRUDENTIAL SECURITIES INCORPORATED By: /s/ Timothy O'Neill ---------------------------- Name: Timothy O'Neill Title: Director BANCBOSTON SECURITIES INC. By: ---------------------------- Name: Title: 40 The foregoing Purchase Agreement is hereby confirmed and accepted as of the date first above written. NATIONSBANC MONTGOMERY SECURITIES LLC By: ----------------------------- Name: Title: PRUDENTIAL SECURITIES INCORPORATED By: ---------------------------- Name: Title: BANCBOSTON SECURITIES INC. By: /s/ Gregory C. Foy ---------------------------- Name: Gregory C. Foy Title: Managing Director 41 EXHIBIT A Amendment 42 1. "SECTION 6.6 - SUSPENSION OF REDEMPTION OBLIGATION. Notwithstanding any provision of this Section 6 to the contrary, if at any time the Corporation shall have outstanding any Indebtedness (as hereinafter defined) the terms of which restrict the Corporation's ability to redeem, in whole or in part, the Series A Preferred Stock ("Restrictive Indebtedness"), then in such event the Corporation's obligations under Section 6.1 and Section 6.2 to redeem any shares of Series A Preferred Stock shall be suspended until ninety-one (91) days after the date that such Restrictive Indebtedness is no longer outstanding. The Corporation shall notify the holders of the Series A Preferred Stock in writing within ten (10) days of its incurrence of any Restrictive Indebtedness which under this Section 6.6 would require the suspension of its redemption obligations under Sections 6.1 and 6.2 hereof. Within ten days after the expiration of ninety-one (91) days after the date of the payment of such Restrictive Indebtedness in full, the Corporation shall issue a written notice of redemption in accordance with Section 6.5 hereof for such number of shares of Series A Preferred Stock as the Corporation would have been obligated to redeem, pursuant to the provisions of Sections 6.1 or 6.2 hereof, on or prior to such notice date, but for the provisions of this Section 6.6. Nothing in this Section 6.6 shall affect or impair the rights granted the holders of Series A Preferred Stock pursuant to Section 5 hereof, nor shall it affect or impair any of the provisions relating to conversion set forth in Section 8 hereof. Notwithstanding any other provision of this Section 6 to the contrary, unless approved by the Preferred Directors, the aggregate principal amount of Restrictive Indebtedness shall not exceed at any time $150 million. For purposes of this Section 6.6, "Indebtedness" shall mean (i) any obligation of the Corporation or its subsidiaries for borrowed money, (ii) any obligation of the Corporation or its subsidiaries evidenced by bonds, debentures, notes or similar instruments, and (iii) any reimbursement obligation of the Corporation or its subsidiaries with respect to letters of credit, bankers' acceptances or similar facilities issued for the account of the Corporation and/or its subsidiaries, in each case, other than any obligation owed to a Person who directly or indirectly is controlling or controlled by or under direct or indirect common control with the Corporation." 2. "7(g) The sum of (i) consolidated stockholders' equity of the Corporation and its subsidiaries, and (ii) (to the extent not included in the stockholders' equity) the Series A Preferred Stock and (iii) up to $5 million outstanding in respect of notes issued by the Corporation on the Original Issue Date to its stockholders on such date and to the initial purchasers of the Series A Preferred Stock, all determined in accordance with generally accepted accounting principles consistently applied, shall at any time be less than $19,500,000 ( the "Minimum Amount") provided, however, that the Minimum Amount shall be reduced dollar for dollar by any payments with respect of the principal balance of the notes referred to in clause (iii) hereof." 4 43 3. "8.2 AUTOMATIC CONVERSION. Each share of Series A Preferred Stock shall automatically be converted into shares of Common Stock at the then effective Conversion Price at any time upon the closing of an underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, with managing underwriters reasonably satisfactory to the Required Holders, covering the offer and sale of Common Stock for the account of the Corporation to the public generally providing net proceeds to the Corporation (after underwriter commissions and discounts, but before other offering expenses) of not less than $20,000,000 and at a price per share of Common Stock equal to 137.8% of the initial Conversion Price if such underwritten public offering shall be consummated on or before May 31, 1999, and thereafter 175% of the initial Conversion Price, in each case adjusted for stock splits and stock dividends after the Original Issue Date (a "QUALIFIED PUBLIC OFFERING")." 5 44 EXHIBIT B Registration Rights Agreement 45 EXHIBIT B ================================================================================ REGISTRATION RIGHTS AGREEMENT Dated as of July 21, 1998 by and among AAi.FosterGrant, Inc. The Guarantors Signatories Hereto and NationsBanc Montgomery Securities LLC Prudential Securities Incorporated and BancBoston Securities Inc. ================================================================================ 46 This Registration Rights Agreement (this "AGREEMENT") is made and entered into as of July 21, 1998, by and among AAi.FosterGrant, Inc., a Rhode Island corporation (the "COMPANY"), the Guarantors signatories hereto (each a "GUARANTOR" and, collectively, the "GUARANTORS"), and NationsBanc Montgomery Securities LLC, Prudential Securities Incorporated and BancBoston Securities Inc. (each an "INITIAL PURCHASER" and, collectively, the "INITIAL PURCHASERS"), each of whom has agreed to purchase the Company's 10 3/4% Senior Notes due 2006 (the "SERIES A NOTES") pursuant to the Purchase Agreement (as defined below). This Agreement is made pursuant to that certain Purchase Agreement, dated July 16, 1998 (the "PURCHASE AGREEMENT"), by and among the Company, the Guarantors and the Initial Purchasers. In order to induce the Initial Purchasers to purchase the Series A Notes, the Company and the Guarantors have agreed to provide the registration rights set forth in this Agreement. The execution and delivery of this Agreement is a condition to the obligations of the Initial Purchasers set forth in Section 7 of the Purchase Agreement. Capitalized terms used herein and not otherwise defined shall have the meaning assigned to them in the Indenture, dated July 21, 1998, among the Company, the Guarantors and IBJ Schroder Bank & Trust Company, as Trustee, relating to the Series A Notes and the Series B Notes (the "INDENTURE"). The parties hereby agree as follows: SECTION 1. DEFINITIONS As used in this Agreement, the following capitalized terms shall have the following meanings: ACT: The Securities Act of 1933, as amended. AFFILIATE: As defined in Rule 144 of the Act. BROKER-DEALER: Any broker or dealer registered under the Exchange Act. BUSINESS DAY: Any day except a Saturday, Sunday or other day in the City of New York on which banks are authorized or ordered to close. CERTIFICATED SECURITIES: Definitive Notes, as defined in the Indenture. CLOSING DATE: The date hereof. COMMISSION: The Securities and Exchange Commission. CONSUMMATE: An Exchange Offer shall be deemed "Consummated" for purposes of this Agreement upon the occurrence of (a) the filing and effectiveness under the Act of the Exchange Offer Registration Statement relating to the Series B Notes to be issued in the Exchange Offer, 2 47 (b) the maintenance of such Exchange Offer Registration Statement as continuously effective and the keeping of the Exchange Offer open for a period not less than the period required pursuant to Section 3(b) hereof and (c) the delivery by the Company to the Registrar under the Indenture of Series B Notes in the same aggregate principal amount as the aggregate principal amount of Series A Notes tendered by Holders thereof pursuant to the Exchange Offer. CONSUMMATION DEADLINE: As defined in Section 3(b) hereof. EFFECTIVENESS DEADLINE: As defined in Sections 3(a) and 4(a) hereof. EXCHANGE ACT: The Securities Exchange Act of 1934, as amended. EXCHANGE OFFER: The exchange and issuance by the Company of a principal amount of Series B Notes (which shall be registered pursuant to the Exchange Offer Registration Statement) equal to the outstanding principal amount of Series A Notes that are tendered by such Holders in connection with such exchange and issuance. EXCHANGE OFFER REGISTRATION STATEMENT: The Registration Statement relating to the Exchange Offer, including the related Prospectus. EXEMPT RESALES: The transactions in which the Initial Purchasers propose to sell the Series A Notes to certain "qualified institutional buyers," as such term is defined in Rule 144A under the Act and pursuant to Regulation S under the Act. FILING DEADLINE: As defined in Sections 3(a) and 4(a) hereof. HOLDERS: As defined in Section 2 hereof. INDEMNIFIED HOLDER: As defined in Section 8(a) hereof. INDEMNIFIED PARTY: As defined in Section 8(c) hereof. INDEMNIFYING PARTY: As defined in Section 8(c) hereof. INDENTURE: The Indenture, dated as of the Closing Date, among the Company, the Guarantors and the Trustee, pursuant to which the Notes are to be issued, as such Indenture is amended or supplemented from time to time in accordance with the terms therein. LIQUIDATED DAMAGES: As defined in Section 5 hereof. MANAGING UNDERWRITERS: As defined in Section 10 hereof. NOTES: Series A and Series B Notes. 3 48 PROSPECTUS: The prospectus included in a Registration Statement at the time such Registration Statement is declared effective, as amended or supplemented by any prospectus supplement and by all other amendments thereto, including post-effective amendments, and all material incorporated by reference into such Prospectus. RECOMMENCEMENT DATE: As defined in Section 6(d) hereof. REGISTRATION DEFAULT: As defined in Section 5 hereof. REGISTRATION STATEMENT: Any registration statement of the Company and the Guarantors relating to (a) an offering of Series B Notes pursuant to an Exchange Offer or (b) the registration for resale of Transfer Restricted Securities pursuant to the Shelf Registration Statement, in each case, (i) that is filed pursuant to the provisions of this Agreement and (ii) including the Prospectus included therein, all amendments and supplements thereto (including post-effective amendments) and all exhibits and material incorporated by reference therein. REGULATION S: Regulation S promulgated under the Act. RESTRICTED BROKER-DEALER: Any Broker-Dealer that holds Series B Notes that were acquired in the Exchange Offer in exchange for Series A Notes that such Broker-Dealer acquired for its own account as a result of market-making activities or other trading activities (other than Series A Notes acquired directly from the Company or any of its affiliates). RULE 144: Rule 144 promulgated under the Act. SERIES B NOTES: The Company's 10 3/4 % Series B Senior Notes due 2006 to be issued pursuant to tHe Indenture in the Exchange Offer or as contemplated by Section 4 hereof. SHELF REGISTRATION STATEMENT: As defined in Section 4 hereof. SUSPENSION NOTICE: As defined in Section 6(d) hereof. TIA: The Trust Indenture Act of 1939 (15 U.S.C. Section 77a-77b) as in effect on the date of the Indenture. TRANSFER RESTRICTED SECURITIES: Each Note, until the earliest to occur of (a) the date on which such Note is exchanged in the Exchange Offer for a Series B Note and entitled to be resold to the public by the Holder thereof without complying with the prospectus delivery requirements of the Act, (b) the date on which such Note has been disposed of in accordance with a Shelf Registration Statement, (c) the date on which such Series A Note is disposed of by a Broker-Dealer pursuant to the "Plan of Distribution" contemplated by the Exchange Offer Registration Statement (including delivery of the Prospectus contained therein) or (d) the date on which such Series A Note is distributed to the public pursuant to Rule 144 under the Act. 4 49 TRUSTEE: IBJ Schroder Bank & Trust Company and any of its successors. SECTION 2. HOLDERS A Person is deemed to be a holder of Transfer Restricted Securities (a "HOLDER") whenever such Person owns Transfer Restricted Securities. SECTION 3. REGISTERED EXCHANGE OFFER (a) Unless the Exchange Offer shall not be permitted by applicable federal law (after the procedures set forth in Section 6(a)(i) below have been complied with), the Company and the Guarantors shall (i) cause the Exchange Offer Registration Statement to be filed with the Commission as soon as practicable after the Closing Date, but in no event later than 45 days after the Closing Date (such 45th day being the "FILING DEADLINE"), (ii) use their best efforts to cause such Exchange Offer Registration Statement to become effective at the earliest possible time, but in no event later than 135 days after the Closing Date (such 135th day being the "EFFECTIVENESS DEADLINE"), (iii) in connection with the foregoing, (A) file all pre-effective amendments to such Exchange Offer Registration Statement as may be necessary in order to cause it to become effective, (B) file, if applicable, a post-effective amendment to such Exchange Offer Registration Statement pursuant to Rule 430A under the Act and (C) cause all necessary filings, if any, in connection with the registration and qualification of the Series B Notes to be made under the Blue Sky laws of such jurisdictions as are necessary to permit Consummation of the Exchange Offer and (iv) upon the effectiveness of such Exchange Offer Registration Statement, commence and Consummate the Exchange Offer. The Exchange Offer shall be on the appropriate form permitting (i) registration of the Series B Notes to be offered in exchange for the Series A Notes that are Transfer Restricted Securities and (ii) resales of Series B Notes by Broker-Dealers that tendered into the Exchange Offer Series A Notes that such Broker-Dealers acquired for its own account as a result of market-making activities or other trading activities (other than Series A Notes acquired directly from the Company or any of its Affiliates) as contemplated by Section 3(c) below. (b) The Company and the Guarantors shall use their respective best efforts to cause the Exchange Offer Registration Statement to be effective continuously, and shall keep the Exchange Offer open for a period of not less than the minimum period required under applicable federal and state securities laws to Consummate the Exchange Offer; provided, however, that in no event shall such period be less than 20 Business Days. The Company and the Guarantors shall cause the Exchange Offer to comply with all applicable federal and state securities laws. No securities other than the Series B Notes and the guarantees thereof shall be included in the Exchange Offer Registration Statement. The Company and the Guarantors shall use their respective best efforts to cause the Exchange Offer to be Consummated on the earliest practicable date after the Exchange Offer Registration Statement has become effective, but in no event later than 30 Business Days thereafter (such 30th day being the "CONSUMMATION DEADLINE"). 5 50 (c) (i) The Company and the Guarantors shall include a "Plan of Distribution" section in the Prospectus contained in the Exchange Offer Registration Statement and indicate therein that any Broker-Dealer who holds Transfer Restricted Securities that were acquired for the account of such Broker-Dealer as a result of market-making activities or other trading activities (other than Transfer Restricted Securities acquired directly from the Company or any Affiliate of the Company) may exchange such Transfer Restricted Securities pursuant to the Exchange Offer; however, such Broker-Dealer may be deemed to be an "underwriter" within the meaning of the Act and must, therefore, deliver a prospectus meeting the requirements of the Act in connection with its initial resale of any Series B Notes received by such Broker-Dealer in the Exchange Offer, and that the Prospectus contained in the Exchange Offer Registration Statement may be used to satisfy such prospectus delivery requirement. Such "Plan of Distribution" section shall also contain all other information with respect to such sales by such Broker-Dealers that the Commission may require in order to permit such sales pursuant thereto, but such "Plan of Distribution" shall not name any such Broker-Dealer or disclose the amount of Transfer Restricted Securities held by any such Broker-Dealer, except to the extent required by the Commission as a result of a change in policy, rules or regulations after the date of this Agreement. (ii) To the extent necessary to ensure that the Exchange Offer Registration Statement is available for sales of Series B Notes by Broker-Dealers, upon the reasonable request of any Broker-Dealer who certifies in writing to the Company that it anticipates it will be a Restricted Broker-Dealer, the Company and the Guarantors agree to use their respective best efforts to keep the Exchange Offer Registration Statement continuously effective, supplemented and amended as required by the provisions of Section 6(c) hereof and in conformity with the requirements of this Agreement, the Act and the policies, rules and regulations of the Commission as announced from time to time, for a period of 180 days from the date on which the Exchange Offer is Consummated (unless extended pursuant to Section 6(d) hereof), or such shorter period as will terminate when all Transfer Restricted Securities covered by such Registration Statement have been sold pursuant thereto. The Company and the Guarantors shall promptly provide sufficient copies of the latest version of such Prospectus to such Broker-Dealers promptly upon request, at any time during such period. SECTION 4. SHELF REGISTRATION (a) SHELF REGISTRATION. If (i) the Exchange Offer is not permitted by applicable law (after the Company and the Guarantors have complied with the procedures set forth in Section 6(a)(i) below) or (ii) if any Holder of Transfer Restricted Securities shall notify the Company within 20 Business Days following the Consummation Deadline that (A) such Holder was prohibited by law or Commission policy from participating in the Exchange Offer or (B) such Holder may not resell the Series B Notes acquired by it in the Exchange Offer to the public without delivering a prospectus and the Prospectus contained in the Exchange Offer Registration 6 51 Statement is not appropriate or available for such resales by such Holder or (C) such Holder is a Broker-Dealer and holds Series A Notes acquired directly from the Company or any of its Affiliates, then the Company and the Guarantors shall: (x) cause to be filed, on or prior to 30 days after the earlier of (i) the date on which the Company determines that the Exchange Offer Registration Statement cannot be filed as a result of clause (a)(i) above and (ii) the date on which the Company receives the notice specified in clause (a)(ii) above, (such earlier date, the "FILING DEADLINE"), a shelf registration statement pursuant to Rule 415 under the Act (which may be an amendment to the Exchange Offer Registration Statement (the "SHELF REGISTRATION STATEMENT")), relating to all Transfer Restricted Securities, and (y) shall use their respective best efforts to cause such Shelf Registration Statement to become effective on or prior to 90 days after the earlier of (i) the date on which the Company determines that the Exchange Offer Registration Statement cannot be filed as a result of clause (a)(i) above and (ii) the date on which the Company receives the notice specified in clause (a)(ii) above (such 90th day the "EFFECTIVENESS DEADLINE"). If, after the Company and the Guarantors have filed an Exchange Offer Registration Statement that satisfies the requirements of Section 3(a) above, the Company and the Guarantors are required to file and make effective a Shelf Registration Statement solely because the Exchange Offer is not permitted under applicable federal law (i.e., clause (a)(i) above), then the filing of the Exchange Offer Registration Statement shall be deemed to satisfy the requirements of clause (x) above; provided that, in such event, the Company and the Guarantors shall remain obligated to meet the Effectiveness Deadline set forth in clause (y). The Company and the Guarantors shall use their respective best efforts to keep any Shelf Registration Statement required by this Section 4(a) continuously effective, supplemented and amended as required by and subject to the provisions of Sections 6(b) and (c) hereof to the extent necessary to ensure that it is available for sales of Transfer Restricted Securities by the Holders thereof entitled to the benefit of this Section 4(a), and to ensure that it conforms with the requirements of this Agreement, the Act and the policies, rules and regulations of the Commission as announced from time to time, until the Transfer Restricted Securities are available for sale under Rule 144(k) under the Act (as extended pursuant to Section 6(d)), or such shorter period as will terminate when all Transfer Restricted Securities covered by such Registration Statement have been sold pursuant thereto. (b) PROVISION BY HOLDERS OF CERTAIN INFORMATION IN CONNECTION WITH THE SHELF REGISTRATION STATEMENT. No Holder of Transfer Restricted Securities may include any of its Transfer Restricted Securities in any Shelf Registration Statement pursuant to this Agreement unless and until such Holder agrees in writing to be bound by all the provisions of this Agreement applicable to such Holder and furnishes to the Company in writing, within 20 days after receipt of a request therefor, the information specified in Item 507 or 508 of Regulation S- 7 52 K, as applicable, of the Act for use in connection with any Shelf Registration Statement or Prospectus or preliminary Prospectus included therein. No Holder of Transfer Restricted Securities shall be entitled to Liquidated Damages pursuant to Section 5 hereof unless and until such Holder shall have provided all such agreement and information. Each selling Holder agrees to promptly furnish additional information required to be disclosed in order to make the information previously furnished to the Company by such Holder not materially misleading. (c) BLACK OUT PERIOD. During any consecutive 365 day period, the Company may suspend the effectiveness of the Shelf Registration Statement on two occasions for a period of not more than 45 consecutive days if there is a possible acquisition or business combination or other transaction, business development or event involving the Company that may require disclosure in the Shelf Registration Statement and the Board of Directors of the Company determines in the exercise of its reasonable judgment that such disclosure is not in the best interests of the Company and its shareholders or obtaining any financial statements relating to an acquisition or business combination required to be included in the Shelf Registration Statement would be impracticable. In such a case, the Company shall promptly notify the Holders of the suspension of the Shelf Registration Statements' effectiveness, provided that such notice shall not require the Company to disclose the possible acquisition or business combination or other transaction, business development or event if the Board of Directors of the Company determines in good faith that such acquisition or business combination or other transaction, business development or event should remain confidential. Upon the abandonment, consummation or termination of the possible acquisition or business combination or other transaction, business development or event, or the availability of the required financial statements with respect to a possible acquisition or business combination, the suspension of the use of the Shelf Registration Statement pursuant to this Section 4(c) shall cease and the Company shall promptly comply with Section 6(c)(ii) hereof and notify the Holders that disposition of Transfer Restricted Securities may be resumed. SECTION 5. LIQUIDATED DAMAGES If (i) any Registration Statement required by this Agreement is not filed with the Commission on or prior to the applicable Filing Deadline, (ii) any such Registration Statement has not been declared effective by the Commission on or prior to the applicable Effectiveness Deadline, (iii) the Exchange Offer has not been Consummated on or prior to the Consummation Deadline or (iv) any Registration Statement required by this Agreement is filed and declared effective but shall thereafter cease to be effective or fail to be usable for its intended purpose during the periods specified in this Agreement without being succeeded immediately by a post-effective amendment to such Registration Statement that cures such failure and that is itself declared effective immediately (each such event referred to in clauses (i) through (iv), a "REGISTRATION DEFAULT"), then the Company and the Guarantors hereby jointly and severally agree to pay to each Holder of Transfer Restricted Securities affected thereby Liquidated Damages in an amount equal to $.05 per week per $1,000 in principal amount of Transfer Restricted Securities held by such Holder for each week or portion thereof that the Registration 8 53 Default continues for the first 90-day period immediately following the occurrence of such Registration Default ("LIQUIDATED DAMAGES"). The amount of the Liquidated Damages shall increase by an additional $.05 per week per $1,000 in principal amount of 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 $.30 per week per $1,000 in principal amount of Transfer Restricted Securities; provided that the Company and the Guarantors shall in no event be required to pay Liquidated Damages for more than one Registration Default at any given time. Notwithstanding anything to the contrary set forth herein, (1) upon filing of the Exchange Offer Registration Statement and/or, if applicable, the Shelf Registration Statement, in the case of (i) above, (2) upon the effectiveness of the Exchange Offer Registration Statement and/or, if applicable, the Shelf Registration Statement, in the case of (ii) above, (3) upon consummation of the Exchange Offer, in the case of (iii) above, or (4) upon the filing of a post-effective amendment to the Registration Statement or an additional Registration Statement that causes the Exchange Offer Registration Statement and/or, if applicable, the Shelf Registration Statement to again be declared effective or made usable in the case of (iv) above, the Liquidated Damages payable with respect to the Transfer Restricted Securities as a result of such clause (i), (ii), (iii) or (iv), as applicable, shall cease. All accrued Liquidated Damages shall be paid to the Holders entitled thereto, in the manner provided for the payment of interest in the Indenture, on each Interest Payment Date, as more fully set forth in the Indenture and the Notes. All obligations of the Company and the Guarantors set forth in the preceding paragraph that are outstanding with respect to any Transfer Restricted Security at the time such security ceases to be a Transfer Restricted Security shall survive until such time as all such obligations with respect to such Transfer Restricted Security shall have been satisfied in full. SECTION 6. REGISTRATION PROCEDURES (a) EXCHANGE OFFER REGISTRATION STATEMENT. In connection with the Exchange Offer, the Company and the Guarantors shall (x) comply with all applicable provisions of Section 6(c) below, (y) use their respective best efforts to effect such exchange and to permit the resale of Series B Notes by Broker-Dealers that tendered in the Exchange Offer Series A Notes that such Broker-Dealer acquired for its own account as a result of its market-making activities or other trading activities (other than Series A Notes acquired directly from the Company or any of its Affiliates) being sold in accordance with the intended method or methods of distribution thereof and (z) comply with all of the following provisions: (i) If, following the Closing Date, there has been announced a change in Commission policy with respect to exchange offers such as the Exchange Offer, that in the reasonable opinion of counsel to the Company raises a substantial question as to whether the Exchange Offer is permitted by applicable federal law, the Company and the Guarantors hereby agree to seek a no-action letter or other favorable decision from the Commission allowing the Company and the Guarantors to Consummate an Exchange 9 54 Offer for such Transfer Restricted Securities. The Company and the Guarantors hereby agree to pursue the issuance of such a decision to the Commission staff level. In connection with the foregoing, the Company and the Guarantors hereby agree to take all such other actions as may be requested by the Commission or otherwise required in connection with the issuance of such decision, including without limitation (A) participating in telephonic conferences with the Commission, (B) delivering to the Commission staff an analysis prepared by counsel to the Company setting forth the legal bases, if any, upon which such counsel has concluded that such an Exchange Offer should be permitted and (C) diligently pursuing a resolution (which need not be favorable) by the Commission staff. (ii) As a condition to its participation in the Exchange Offer, each Holder of Transfer Restricted Securities (including, without limitation, any Holder who is a Broker- Dealer) shall furnish, upon the request of the Company, prior to the Consummation of the Exchange Offer, a written representation to the Company and the Guarantors (which may be contained in the letter of transmittal contemplated by the Exchange Offer Registration Statement) to the effect that (A) it is not an Affiliate of the Company, (B) it is not engaged in, and does not intend to engage in, and has no arrangement or understanding with any person to participate in, a distribution of the Series B Notes to be issued in the Exchange Offer and (C) it is acquiring the Series B Notes in its ordinary course of business. As a condition to its participation in the Exchange Offer, each Holder using the Exchange Offer to participate in a distribution of the Series B Notes shall acknowledge and agree that, if the resales are of Series B Notes obtained by such Holder in exchange for Series A Notes acquired directly from the Company or an Affiliate thereof, it (1) could not, under Commission policy as in effect on the date of this Agreement, rely on the position of the Commission enunciated in MORGAN STANLEY AND CO., INC. (available June 5, 1991) and EXXON CAPITAL HOLDINGS CORPORATION (available May 13, 1988), as interpreted in the Commission's letter to SHEARMAN & STERLING dated July 2, 1993, and similar no-action letters (including, if applicable, any no-action letter obtained pursuant to clause (i) above) and (2) must comply with the registration and prospectus delivery requirements of the Act in connection with a secondary resale transaction and that such a secondary resale transaction must be covered by an effective registration statement containing the selling security holder information required by Item 507 or 508, as applicable, of Regulation S-K. (iii) Prior to effectiveness of the Exchange Offer Registration Statement, the Company and the Guarantors shall provide a supplemental letter to the Commission (A) stating that the Company and the Guarantors are registering the Exchange Offer in reliance on the position of the Commission enunciated in EXXON CAPITAL HOLDINGS CORPORATION (available May 13, 1988), MORGAN STANLEY AND CO., INC. (available June 5, 1991), as interpreted in the Commission's letter to SHEARMAN & STERLING dated July 2, 1993, and, if applicable, any no-action letter obtained pursuant to clause (i) above, (B) 10 55 including a representation that neither the Company nor any Guarantor has entered into any arrangement or understanding with any Person to distribute the Series B Notes to be received in the Exchange Offer and that, to the best of the Company's and each Guarantor's information and belief, each Holder participating in the Exchange Offer is acquiring the Series B Notes in its ordinary course of business and has no arrangement or understanding with any Person to participate in the distribution of the Series B Notes received in the Exchange Offer and (C) any other undertaking or representation required by the Commission as set forth in any no-action letter obtained pursuant to clause (i) above, if applicable. (b) SHELF REGISTRATION STATEMENT. In connection with the Shelf Registration Statement, the Company and the Guarantors shall comply with all the provisions of Section 6(c) below and shall use their respective best efforts to effect such registration to permit the sale of the Transfer Restricted Securities being sold in accordance with the intended method or methods of distribution thereof (as indicated in the information furnished to the Company pursuant to Section 4(b) hereof), and pursuant thereto the Company and the Guarantors shall prepare and file with the Commission a Registration Statement relating to the registration on any appropriate form under the Act, which form shall be available for the sale of the Transfer Restricted Securities in accordance with the intended method or methods of distribution thereof within the time periods and otherwise in accordance with the provisions hereof. (c) GENERAL PROVISIONS. In connection with any Registration Statement and any related Prospectus required by this Agreement, the Company and the Guarantors shall: (i) use their respective best efforts to keep such Registration Statement continuously effective and provide all requisite financial statements for the period specified in Section 3 or 4 of this Agreement, as applicable. Upon the occurrence of any event that would cause any such Registration Statement or the Prospectus contained therein (A) to contain an untrue statement of material fact or omit to state any material fact necessary to make the statements therein not misleading or (B) not to be effective and usable for resale of Transfer Restricted Securities during the periods required by this Agreement, the Company and the Guarantors shall file promptly an appropriate amendment to such Registration Statement curing such defect and, if Commission review is required, use their respective best efforts to cause such amendment to be declared effective as soon as practicable; (ii) prepare and file with the Commission such amendments and post-effective amendments to the applicable Registration Statement as may be necessary to keep such Registration Statement effective for the applicable period set forth in Section 3 or 4 hereof; cause the Prospectus to be supplemented by any required Prospectus supplement, and as so supplemented to be filed pursuant to Rule 424 under the Act, and to comply fully with Rules 424, 430A and 462, as applicable, under the Act in a timely manner; and comply with the provisions of the Act with respect to the disposition of all securities 11 56 covered by such Registration Statement during the applicable period in accordance with the intended method or methods of distribution by the sellers thereof set forth in such Registration Statement or supplement to the Prospectus; (iii) advise the Initial Purchasers, and in the case of a Shelf Registration Statement, each selling Holder promptly and, if requested by such Holder, confirm such advice in writing, (A) when the Prospectus or any Prospectus supplement or post-effective amendment has been filed and, with respect to any applicable Registration Statement or any post-effective amendment thereto, when the same has become effective, (B) of any request by the Commission for amendments to the Registration Statement or amendments or supplements to the Prospectus or for additional information relating thereto, (C) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement under the Act or of the suspension by any state securities commission of the qualification of the Transfer Restricted Securities for offering or sale in any jurisdiction, or the initiation of any proceeding for any of the preceding purposes and (D) of the existence of any fact or the happening of any event that makes any statement of a material fact made in the Registration Statement, the Prospectus, any amendment or supplement thereto or any document incorporated by reference therein untrue, or that requires the making of any additions to or changes in the Registration Statement in order to make the statements therein not misleading, or that requires the making of any additions to or changes in the Prospectus in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. If at any time the Commission shall issue any stop order suspending the effectiveness of the Registration Statement, or any state securities commission or other regulatory authority shall issue an order suspending the qualification or exemption from qualification of the Transfer Restricted Securities under state securities or Blue Sky laws, then the Company and the Guarantors shall use their respective best efforts to obtain the withdrawal or lifting of such order at the earliest possible time; (iv) subject to Section 6(c)(i) hereof, if any fact or event contemplated by Section 6(c)(iii)(D) hereof shall exist or have occurred, prepare a supplement or post-effective amendment to the Registration Statement or related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of Transfer Restricted Securities, the Prospectus will not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; (v) furnish to each Initial Purchaser, and in the case of a Shelf Registration Statement, to each Holder in connection with such exchange or sale, if any, before filing with the Commission, a copy of any Registration Statement or any Prospectus included therein or any amendments or supplements to any such Registration Statement or Prospectus (including all documents incorporated by reference after the initial filing of 12 57 such Registration Statement), which documents shall be subject to the review and comment of such Initial Purchasers, and, in the case of a Shelf Registration Statement, such Holders in connection with such sale, if any, for a period of at least three Business Days, and the Company and the Guarantors shall not file any such Registration Statement or Prospectus or any amendment or supplement to any such Registration Statement or Prospectus (including all such documents incorporated by reference) to which such Initial Purchasers, or, in the case of a Shelf Registration Statement, such Holders shall reasonably object within three Business Days after the receipt thereof. An Initial Purchaser or selling Holder shall be deemed to have reasonably objected to such filing if such Registration Statement, amendment, Prospectus or supplement, as applicable, as proposed to be filed, contains an untrue statement of material fact or omits to state any material fact necessary to make the statements therein not misleading or fails to comply with the applicable requirements of the Act; (vi) promptly prior to the filing of any document that is to be incorporated by reference into a Registration Statement or Prospectus, provide a copy of such document to each Initial Purchaser, and in the case of a Shelf Registration Statement, to the representative of the Holders included within the coverage of the Shelf Registration Statement, if any, make the Company's and the Guarantors' representatives available for discussion of such document and other customary due diligence matters, and include such information in such document prior to the filing thereof as such Initial Purchasers or the representative of the Holders may reasonably request; (vii) in the case of a Shelf Registration Statement make available, at reasonable times, for inspection by a representative of the Holders and an attorney and accountant retained by such Holders, in a manner designed to permit underwriters to satisfy their due diligence investigation under the Act, all financial and other records and pertinent corporate documents of the Company and the Guarantors customarily inspected by underwriters in primary underwritten offerings and cause the Company's and the Guarantors' officers, directors and employees to supply all information reasonably requested by and customarily supplied in connection with primary underwritten offerings to, any such representative, attorney or accountant in connection with such Shelf Registration Statement or any post-effective amendment thereto subsequent to the filing thereof and prior to its effectiveness; PROVIDED, HOWEVER, that any records, information or documents that are designated by the Company or any of the Guarantors as confidential at the time of delivery of such records, information or documents shall be kept confidential by such persons, unless (i) such records, information or documents are in the public domain or otherwise publicly available, (ii) disclosure of such records, information or documents is required by court or administrative order or (iii) disclosure of such records, information or documents, in the opinion of counsel to such Person, is otherwise required by law (including, without limitation, pursuant to the requirements of the Act). 13 58 (viii) if requested by the Initial Purchasers or in the case of a Shelf Registration Statement, by any Holder of Notes included within the coverage of the Shelf Registration Statement, promptly include in any Registration Statement or related Prospectus, pursuant to a supplement or post-effective amendment if necessary, such information as such Initial Purchasers or such Holders may reasonably request to have included therein, including, without limitation, information relating to the "Plan of Distribution" of the Transfer Restricted Securities; and make all required filings of such Prospectus supplement or post-effective amendment as soon as practicable after the Company and the Guarantors are notified of the matters to be included in such Prospectus supplement or post-effective amendment; (ix) furnish to each Holder of Notes included within the coverage of the Shelf Registration Statement, without charge, at least one conformed copy of the Shelf Registration Statement, as first filed with the Commission, and of each amendment thereto, without documents incorporated by reference therein or exhibits thereto, unless a Holder so requests in writing. (x) deliver to the Initial Purchasers, and to any other Holder that so requests, without charge, at least one conformed copy of the Exchange Offer Registration Statement and any post-effective amendment thereto, including financial statements and schedules, without documents incorporated therein by reference or exhibits thereto, unless the Initial Purchasers or any such Holder so request in writing. (xi) deliver to each Holder of Notes included within the coverage of the Shelf Registration Statement, without charge, as many copies of the Prospectus (including each preliminary prospectus) included in the Shelf Registration Statement and any amendment or supplement thereto as such Persons reasonably may request; the Company and the Guarantors hereby consent, subject to the provisions of this Agreement, to the use (in accordance with law) of the Prospectus and any amendment or supplement thereto by each selling Holder in connection with the offering and the sale of the Transfer Restricted Securities covered by the Prospectus or any amendment or supplement thereto; (xii) deliver to the Initial Purchasers or any Restricted Broker-Dealer, without charge, as many copies of the final prospectus included in the Exchange Offer Registration Statement and any amendment or supplement thereto as such Person may reasonably request; the Company and the Guarantors hereby consent, subject to the provisions of this Agreement, to the use (in accordance with law) of the prospectus or any amendment or supplement thereto by the Initial Purchasers, if necessary, any Restricted Broker-Dealer and such other Persons required to deliver a prospectus following the Exchange Offer in connection with the offering and sale of the Notes covered by the Prospectus, or any amendment or supplement thereto, included in such Exchange Offer Registration Statement; 14 59 (xiii) upon the request of any Holder of Notes included within the coverage of the Shelf Registration Statement, enter into such agreements (including underwriting agreements) and make such representations and warranties and take all such other actions in connection therewith in order to expedite or facilitate the disposition of the Transfer Restricted Securities pursuant to any Shelf Registration Statement contemplated by this Agreement as may be reasonably requested by any such Holder in connection with any sale or resale pursuant to any Shelf Registration Statement, and in such connection the Company and the Guarantors shall: (A) upon the request of any Holder, furnish (or in the case of paragraphs (2) and (3) below, use their respective best efforts to cause to be furnished) to each Holder, upon the effectiveness of the Shelf Registration Statement: (1) a certificate, dated such date, signed on behalf of the Company and the Guarantors by (x) a principal operating or executive officer of the Company and the Guarantors and (y) a principal financial or accounting officer of the Company and the Guarantors, confirming, as of the date thereof, the matters set forth in paragraphs (a), (c), (d) and (e) of Section 7 of the Purchase Agreement and such matters customarily given in underwritten offerings; (2) an opinion, dated the date of effectiveness of the Shelf Registration Statement, of counsel for the Company and the Guarantors covering matters customarily covered in opinions requested in underwritten offerings and similar to those set forth in Section 7(h) of the Purchase Agreement, and in any event including a statement to the effect that such counsel has participated in conferences with officers and representatives of the Company and the Guarantors and representatives of the independent public accountants for the Company and the Guarantors and has considered the matters required to be stated therein and the statements contained therein, and although such counsel is not passing upon and does not assume the responsibility for, the accuracy, completeness or fairness of such statements; and has not made any independent check or verification thereof, that such counsel advises that, on the basis of the foregoing, no facts have come to the attention of such counsel that lead such counsel to believe that the Shelf Registration Statement, at the time such Shelf Registration Statement or any post-effective amendment thereto became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus contained in such Shelf Registration Statement as of its date, contained an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which 15 60 they were made, not misleading. Without limiting the foregoing, such counsel may state further that such counsel assumes no responsibility for, and has not independently verified, the accuracy, completeness or fairness of the financial statements and other financial data included in any Registration Statement contemplated by this Agreement or the related Prospectus; and (3) a customary comfort letter, dated as of the date of effectiveness of the Shelf Registration Statement, from the Company's independent accountants, in the customary form and covering matters of the type customarily covered in comfort letters to underwriters in connection with underwritten offerings, and affirming the matters set forth in the comfort letters delivered pursuant to Section 7(n) of the Purchase Agreement, subject to receipt of appropriate documentation, if required by, and only if permitted by, Statement of Auditing Standards No. 72; and (B) deliver such other documents and certificates as may be reasonably requested by the representative of the selling Holders to evidence compliance with the matters covered in clause (A) above and with any customary conditions contained in any agreement entered into by the Company and the Guarantors pursuant to this clause (xiii); (xiv) prior to any public offering of Transfer Restricted Securities, cooperate with the selling Holders and their counsel in connection with the registration and qualification of the Transfer Restricted Securities under the securities or Blue Sky laws of such jurisdictions as the selling Holders may request and do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of the Transfer Restricted Securities covered by the applicable Registration Statement; provided, however, that neither the Company nor any Guarantor shall be required to register or qualify as a foreign corporation where it is not now so qualified or to take any action that would subject it to the service of process in suits or to taxation, other than as to matters and transactions relating to the Registration Statement, in any jurisdiction where it is not now so subject; (xv) issue, upon the request of any Holder of Series A Notes covered by any Shelf Registration Statement contemplated by this Agreement, Series B Notes having an aggregate principal amount equal to the aggregate principal amount of Series A Notes surrendered to the Company by such Holder in exchange therefor or being sold by such Holder; such Series B Notes to be registered in the name of such Holder or in the name of the purchaser(s) of such Series B Notes, as the case may be; in return, the Series A Notes held by such Holder shall be surrendered to the Company for cancellation; 16 61 (xvi) in connection with any sale of Transfer Restricted Securities that will result in such securities no longer being Transfer Restricted Securities, cooperate with the Holders to facilitate the timely preparation and delivery of certificates representing Transfer Restricted Securities to be sold and not bearing any restrictive legends; and to register such Transfer Restricted Securities in such denominations and such names as the selling Holders may request at least two Business Days prior to the closing of any such sale of Transfer Restricted Securities; (xvii) use their respective best efforts to cause the disposition of the Transfer Restricted Securities covered by the Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the seller or sellers thereof to Consummate the disposition of such Transfer Restricted Securities, subject to the proviso contained in clause (xiv) above; (xviii) provide a CUSIP number for all Transfer Restricted Securities not later than the effective date of a Registration Statement covering such Transfer Restricted Securities and provide the Trustee under the Indenture with printed certificates for the Transfer Restricted Securities which are in a form eligible for deposit with The Depository Trust Company; (xix) otherwise use their respective best efforts to comply with all applicable rules and regulations of the Commission, and make generally available to their security holders with regard to any applicable Registration Statement, as soon as practicable, a consolidated earnings statement meeting the requirements of Rule 158 (which need not be audited) covering a twelve-month period beginning after the effective date of the Registration Statement (as such term is defined in paragraph (c) of Rule 158 under the Act); (xx) in the case of a Shelf Registration Statement, make appropriate officers of the Company available to the selling Holders for meetings with prospective purchasers of the Transfer Restricted Securities and prepare and present to potential investors customary "road show" material in a manner consistent with other new issuances of other securities similar to the Transfer Restricted Securities; (xxi) cause the Indenture to be qualified under the TIA not later than the effective date of the first Registration Statement required by this Agreement and, in connection therewith, cooperate with the Trustee and the Holders to effect such changes to the Indenture as may be required for such Indenture to be so qualified in accordance with the terms of the TIA; and execute, and use best efforts to cause the Trustee to execute, all documents that may be required to effect such changes and all other forms and documents required to be filed with the Commission to enable such Indenture to be so qualified in a timely manner; and 17 62 (xxii) provide promptly to each Holder upon request each document filed with the Commission pursuant to the requirements of Section 13 or Section 15(d) of the Exchange Act. (d) RESTRICTIONS ON HOLDERS. Each Holder agrees by acquisition of a Transfer Restricted Security that, upon receipt of the notice referred to in Section 6(c)(iii)(C) or any notice from the Company of the existence of any fact of the kind described in Section 6(c)(iii)(D) hereof (in each case, a "SUSPENSION NOTICE"), such Holder will forthwith discontinue disposition of Transfer Restricted Securities pursuant to the applicable Registration Statement until (i) such Holder has received copies of the supplemented or amended Prospectus contemplated by Section 6(c)(iv) hereof, or (ii) such Holder is advised in writing by the Company that the use of the Prospectus may be resumed, and has received copies of any additional or supplemental filings that are incorporated by reference in the Prospectus (in each case, the "RECOMMENCEMENT DATE"). Each Holder receiving a Suspension Notice hereby agrees that it will either (i) destroy any Prospectuses, other than permanent file copies, then in such Holder's possession which have been replaced by the Company with more recently dated Prospectuses or (ii) deliver to the Company (at the Company's expense) all copies, other than permanent file copies, then in such Holder's possession of the Prospectus covering such Transfer Restricted Securities that was current at the time of receipt of the Suspension Notice. The time period regarding the effectiveness of such Registration Statement set forth in Section 3 or 4 hereof, as applicable, shall be extended by a number of days equal to the number of days in the period from and including the date of delivery of the Suspension Notice to the Recommencement Date. SECTION 7. REGISTRATION EXPENSES All expenses incident to the Company's and the Guarantors' performance of or compliance with this Agreement shall be borne by the Company, regardless of whether a Registration Statement becomes effective, including without limitation: (i) all registration and filing fees and expenses, (ii) all fees and expenses of compliance with federal securities and state Blue Sky or securities laws, (iii) all expenses of printing (including printing certificates for the Series B Notes to be issued in the Exchange Offer and printing of Prospectuses, messenger and delivery services and telephone, (iv) all fees and disbursements of counsel for the Company and the Guarantors and in the event of a Shelf Registration Statement, the reasonable fees and disbursements of one firm of counsel for the Holders of Transfer Restricted Securities (who shall be Latham & Watkins, unless another firm shall be chosen by the Holders of a majority in principal amount of the Transfer Restricted Securities for whose benefit such Shelf Registration Statement is being prepared) and fees and disbursements of the Trustee and counsel, (v) all application and filing fees in connection with listing the Series B Notes on a national securities exchange or automated quotation system pursuant to the requirements hereof and (vi) all fees and disbursements of independent certified public accountants of the Company and the Guarantors (including the expenses of any special audit and comfort letters required by or incident to such performance) but excluding fees and expenses of counsel to the underwriters and underwriting 18 63 discounts and commissions and transfer taxes, if any, relating to the sale or disposition of the Series B Notes by a Holder. The Company shall, in any event, bear its and the Guarantors' internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expenses of any annual audit and the fees and expenses of any Person, including special experts, retained by the Company or the Guarantors. SECTION 8. INDEMNIFICATION (a) The Company and the Guarantors agree, jointly and severally, to indemnify and hold harmless (i) each Holder, (ii) each person, if any, who controls (within the meaning of Section 15 of the Act or Section 20 of the Exchange Act) any Holder (any of the persons referred to in this clause (ii) being hereinafter referred to as a "controlling person") and (iii) the respective officers, directors, partners, employees, representatives and agents of any Holder or any controlling person (any person referred to in clause (i), (ii) or (iii) may hereinafter be referred to as an "INDEMNIFIED HOLDER") from and against any and all losses, claims, damages, liabilities, judgments, (including without limitation, any legal or other expenses incurred in connection with investigating or defending any matter, including any action that could give rise to any such losses, claims, damages, liabilities or judgments) caused by any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement, preliminary prospectus or Prospectus (or any amendment or supplement thereto) provided by the Company to any holder or any prospective purchaser of Series B Notes, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities or judgments are caused by an untrue statement or omission or alleged untrue statement or omission that is based upon information relating to any of the Holders furnished in writing to the Company by any of the Holders. (b) Each Holder of Transfer Restricted Securities agrees, severally and not jointly, to indemnify and hold harmless the Company and the Guarantors, and their respective directors, officers, employees, agents and representatives, and each person, if any, who controls (within the meaning of Section 15 of the Act or Section 20 of the Exchange Act) the Company or the Guarantors, to the same extent as the foregoing indemnity from the Company and the Guarantors to each of the Indemnified Holders, but only with reference to information relating to such Indemnified Holder furnished in writing to the Company by such Indemnified Holder expressly for use in any Registration Statement. In no event shall any Indemnified Holder be liable or responsible for any amount in excess of the amount by which the total amount received by such Indemnified Holder with respect to its sale of Transfer Restricted Securities pursuant to a Registration Statement exceeds the amount of any damages that such Indemnified Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. 19 64 (c) In case any action shall be commenced involving any person in respect of which indemnity may be sought pursuant to Section 8(a) or 8(b) (the "INDEMNIFIED PARTY"), the Indemnified Party shall promptly notify the person against whom such indemnity may be sought (the "INDEMNIFYING PARTY") in writing and the Indemnifying Party shall assume the defense of such action, including the employment of counsel reasonably satisfactory to the Indemnified Party and the payment of all fees and expenses of such counsel, as incurred (except that in the case of any action in respect of which indemnity may be sought pursuant to both Sections 8(a) and 8(b), an Indemnified Holder shall not be required to assume the defense of such action pursuant to this Section 8(c), but may employ separate counsel and participate in the defense thereof, but the fees and expenses of such counsel, except as provided below, shall be at the expense of the Indemnified Holder). Any Indemnified Party shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of the Indemnified Party unless (i) the employment of such counsel shall have been specifically authorized in writing by the Indemnifying Party, (ii) the Indemnifying Party shall have failed to assume the defense of such action or employ counsel reasonably satisfactory to the Indemnified Party or (iii) the named parties to any such action (including any impleaded parties) include both the Indemnified Party and the Indemnifying Party, and the Indemnified Party shall have been advised by such counsel that there may be one or more legal defenses available to it which are different from or additional to those available to the Indemnifying Party (in which case the Indemnifying Party shall not have the right to assume the defense of such action on behalf of the Indemnified Party). In any such case, the Indemnifying Party shall not, in connection with any one action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the fees and expenses of more than one separate firm of attorneys (in addition to any local counsel) for all Indemnified Parties and all such fees and expenses shall be reimbursed as they are incurred. Such firm shall be designated in writing by a majority of the Indemnified Holders, in the case of the parties indemnified pursuant to Section 8(a), and by the Company, in the case of parties indemnified pursuant to Section 8(b). The Indemnifying Party shall indemnify and hold harmless the Indemnified Party from and against any and all losses, claims, damages, liabilities and judgments by reason of any settlement of any action (i) effected with its written consent or (ii) effected without its written consent if the settlement is entered into more than 50 days after the Indemnifying Party shall have received a request from the Indemnified Party for reimbursement for the fees and expenses of counsel (in any case where such fees and expenses are at the expense of the Indemnifying Party) and, prior to the date of such settlement, the Indemnifying Party shall have failed to comply with such reimbursement request. No Indemnifying Party shall, without the prior written consent of the Indemnified Party, effect any settlement or compromise of, or consent to the entry of judgment with respect to, any pending or threatened action in respect of which the Indemnified Party is or could have been a party and indemnity or contribution may be or could have been sought hereunder by the Indemnified Party, unless such settlement, compromise or judgment (i) includes an unconditional release of the Indemnified Party from all liability on claims that are or could 20 65 have been the subject matter of such action and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of the Indemnified Party. (d) To the extent that the indemnification provided for in this Section 8 is unavailable to an Indemnified Party in respect of any losses, claims, damages, liabilities or judgments referred to therein, then each Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such losses, claims, damages, liabilities or judgments (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Guarantors, on the one hand, and the Holders, on the other hand, from their sale of Transfer Restricted Securities or (ii) if the allocation provided by clause 8(d)(i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause 8(d)(i) above but also the relative fault of the Company and the Guarantors, on the one hand, and of the Indemnified Holder, on the other hand, in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or judgments, as well as any other relevant equitable considerations. The relative fault of the Company and the Guarantors, on the one hand, and of the Indemnified Holder, on the other hand, shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or such Guarantors, on the one hand, or by the Indemnified Holder, on the other hand, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities and judgments referred to above shall be deemed to include, subject to the limitations set forth in the second paragraph of Section 8(a), any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any action or claim. The Company, the Guarantors and each Holder agree that it would not be just and equitable if contribution pursuant to this Section 8(d) were determined by pro rata allocation (even if the Holders were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an Indemnified Party as a result of the losses, claims, damages, liabilities or judgments referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such Indemnified Party in connection with investigating or defending any matter, including any action that could have given rise to such losses, claims, damages, liabilities or judgments. Notwithstanding the provisions of this Section 8, no Holder or its related Indemnified Holders shall be required to contribute, in the aggregate, any amount in excess of the amount by which the total received by such Holder with respect to the sale of its Transfer Restricted Securities pursuant to a Registration Statement exceeds the sum of (A) the amount paid by such Holder for such Transfer Restricted Securities plus (B) the amount of any damages which such Holder has otherwise been required to pay by reason of such 21 66 untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Holders' obligations to contribute pursuant to this Section 8(c) are several in proportion to the respective principal amount of Transfer Restricted Securities held by each of the Holders hereunder and not joint. SECTION 9. RULE 144A AND RULE 144 The Company and each Guarantor agrees with each Holder, for so long as any Transfer Restricted Securities remain outstanding and during any period in which the Company or such Guarantor (i) is not subject to Section 13 or 15(d) of the Exchange Act, to make available, upon request of any Holder, to such Holder or beneficial owner of Transfer Restricted Securities in connection with any sale thereof and any prospective purchaser of such Transfer Restricted Securities designated by such Holder or beneficial owner, the information required by Rule 144A(d)(4) under the Act in order to permit resales of such Transfer Restricted Securities pursuant to Rule 144A and (ii) is subject to Section 13 or 15 (d) of the Exchange Act, to make all filings required thereby in a timely manner in order to permit resales of such Transfer Restricted Securities pursuant to Rule 144. SECTION 10. UNDERWRITTEN REGISTRATIONS If any of the Transfer Restricted Securities covered by any Shelf Registration Statement are to be sold in an underwritten offering, the investment banker or investment bankers and manager or managers that will administer the offering ("MANAGING UNDERWRITERS") will be selected by the Holders of a majority in aggregate principal amount of such Transfer Restricted Securities included in such offering; provided, however, that the Managing Underwriters shall be reasonably satisfactory to the Company. No Person may participate in any underwritten registration hereunder unless such Person (i) agrees to sell such Person's Transfer Restricted Securities on the basis reasonably provided in any underwriting arrangements approved by the Persons entitled hereunder to approve such arrangements and (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements. SECTION 11. MISCELLANEOUS (a) REMEDIES. The Company and the Guarantors acknowledge and agree that any failure by the Company and/or the Guarantors to comply with their respective obligations under Sections 3 and 4 hereof may result in material irreparable injury to the Initial Purchasers or the Holders for which there is no adequate remedy at law, that it will not be possible to measure damages for such injuries precisely and that, in the event of any such failure, the Initial 22 67 Purchasers or any Holder may obtain such relief as may be required to specifically enforce the Company's and the Guarantors' obligations under Sections 3 and 4 hereof. The Company and the Guarantors further agree to waive the defense in any action for specific performance that a remedy at law would be adequate. (b) NO INCONSISTENT AGREEMENTS. Neither the Company nor any Guarantor shall, on or after the date of this Agreement, enter into any agreement with respect to its securities that is inconsistent with the rights granted to the Holders in this Agreement or otherwise conflicts with the provisions hereof. The rights granted to the Holders hereunder do not in any way conflict with and are not inconsistent with the rights granted to the holders of the Company's and the Guarantors' securities under any agreement in effect on the date hereof. (c) AMENDMENTS AND WAIVERS. The provisions of this Agreement may not be amended, modified or supplemented, and waivers or consents to or departures from the provisions hereof may not be given, unless (i) in the case of Section 5 hereof and this Section 10(c)(i), the Company has obtained the written consent of Holders of all outstanding Transfer Restricted Securities and (ii) in the case of all other provisions hereof, the Company has obtained the written consent of Holders of a majority of the outstanding principal amount of Transfer Restricted Securities (excluding Transfer Restricted Securities held by the Company or its Affiliates). Notwithstanding the foregoing, a waiver or consent to departure from the provisions hereof that relates exclusively to the rights of Holders whose Transfer Restricted Securities are being tendered pursuant to the Exchange Offer, and that does not affect directly or indirectly the rights of other Holders whose Transfer Restricted Securities are not being tendered pursuant to such Exchange Offer, may be given by the Holders of a majority of the outstanding principal amount of Transfer Restricted Securities subject to such Exchange Offer. (d) THIRD PARTY BENEFICIARY. The Holders of Transfer Restricted Securities participating in the Exchange Offer shall be third party beneficiaries to the agreements made hereunder between the Company and the Guarantors, on the one hand, and the Initial Purchasers, on the other hand, and shall have the right to enforce such agreements directly to the extent they may deem such enforcement necessary or advisable to protect their rights or the rights of Holders hereunder. (e) NOTICES. All notices and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, first-class mail (registered or certified, return receipt requested), telex, telecopier or air courier guaranteeing overnight delivery: (i) if to a Holder, at the address set forth on the records of the Registrar under the Indenture, with a copy to the Registrar under the Indenture; and (ii) if to the Company or the Guarantors: AAi.FosterGrant, Inc. 23 68 500 George Washington Hwy. Smithfield, RI 02917 Telecopier No.: (401) 231-3212 Attention: Chief Financial Officer With a copy to: Hinckley, Allen & Snyder 1500 Fleet Center Providence, RI Telecopier No.: (401) 277-9600 Attention: Stephen J. Carlotti All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five Business Days after being deposited in the mail, postage prepaid, if mailed; when receipt acknowledged, if telecopied; and on the next business day, if timely delivered to an air courier guaranteeing overnight delivery. Copies of all such notices, demands or other communications shall be concurrently delivered by the Person giving the same to the Trustee at the address specified in the Indenture. Upon the date of filing of the Exchange Offer or a Shelf Registration Statement, as the case may be, notice shall be delivered to the Initial Purchasers in the form attached hereto as Exhibit A. (f) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties, including without limitation and without the need for an express assignment, subsequent Holders; provided, that nothing herein shall be deemed to permit any assignment, transfer or other disposition of Transfer Restricted Securities in violation of the terms hereof or of the Purchase Agreement or the Indenture. If any transferee of any Holder shall acquire Transfer Restricted Securities in any manner, whether by operation of law or otherwise, such Transfer Restricted Securities shall be held subject to all of the terms of this Agreement, and by taking and holding such Transfer Restricted Securities such Holder shall be conclusively deemed to have agreed to be bound by and to perform all of the terms and provisions of this Agreement, including the restrictions on resale set forth in this Agreement and, if applicable, the Purchase Agreement, and such Holder shall be entitled to receive the benefits hereof. (g) COUNTERPARTS. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. 24 69 (h) HEADINGS. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (i) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE CONFLICT OF LAW RULES THEREOF. (j) SEVERABILITY. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. (k) ENTIRE AGREEMENT. This Agreement is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein with respect to the registration rights granted with respect to the Transfer Restricted Securities. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter. 25 70 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. AAI.FOSTERGRANT, INC. By: /s/ Gerald F. Cerce ----------------------------------- Name: Gerald F. Cerce Title: President and Chief Executive Officer FOSTER GRANT HOLDINGS, INC. By: /s/ Gerald F. Cerce ----------------------------------- Name: Gerald F. Cerce Title: President THE BONNEAU COMPANY By: /s/ Gerald F. Cerce ----------------------------------- Name: Gerald F. Cerce Title: President OPTI-RAY, INC. By: /s/ Gerald F. Cerce ----------------------------------- Name: Gerald F. Cerce Title: President BONNEAU GENERAL, INC. By: /s/ Gerald F. Cerce ----------------------------------- Name: Gerald F. Cerce Title: President 26 71 BONNEAU HOLDINGS, INC. By: /s/ Gerald F. Cerce ----------------------------------- Name: Gerald F. Cerce Title: President O-RAY HOLDINGS, INC. By: /s/ Gerald F. Cerce ----------------------------------- Name: Gerald F. Cerce Title: President F.G.G. INVESTMENTS, INC. By: /s/ Gerald F. Cerce ----------------------------------- Name: Gerald F. Cerce Title: President FOSTER GRANT GROUP, L.P. By: BONNEAU HOLDINGS, INC., GENERAL PARTNER By: /s/ Gerald F. Cerce ----------------------------------- Name: Gerald F. Cerce Title: President and Chief Executive Officer FANTASMA, LLC By: /s/ Gerald F. Cerce ----------------------------------- Name: Gerald F. Cerce Title: President 27 72 NATIONSBANC MONTGOMERY SECURITIES LLC By: /s/ J. Scott Holmes ------------------------------ Name: J. Scott Holmes Title: Principal PRUDENTIAL SECURITIES INCORPORATED By: /s/ Timothy O'Neill ------------------------------ Name: Timothy O'Neill Title: Director BANCBOSTON SECURITIES INC. By: /s/ Gregory C. Foy ------------------------------ Name: Gregory C. Foy Title: Managing Director 28 73 EXHIBIT A NOTICE OF FILING OF REGISTRATION STATEMENT To: NationsBanc Montgomery Securities LLC Prudential Securities Incorporated BancBoston Securities Inc. From: AAi.FosterGrant, Inc. Re: 10 3/4% Series A Senior Notes Due 2006 Date: ____________, 199__ For your information only (NO ACTION REQUIRED): Today, ________________, 199__, we filed [an Exchange Registration Statement] [a Shelf Registration Statement] with the Securities and Exchange Commission. We currently expect this registration statement to be declared effective by __________________________, 199__. A-1 74 SCHEDULE A Subsidiaries Company Name Jurisdiction Of Organization ------------ ---------------------------- 1. Foster Grant Holdings, Inc. Delaware 2. The Bonneau Company Texas 3. Opti-Ray, Inc. New York 4. Bonneau General, Inc. Delaware 5. Bonneau Holdings, Inc. Delaware 6. O-Ray Holdings, Inc. Delaware 7. F.G.G. Investments, Inc. Delaware 8. Foster Grant Group, L.P. Delaware 9. Fantasma, LLC (80%) Delaware 10. AAi Company of Canada Nova Scotia Canada 11. Vendome Accessories Limited (51%) Nova Scotia Canada 12. AAi Foster Grant Limited United Kingdom 75 13. AAi/Joske's, S. de R. L. de C.V. (55%) Mexico 76 SCHEDULE B MATERIAL CONTRACTS 77 SCHEDULE B This Schedule B gives effect to the Offering and the documents related thereby. 1. Indenture between the Company, its Domestic Subsidiaries and IBJ Schroder Bank & Trust Company, as trustee, to be dated July 21, 1998. 2. Registration Rights Agreement between the Company, the Domestic Subsidiaries and Initial Purchasers to be dated July 21, 1998. 3. Amended and Restated Financing and Security Agreement by and among the Company, certain of its Subsidiaries, NationsBank, N.A. as agent, and other lenders party thereto dated as of May 9, 1997, as amended by the Second Amended and Restated Financing and Security Agreement by and among the Company, its Domestic Subsidiaries, NationsBank, N.A., as agent, and other lenders party hereto to be dated July 21, 1998. 4. Fantasma LLC Member Agreement by and among the Company, Roger D. Dreyer and Houdini Capital LTD dated as of June 23, 1998. 5. Fantasma LLC Member Agreement by and among the Company and Paul Michaels dated as of June 23, 1998. 6. Agreement of Amendment, Termination & Modification between the Company, Bolle Inc., Foster Grant, Foster Grant Group, LP and Foster Grant Holdings, Inc. dated June 1998. 7. Stock Purchase Agreement by and among the Company, BEC Group, Inc., Foster Grant Group, L.P. and Foster Grant Holdings, Inc., dated May 31, 1996, as amended by a side letter dated December 11, 1996. 8. Letter Agreement of Weston Presidio Capital II, L.P. regarding voting of the Company's Preferred Stock dated December 9, 1996. 9. Securities Purchase Agreement among the Company, Weston Presidio II, L.P. and certain other investors, dated May 31, 1996, as amended on December 11, 1996. 10. Tag-Along Transfer Restriction and Voting Agreement among the Company, Weston Presidio Capital II, L.P. and certain other investors and certain shareholders of the Company dated May 31, 1996, as amended on December 11, 1996. 78 11. Registration Rights Agreement among the Company, Weston Presidio Capital II, L.P. and certain other investors and certain shareholders of the Company dated May 31, 1996. 12. The Company's Incentive Stock Plan. 13. Employment Agreement between the Company and Gerald F. Cerce dated May 31, 1996. 14. Employment Agreement between the Company and John H. Flynn, Jr. dated May 31, 1996. 15. Employment Agreement between the Company and Duane M. DeSisto dated May 31, 1996. 16. Employment Agreement between the Company and Robert Lallo dated May 31, 1996. 17. Employment Agreement between the Company and Felix Porcaro dated May 31, 1996. 18. Supplement Executive Retirement Plan between the Company and Gerald F. Cerce dated September 29, 1994, as amended. 79 SCHEDULE C AAI.FOSTERGRANT, INC. Initial Purchaser Amount - ----------------- ------ NationsBanc Montgomery Securities LLC ...........................$56,250,000.00 Prudential Securities Incorporated...............................$11,250,000.00 BancBoston Securities Inc........................................$ 7,500,000.00 $75,000,000.00 ============== EX-4.3 23 REGISTRATION RIGHTS AGREEMENT DATED 7/21/98 1 EXHIBIT 4.3 EXECUTION COPY ================================================================================ REGISTRATION RIGHTS AGREEMENT Dated as of July 21, 1998 by and among AAi.FosterGrant, Inc. The Guarantors Signatories Hereto and NationsBanc Montgomery Securities LLC Prudential Securities Incorporated and BancBoston Securities Inc. ================================================================================ 2 This Registration Rights Agreement (this "AGREEMENT") is made and entered into as of July 21, 1998, by and among AAi.FosterGrant, Inc., a Rhode Island corporation (the "COMPANY"), the Guarantors signatories hereto (each a "GUARANTOR" and, collectively, the "GUARANTORS"), and NationsBanc Montgomery Securities LLC, Prudential Securities Incorporated and BancBoston Securities Inc. (each an "INITIAL PURCHASER" and, collectively, the "INITIAL PURCHASERS"), each of whom has agreed to purchase the Company's 10 3/4 % Senior Notes due 2006 (the "SERIES A NOTES") pursuant to the Purchase Agreement (as defined below). This Agreement is made pursuant to that certain Purchase Agreement, dated July 16, 1998 (the "PURCHASE AGREEMENT"), by and among the Company, the Guarantors and the Initial Purchasers. In order to induce the Initial Purchasers to purchase the Series A Notes, the Company and the Guarantors have agreed to provide the registration rights set forth in this Agreement. The execution and delivery of this Agreement is a condition to the obligations of the Initial Purchasers set forth in Section 7 of the Purchase Agreement. Capitalized terms used herein and not otherwise defined shall have the meaning assigned to them in the Indenture, dated July 21, 1998, among the Company, the Guarantors and IBJ Schroder Bank & Trust Company, as Trustee, relating to the Series A Notes and the Series B Notes (the "INDENTURE"). The parties hereby agree as follows: SECTION 1. DEFINITIONS As used in this Agreement, the following capitalized terms shall have the following meanings: ACT: The Securities Act of 1933, as amended. AFFILIATE: As defined in Rule 144 of the Act. BROKER-DEALER: Any broker or dealer registered under the Exchange Act. BUSINESS DAY: Any day except a Saturday, Sunday or other day in the City of New York on which banks are authorized or ordered to close. CERTIFICATED SECURITIES: Definitive Notes, as defined in the Indenture. CLOSING DATE: The date hereof. COMMISSION: The Securities and Exchange Commission. CONSUMMATE: An Exchange Offer shall be deemed "Consummated" for purposes of this Agreement upon the occurrence of (a) the filing and effectiveness under the Act of the Exchange Offer Registration Statement relating to the Series B Notes to be issued in the Exchange Offer, 2 3 (b) the maintenance of such Exchange Offer Registration Statement as continuously effective and the keeping of the Exchange Offer open for a period not less than the period required pursuant to Section 3(b) hereof and (c) the delivery by the Company to the Registrar under the Indenture of Series B Notes in the same aggregate principal amount as the aggregate principal amount of Series A Notes tendered by Holders thereof pursuant to the Exchange Offer. CONSUMMATION DEADLINE: As defined in Section 3(b) hereof. EFFECTIVENESS DEADLINE: As defined in Sections 3(a) and 4(a) hereof. EXCHANGE ACT: The Securities Exchange Act of 1934, as amended. EXCHANGE OFFER: The exchange and issuance by the Company of a principal amount of Series B Notes (which shall be registered pursuant to the Exchange Offer Registration Statement) equal to the outstanding principal amount of Series A Notes that are tendered by such Holders in connection with such exchange and issuance. EXCHANGE OFFER REGISTRATION STATEMENT: The Registration Statement relating to the Exchange Offer, including the related Prospectus. EXEMPT RESALES: The transactions in which the Initial Purchasers propose to sell the Series A Notes to certain "qualified institutional buyers," as such term is defined in Rule 144A under the Act and pursuant to Regulation S under the Act. FILING DEADLINE: As defined in Sections 3(a) and 4(a) hereof. HOLDERS: As defined in Section 2 hereof. INDEMNIFIED HOLDER: As defined in Section 8(a) hereof. INDEMNIFIED PARTY: As defined in Section 8(c) hereof. INDEMNIFYING PARTY: As defined in Section 8(c) hereof. INDENTURE: The Indenture, dated as of the Closing Date, among the Company, the Guarantors and the Trustee, pursuant to which the Notes are to be issued, as such Indenture is amended or supplemented from time to time in accordance with the terms therein. LIQUIDATED DAMAGES: As defined in Section 5 hereof. MANAGING UNDERWRITERS: As defined in Section 10 hereof. NOTES: Series A and Series B Notes. 3 4 PROSPECTUS: The prospectus included in a Registration Statement at the time such Registration Statement is declared effective, as amended or supplemented by any prospectus supplement and by all other amendments thereto, including post-effective amendments, and all material incorporated by reference into such Prospectus. RECOMMENCEMENT DATE: As defined in Section 6(d) hereof. REGISTRATION DEFAULT: As defined in Section 5 hereof. REGISTRATION STATEMENT: Any registration statement of the Company and the Guarantors relating to (a) an offering of Series B Notes pursuant to an Exchange Offer or (b) the registration for resale of Transfer Restricted Securities pursuant to the Shelf Registration Statement, in each case, (i) that is filed pursuant to the provisions of this Agreement and (ii) including the Prospectus included therein, all amendments and supplements thereto (including post-effective amendments) and all exhibits and material incorporated by reference therein. REGULATION S: Regulation S promulgated under the Act. RESTRICTED BROKER-DEALER: Any Broker-Dealer that holds Series B Notes that were acquired in the Exchange Offer in exchange for Series A Notes that such Broker-Dealer acquired for its own account as a result of market-making activities or other trading activities (other than Series A Notes acquired directly from the Company or any of its affiliates). RULE 144: Rule 144 promulgated under the Act. SERIES B NOTES: The Company's 10 3/4 % Series B Senior Notes due 2006 to be issued pursuant to tHe Indenture in the Exchange Offer or as contemplated by Section 4 hereof. SHELF REGISTRATION STATEMENT: As defined in Section 4 hereof. SUSPENSION NOTICE: As defined in Section 6(d) hereof. TIA: The Trust Indenture Act of 1939 (15 U.S.C. Section 77a-77b) as in effect on the date of the Indenture. TRANSFER RESTRICTED SECURITIES: Each Note, until the earliest to occur of (a) the date on which such Note is exchanged in the Exchange Offer for a Series B Note and entitled to be resold to the public by the Holder thereof without complying with the prospectus delivery requirements of the Act, (b) the date on which such Note has been disposed of in accordance with a Shelf Registration Statement, (c) the date on which such Series A Note is disposed of by a Broker-Dealer pursuant to the "Plan of Distribution" contemplated by the Exchange Offer Registration Statement (including delivery of the Prospectus contained therein) or (d) the date on which such Series A Note is distributed to the public pursuant to Rule 144 under the Act. 4 5 TRUSTEE: IBJ Schroder Bank & Trust Company and any of its successors. SECTION 2. HOLDERS A Person is deemed to be a holder of Transfer Restricted Securities (a "HOLDER") whenever such Person owns Transfer Restricted Securities. SECTION 3. REGISTERED EXCHANGE OFFER (a) Unless the Exchange Offer shall not be permitted by applicable federal law (after the procedures set forth in Section 6(a)(i) below have been complied with), the Company and the Guarantors shall (i) cause the Exchange Offer Registration Statement to be filed with the Commission as soon as practicable after the Closing Date, but in no event later than 45 days after the Closing Date (such 45th day being the "FILING DEADLINE"), (ii) use their best efforts to cause such Exchange Offer Registration Statement to become effective at the earliest possible time, but in no event later than 135 days after the Closing Date (such 135th day being the "EFFECTIVENESS DEADLINE"), (iii) in connection with the foregoing, (A) file all pre-effective amendments to such Exchange Offer Registration Statement as may be necessary in order to cause it to become effective, (B) file, if applicable, a post-effective amendment to such Exchange Offer Registration Statement pursuant to Rule 430A under the Act and (C) cause all necessary filings, if any, in connection with the registration and qualification of the Series B Notes to be made under the Blue Sky laws of such jurisdictions as are necessary to permit Consummation of the Exchange Offer and (iv) upon the effectiveness of such Exchange Offer Registration Statement, commence and Consummate the Exchange Offer. The Exchange Offer shall be on the appropriate form permitting (i) registration of the Series B Notes to be offered in exchange for the Series A Notes that are Transfer Restricted Securities and (ii) resales of Series B Notes by Broker-Dealers that tendered into the Exchange Offer Series A Notes that such Broker-Dealers acquired for its own account as a result of market-making activities or other trading activities (other than Series A Notes acquired directly from the Company or any of its Affiliates) as contemplated by Section 3(c) below. (b) The Company and the Guarantors shall use their respective best efforts to cause the Exchange Offer Registration Statement to be effective continuously, and shall keep the Exchange Offer open for a period of not less than the minimum period required under applicable federal and state securities laws to Consummate the Exchange Offer; provided, however, that in no event shall such period be less than 20 Business Days. The Company and the Guarantors shall cause the Exchange Offer to comply with all applicable federal and state securities laws. No securities other than the Series B Notes and the guarantees thereof shall be included in the Exchange Offer Registration Statement. The Company and the Guarantors shall use their respective best efforts to cause the Exchange Offer to be Consummated on the earliest practicable date after the Exchange Offer Registration Statement has become effective, but in no event later than 30 Business Days thereafter (such 30th day being the "CONSUMMATION DEADLINE"). 5 6 (c) (i) The Company and the Guarantors shall include a "Plan of Distribution" section in the Prospectus contained in the Exchange Offer Registration Statement and indicate therein that any Broker-Dealer who holds Transfer Restricted Securities that were acquired for the account of such Broker-Dealer as a result of market-making activities or other trading activities (other than Transfer Restricted Securities acquired directly from the Company or any Affiliate of the Company) may exchange such Transfer Restricted Securities pursuant to the Exchange Offer; however, such Broker-Dealer may be deemed to be an "underwriter" within the meaning of the Act and must, therefore, deliver a prospectus meeting the requirements of the Act in connection with its initial resale of any Series B Notes received by such Broker-Dealer in the Exchange Offer, and that the Prospectus contained in the Exchange Offer Registration Statement may be used to satisfy such prospectus delivery requirement. Such "Plan of Distribution" section shall also contain all other information with respect to such sales by such Broker-Dealers that the Commission may require in order to permit such sales pursuant thereto, but such "Plan of Distribution" shall not name any such Broker-Dealer or disclose the amount of Transfer Restricted Securities held by any such Broker-Dealer, except to the extent required by the Commission as a result of a change in policy, rules or regulations after the date of this Agreement. (ii) To the extent necessary to ensure that the Exchange Offer Registration Statement is available for sales of Series B Notes by Broker-Dealers, upon the reasonable request of any Broker-Dealer who certifies in writing to the Company that it anticipates it will be a Restricted Broker-Dealer, the Company and the Guarantors agree to use their respective best efforts to keep the Exchange Offer Registration Statement continuously effective, supplemented and amended as required by the provisions of Section 6(c) hereof and in conformity with the requirements of this Agreement, the Act and the policies, rules and regulations of the Commission as announced from time to time, for a period of 180 days from the date on which the Exchange Offer is Consummated (unless extended pursuant to Section 6(d) hereof), or such shorter period as will terminate when all Transfer Restricted Securities covered by such Registration Statement have been sold pursuant thereto. The Company and the Guarantors shall promptly provide sufficient copies of the latest version of such Prospectus to such Broker-Dealers promptly upon request, at any time during such period. SECTION 4. SHELF REGISTRATION (a) SHELF REGISTRATION. If (i) the Exchange Offer is not permitted by applicable law (after the Company and the Guarantors have complied with the procedures set forth in Section 6(a)(i) below) or (ii) if any Holder of Transfer Restricted Securities shall notify the Company within 20 Business Days following the Consummation Deadline that (A) such Holder was prohibited by law or Commission policy from participating in the Exchange Offer or (B) such Holder may not resell the Series B Notes acquired by it in the Exchange Offer to the public without delivering a prospectus and the Prospectus contained in the Exchange Offer Registration 6 7 Statement is not appropriate or available for such resales by such Holder or (C) such Holder is a Broker-Dealer and holds Series A Notes acquired directly from the Company or any of its Affiliates, then the Company and the Guarantors shall: (x) cause to be filed, on or prior to 30 days after the earlier of (i) the date on which the Company determines that the Exchange Offer Registration Statement cannot be filed as a result of clause (a)(i) above and (ii) the date on which the Company receives the notice specified in clause (a)(ii) above, (such earlier date, the "FILING DEADLINE"), a shelf registration statement pursuant to Rule 415 under the Act (which may be an amendment to the Exchange Offer Registration Statement (the "SHELF REGISTRATION STATEMENT")), relating to all Transfer Restricted Securities, and (y) shall use their respective best efforts to cause such Shelf Registration Statement to become effective on or prior to 90 days after the earlier of (i) the date on which the Company determines that the Exchange Offer Registration Statement cannot be filed as a result of clause (a)(i) above and (ii) the date on which the Company receives the notice specified in clause (a)(ii) above (such 90th day the "EFFECTIVENESS DEADLINE"). If, after the Company and the Guarantors have filed an Exchange Offer Registration Statement that satisfies the requirements of Section 3(a) above, the Company and the Guarantors are required to file and make effective a Shelf Registration Statement solely because the Exchange Offer is not permitted under applicable federal law (i.e., clause (a)(i) above), then the filing of the Exchange Offer Registration Statement shall be deemed to satisfy the requirements of clause (x) above; provided that, in such event, the Company and the Guarantors shall remain obligated to meet the Effectiveness Deadline set forth in clause (y). The Company and the Guarantors shall use their respective best efforts to keep any Shelf Registration Statement required by this Section 4(a) continuously effective, supplemented and amended as required by and subject to the provisions of Sections 6(b) and (c) hereof to the extent necessary to ensure that it is available for sales of Transfer Restricted Securities by the Holders thereof entitled to the benefit of this Section 4(a), and to ensure that it conforms with the requirements of this Agreement, the Act and the policies, rules and regulations of the Commission as announced from time to time, until the Transfer Restricted Securities are available for sale under Rule 144(k) under the Act (as extended pursuant to Section 6(d)), or such shorter period as will terminate when all Transfer Restricted Securities covered by such Registration Statement have been sold pursuant thereto. (b) PROVISION BY HOLDERS OF CERTAIN INFORMATION IN CONNECTION WITH THE SHELF REGISTRATION STATEMENT. No Holder of Transfer Restricted Securities may include any of its Transfer Restricted Securities in any Shelf Registration Statement pursuant to this Agreement unless and until such Holder agrees in writing to be bound by all the provisions of this Agreement applicable to such Holder and furnishes to the Company in writing, within 20 days after receipt of a request therefor, the information specified in Item 507 or 508 of Regulation S- 7 8 K, as applicable, of the Act for use in connection with any Shelf Registration Statement or Prospectus or preliminary Prospectus included therein. No Holder of Transfer Restricted Securities shall be entitled to Liquidated Damages pursuant to Section 5 hereof unless and until such Holder shall have provided all such agreement and information. Each selling Holder agrees to promptly furnish additional information required to be disclosed in order to make the information previously furnished to the Company by such Holder not materially misleading. (c) BLACK OUT PERIOD. During any consecutive 365 day period, the Company may suspend the effectiveness of the Shelf Registration Statement on two occasions for a period of not more than 45 consecutive days if there is a possible acquisition or business combination or other transaction, business development or event involving the Company that may require disclosure in the Shelf Registration Statement and the Board of Directors of the Company determines in the exercise of its reasonable judgment that such disclosure is not in the best interests of the Company and its shareholders or obtaining any financial statements relating to an acquisition or business combination required to be included in the Shelf Registration Statement would be impracticable. In such a case, the Company shall promptly notify the Holders of the suspension of the Shelf Registration Statements' effectiveness, provided that such notice shall not require the Company to disclose the possible acquisition or business combination or other transaction, business development or event if the Board of Directors of the Company determines in good faith that such acquisition or business combination or other transaction, business development or event should remain confidential. Upon the abandonment, consummation or termination of the possible acquisition or business combination or other transaction, business development or event, or the availability of the required financial statements with respect to a possible acquisition or business combination, the suspension of the use of the Shelf Registration Statement pursuant to this Section 4(c) shall cease and the Company shall promptly comply with Section 6(c)(ii) hereof and notify the Holders that disposition of Transfer Restricted Securities may be resumed. SECTION 5. LIQUIDATED DAMAGES If (i) any Registration Statement required by this Agreement is not filed with the Commission on or prior to the applicable Filing Deadline, (ii) any such Registration Statement has not been declared effective by the Commission on or prior to the applicable Effectiveness Deadline, (iii) the Exchange Offer has not been Consummated on or prior to the Consummation Deadline or (iv) any Registration Statement required by this Agreement is filed and declared effective but shall thereafter cease to be effective or fail to be usable for its intended purpose during the periods specified in this Agreement without being succeeded immediately by a post-effective amendment to such Registration Statement that cures such failure and that is itself declared effective immediately (each such event referred to in clauses (i) through (iv), a "REGISTRATION DEFAULT"), then the Company and the Guarantors hereby jointly and severally agree to pay to each Holder of Transfer Restricted Securities affected thereby Liquidated Damages in an amount equal to $.05 per week per $1,000 in principal amount of Transfer Restricted Securities held by such Holder for each week or portion thereof that the Registration 8 9 Default continues for the first 90-day period immediately following the occurrence of such Registration Default ("LIQUIDATED DAMAGES"). The amount of the Liquidated Damages shall increase by an additional $.05 per week per $1,000 in principal amount of 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 $.30 per week per $1,000 in principal amount of Transfer Restricted Securities; provided that the Company and the Guarantors shall in no event be required to pay Liquidated Damages for more than one Registration Default at any given time. Notwithstanding anything to the contrary set forth herein, (1) upon filing of the Exchange Offer Registration Statement and/or, if applicable, the Shelf Registration Statement, in the case of (i) above, (2) upon the effectiveness of the Exchange Offer Registration Statement and/or, if applicable, the Shelf Registration Statement, in the case of (ii) above, (3) upon consummation of the Exchange Offer, in the case of (iii) above, or (4) upon the filing of a post-effective amendment to the Registration Statement or an additional Registration Statement that causes the Exchange Offer Registration Statement and/or, if applicable, the Shelf Registration Statement to again be declared effective or made usable in the case of (iv) above, the Liquidated Damages payable with respect to the Transfer Restricted Securities as a result of such clause (i), (ii), (iii) or (iv), as applicable, shall cease. All accrued Liquidated Damages shall be paid to the Holders entitled thereto, in the manner provided for the payment of interest in the Indenture, on each Interest Payment Date, as more fully set forth in the Indenture and the Notes. All obligations of the Company and the Guarantors set forth in the preceding paragraph that are outstanding with respect to any Transfer Restricted Security at the time such security ceases to be a Transfer Restricted Security shall survive until such time as all such obligations with respect to such Transfer Restricted Security shall have been satisfied in full. SECTION 6. REGISTRATION PROCEDURES (a) EXCHANGE OFFER REGISTRATION STATEMENT. In connection with the Exchange Offer, the Company and the Guarantors shall (x) comply with all applicable provisions of Section 6(c) below, (y) use their respective best efforts to effect such exchange and to permit the resale of Series B Notes by Broker-Dealers that tendered in the Exchange Offer Series A Notes that such Broker-Dealer acquired for its own account as a result of its market-making activities or other trading activities (other than Series A Notes acquired directly from the Company or any of its Affiliates) being sold in accordance with the intended method or methods of distribution thereof and (z) comply with all of the following provisions: (i) If, following the Closing Date, there has been announced a change in Commission policy with respect to exchange offers such as the Exchange Offer, that in the reasonable opinion of counsel to the Company raises a substantial question as to whether the Exchange Offer is permitted by applicable federal law, the Company and the Guarantors hereby agree to seek a no-action letter or other favorable decision from the Commission allowing the Company and the Guarantors to Consummate an Exchange 9 10 Offer for such Transfer Restricted Securities. The Company and the Guarantors hereby agree to pursue the issuance of such a decision to the Commission staff level. In connection with the foregoing, the Company and the Guarantors hereby agree to take all such other actions as may be requested by the Commission or otherwise required in connection with the issuance of such decision, including without limitation (A) participating in telephonic conferences with the Commission, (B) delivering to the Commission staff an analysis prepared by counsel to the Company setting forth the legal bases, if any, upon which such counsel has concluded that such an Exchange Offer should be permitted and (C) diligently pursuing a resolution (which need not be favorable) by the Commission staff. (ii) As a condition to its participation in the Exchange Offer, each Holder of Transfer Restricted Securities (including, without limitation, any Holder who is a Broker- Dealer) shall furnish, upon the request of the Company, prior to the Consummation of the Exchange Offer, a written representation to the Company and the Guarantors (which may be contained in the letter of transmittal contemplated by the Exchange Offer Registration Statement) to the effect that (A) it is not an Affiliate of the Company, (B) it is not engaged in, and does not intend to engage in, and has no arrangement or understanding with any person to participate in, a distribution of the Series B Notes to be issued in the Exchange Offer and (C) it is acquiring the Series B Notes in its ordinary course of business. As a condition to its participation in the Exchange Offer, each Holder using the Exchange Offer to participate in a distribution of the Series B Notes shall acknowledge and agree that, if the resales are of Series B Notes obtained by such Holder in exchange for Series A Notes acquired directly from the Company or an Affiliate thereof, it (1) could not, under Commission policy as in effect on the date of this Agreement, rely on the position of the Commission enunciated in MORGAN STANLEY AND CO., INC. (available June 5, 1991) and EXXON CAPITAL HOLDINGS CORPORATION (available May 13, 1988), as interpreted in the Commission's letter to SHEARMAN & STERLING dated July 2, 1993, and similar no-action letters (including, if applicable, any no-action letter obtained pursuant to clause (i) above) and (2) must comply with the registration and prospectus delivery requirements of the Act in connection with a secondary resale transaction and that such a secondary resale transaction must be covered by an effective registration statement containing the selling security holder information required by Item 507 or 508, as applicable, of Regulation S-K. (iii) Prior to effectiveness of the Exchange Offer Registration Statement, the Company and the Guarantors shall provide a supplemental letter to the Commission (A) stating that the Company and the Guarantors are registering the Exchange Offer in reliance on the position of the Commission enunciated in EXXON CAPITAL HOLDINGS CORPORATION (available May 13, 1988), MORGAN STANLEY AND CO., INC. (available June 5, 1991), as interpreted in the Commission's letter to SHEARMAN & STERLING dated July 2, 1993, and, if applicable, any no-action letter obtained pursuant to clause (i) above, (B) 10 11 including a representation that neither the Company nor any Guarantor has entered into any arrangement or understanding with any Person to distribute the Series B Notes to be received in the Exchange Offer and that, to the best of the Company's and each Guarantor's information and belief, each Holder participating in the Exchange Offer is acquiring the Series B Notes in its ordinary course of business and has no arrangement or understanding with any Person to participate in the distribution of the Series B Notes received in the Exchange Offer and (C) any other undertaking or representation required by the Commission as set forth in any no-action letter obtained pursuant to clause (i) above, if applicable. (b) SHELF REGISTRATION STATEMENT. In connection with the Shelf Registration Statement, the Company and the Guarantors shall comply with all the provisions of Section 6(c) below and shall use their respective best efforts to effect such registration to permit the sale of the Transfer Restricted Securities being sold in accordance with the intended method or methods of distribution thereof (as indicated in the information furnished to the Company pursuant to Section 4(b) hereof), and pursuant thereto the Company and the Guarantors shall prepare and file with the Commission a Registration Statement relating to the registration on any appropriate form under the Act, which form shall be available for the sale of the Transfer Restricted Securities in accordance with the intended method or methods of distribution thereof within the time periods and otherwise in accordance with the provisions hereof. (c) GENERAL PROVISIONS. In connection with any Registration Statement and any related Prospectus required by this Agreement, the Company and the Guarantors shall: (i) use their respective best efforts to keep such Registration Statement continuously effective and provide all requisite financial statements for the period specified in Section 3 or 4 of this Agreement, as applicable. Upon the occurrence of any event that would cause any such Registration Statement or the Prospectus contained therein (A) to contain an untrue statement of material fact or omit to state any material fact necessary to make the statements therein not misleading or (B) not to be effective and usable for resale of Transfer Restricted Securities during the periods required by this Agreement, the Company and the Guarantors shall file promptly an appropriate amendment to such Registration Statement curing such defect and, if Commission review is required, use their respective best efforts to cause such amendment to be declared effective as soon as practicable; (ii) prepare and file with the Commission such amendments and post-effective amendments to the applicable Registration Statement as may be necessary to keep such Registration Statement effective for the applicable period set forth in Section 3 or 4 hereof; cause the Prospectus to be supplemented by any required Prospectus supplement, and as so supplemented to be filed pursuant to Rule 424 under the Act, and to comply fully with Rules 424, 430A and 462, as applicable, under the Act in a timely manner; and comply with the provisions of the Act with respect to the disposition of all securities 11 12 covered by such Registration Statement during the applicable period in accordance with the intended method or methods of distribution by the sellers thereof set forth in such Registration Statement or supplement to the Prospectus; (iii) advise the Initial Purchasers, and in the case of a Shelf Registration Statement, each selling Holder promptly and, if requested by such Holder, confirm such advice in writing, (A) when the Prospectus or any Prospectus supplement or post-effective amendment has been filed and, with respect to any applicable Registration Statement or any post-effective amendment thereto, when the same has become effective, (B) of any request by the Commission for amendments to the Registration Statement or amendments or supplements to the Prospectus or for additional information relating thereto, (C) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement under the Act or of the suspension by any state securities commission of the qualification of the Transfer Restricted Securities for offering or sale in any jurisdiction, or the initiation of any proceeding for any of the preceding purposes and (D) of the existence of any fact or the happening of any event that makes any statement of a material fact made in the Registration Statement, the Prospectus, any amendment or supplement thereto or any document incorporated by reference therein untrue, or that requires the making of any additions to or changes in the Registration Statement in order to make the statements therein not misleading, or that requires the making of any additions to or changes in the Prospectus in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. If at any time the Commission shall issue any stop order suspending the effectiveness of the Registration Statement, or any state securities commission or other regulatory authority shall issue an order suspending the qualification or exemption from qualification of the Transfer Restricted Securities under state securities or Blue Sky laws, then the Company and the Guarantors shall use their respective best efforts to obtain the withdrawal or lifting of such order at the earliest possible time; (iv) subject to Section 6(c)(i) hereof, if any fact or event contemplated by Section 6(c)(iii)(D) hereof shall exist or have occurred, prepare a supplement or post-effective amendment to the Registration Statement or related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of Transfer Restricted Securities, the Prospectus will not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; (v) furnish to each Initial Purchaser, and in the case of a Shelf Registration Statement, to each Holder in connection with such exchange or sale, if any, before filing with the Commission, a copy of any Registration Statement or any Prospectus included therein or any amendments or supplements to any such Registration Statement or Prospectus (including all documents incorporated by reference after the initial filing of 12 13 such Registration Statement), which documents shall be subject to the review and comment of such Initial Purchasers, and, in the case of a Shelf Registration Statement, such Holders in connection with such sale, if any, for a period of at least three Business Days, and the Company and the Guarantors shall not file any such Registration Statement or Prospectus or any amendment or supplement to any such Registration Statement or Prospectus (including all such documents incorporated by reference) to which such Initial Purchasers, or, in the case of a Shelf Registration Statement, such Holders shall reasonably object within three Business Days after the receipt thereof. An Initial Purchaser or selling Holder shall be deemed to have reasonably objected to such filing if such Registration Statement, amendment, Prospectus or supplement, as applicable, as proposed to be filed, contains an untrue statement of material fact or omits to state any material fact necessary to make the statements therein not misleading or fails to comply with the applicable requirements of the Act; (vi) promptly prior to the filing of any document that is to be incorporated by reference into a Registration Statement or Prospectus, provide a copy of such document to each Initial Purchaser, and in the case of a Shelf Registration Statement, to the representative of the Holders included within the coverage of the Shelf Registration Statement, if any, make the Company's and the Guarantors' representatives available for discussion of such document and other customary due diligence matters, and include such information in such document prior to the filing thereof as such Initial Purchasers or the representative of the Holders may reasonably request; (vii) in the case of a Shelf Registration Statement make available, at reasonable times, for inspection by a representative of the Holders and an attorney and accountant retained by such Holders, in a manner designed to permit underwriters to satisfy their due diligence investigation under the Act, all financial and other records and pertinent corporate documents of the Company and the Guarantors customarily inspected by underwriters in primary underwritten offerings and cause the Company's and the Guarantors' officers, directors and employees to supply all information reasonably requested by and customarily supplied in connection with primary underwritten offerings to, any such representative, attorney or accountant in connection with such Shelf Registration Statement or any post-effective amendment thereto subsequent to the filing thereof and prior to its effectiveness; PROVIDED, HOWEVER, that any records, information or documents that are designated by the Company or any of the Guarantors as confidential at the time of delivery of such records, information or documents shall be kept confidential by such persons, unless (i) such records, information or documents are in the public domain or otherwise publicly available, (ii) disclosure of such records, information or documents is required by court or administrative order or (iii) disclosure of such records, information or documents, in the opinion of counsel to such Person, is otherwise required by law (including, without limitation, pursuant to the requirements of the Act). 13 14 (viii) if requested by the Initial Purchasers or in the case of a Shelf Registration Statement, by any Holder of Notes included within the coverage of the Shelf Registration Statement, promptly include in any Registration Statement or related Prospectus, pursuant to a supplement or post-effective amendment if necessary, such information as such Initial Purchasers or such Holders may reasonably request to have included therein, including, without limitation, information relating to the "Plan of Distribution" of the Transfer Restricted Securities; and make all required filings of such Prospectus supplement or post-effective amendment as soon as practicable after the Company and the Guarantors are notified of the matters to be included in such Prospectus supplement or post-effective amendment; (ix) furnish to each Holder of Notes included within the coverage of the Shelf Registration Statement, without charge, at least one conformed copy of the Shelf Registration Statement, as first filed with the Commission, and of each amendment thereto, without documents incorporated by reference therein or exhibits thereto, unless a Holder so requests in writing. (x) deliver to the Initial Purchasers, and to any other Holder that so requests, without charge, at least one conformed copy of the Exchange Offer Registration Statement and any post-effective amendment thereto, including financial statements and schedules, without documents incorporated therein by reference or exhibits thereto, unless the Initial Purchasers or any such Holder so request in writing. (xi) deliver to each Holder of Notes included within the coverage of the Shelf Registration Statement, without charge, as many copies of the Prospectus (including each preliminary prospectus) included in the Shelf Registration Statement and any amendment or supplement thereto as such Persons reasonably may request; the Company and the Guarantors hereby consent, subject to the provisions of this Agreement, to the use (in accordance with law) of the Prospectus and any amendment or supplement thereto by each selling Holder in connection with the offering and the sale of the Transfer Restricted Securities covered by the Prospectus or any amendment or supplement thereto; (xii) deliver to the Initial Purchasers or any Restricted Broker-Dealer, without charge, as many copies of the final prospectus included in the Exchange Offer Registration Statement and any amendment or supplement thereto as such Person may reasonably request; the Company and the Guarantors hereby consent, subject to the provisions of this Agreement, to the use (in accordance with law) of the prospectus or any amendment or supplement thereto by the Initial Purchasers, if necessary, any Restricted Broker-Dealer and such other Persons required to deliver a prospectus following the Exchange Offer in connection with the offering and sale of the Notes covered by the Prospectus, or any amendment or supplement thereto, included in such Exchange Offer Registration Statement; 14 15 (xiii) upon the request of any Holder of Notes included within the coverage of the Shelf Registration Statement, enter into such agreements (including underwriting agreements) and make such representations and warranties and take all such other actions in connection therewith in order to expedite or facilitate the disposition of the Transfer Restricted Securities pursuant to any Shelf Registration Statement contemplated by this Agreement as may be reasonably requested by any such Holder in connection with any sale or resale pursuant to any Shelf Registration Statement, and in such connection the Company and the Guarantors shall: (A) upon the request of any Holder, furnish (or in the case of paragraphs (2) and (3) below, use their respective best efforts to cause to be furnished) to each Holder, upon the effectiveness of the Shelf Registration Statement: (1) a certificate, dated such date, signed on behalf of the Company and the Guarantors by (x) a principal operating or executive officer of the Company and the Guarantors and (y) a principal financial or accounting officer of the Company and the Guarantors, confirming, as of the date thereof, the matters set forth in paragraphs (a), (c), (d) and (e) of Section 7 of the Purchase Agreement and such matters customarily given in underwritten offerings; (2) an opinion, dated the date of effectiveness of the Shelf Registration Statement, of counsel for the Company and the Guarantors covering matters customarily covered in opinions requested in underwritten offerings and similar to those set forth in Section 7(h) of the Purchase Agreement, and in any event including a statement to the effect that such counsel has participated in conferences with officers and representatives of the Company and the Guarantors and representatives of the independent public accountants for the Company and the Guarantors and has considered the matters required to be stated therein and the statements contained therein, and although such counsel is not passing upon and does not assume the responsibility for, the accuracy, completeness or fairness of such statements; and has not made any independent check or verification thereof, that such counsel advises that, on the basis of the foregoing, no facts have come to the attention of such counsel that lead such counsel to believe that the Shelf Registration Statement, at the time such Shelf Registration Statement or any post-effective amendment thereto became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus contained in such Shelf Registration Statement as of its date, contained an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which 15 16 they were made, not misleading. Without limiting the foregoing, such counsel may state further that such counsel assumes no responsibility for, and has not independently verified, the accuracy, completeness or fairness of the financial statements and other financial data included in any Registration Statement contemplated by this Agreement or the related Prospectus; and (3) a customary comfort letter, dated as of the date of effectiveness of the Shelf Registration Statement, from the Company's independent accountants, in the customary form and covering matters of the type customarily covered in comfort letters to underwriters in connection with underwritten offerings, and affirming the matters set forth in the comfort letters delivered pursuant to Section 7(n) of the Purchase Agreement, subject to receipt of appropriate documentation, if required by, and only if permitted by, Statement of Auditing Standards No. 72; and (B) deliver such other documents and certificates as may be reasonably requested by the representative of the selling Holders to evidence compliance with the matters covered in clause (A) above and with any customary conditions contained in any agreement entered into by the Company and the Guarantors pursuant to this clause (xiii); (xiv) prior to any public offering of Transfer Restricted Securities, cooperate with the selling Holders and their counsel in connection with the registration and qualification of the Transfer Restricted Securities under the securities or Blue Sky laws of such jurisdictions as the selling Holders may request and do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of the Transfer Restricted Securities covered by the applicable Registration Statement; provided, however, that neither the Company nor any Guarantor shall be required to register or qualify as a foreign corporation where it is not now so qualified or to take any action that would subject it to the service of process in suits or to taxation, other than as to matters and transactions relating to the Registration Statement, in any jurisdiction where it is not now so subject; (xv) issue, upon the request of any Holder of Series A Notes covered by any Shelf Registration Statement contemplated by this Agreement, Series B Notes having an aggregate principal amount equal to the aggregate principal amount of Series A Notes surrendered to the Company by such Holder in exchange therefor or being sold by such Holder; such Series B Notes to be registered in the name of such Holder or in the name of the purchaser(s) of such Series B Notes, as the case may be; in return, the Series A Notes held by such Holder shall be surrendered to the Company for cancellation; 16 17 (xvi) in connection with any sale of Transfer Restricted Securities that will result in such securities no longer being Transfer Restricted Securities, cooperate with the Holders to facilitate the timely preparation and delivery of certificates representing Transfer Restricted Securities to be sold and not bearing any restrictive legends; and to register such Transfer Restricted Securities in such denominations and such names as the selling Holders may request at least two Business Days prior to the closing of any such sale of Transfer Restricted Securities; (xvii) use their respective best efforts to cause the disposition of the Transfer Restricted Securities covered by the Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the seller or sellers thereof to Consummate the disposition of such Transfer Restricted Securities, subject to the proviso contained in clause (xiv) above; (xviii) provide a CUSIP number for all Transfer Restricted Securities not later than the effective date of a Registration Statement covering such Transfer Restricted Securities and provide the Trustee under the Indenture with printed certificates for the Transfer Restricted Securities which are in a form eligible for deposit with The Depository Trust Company; (xix) otherwise use their respective best efforts to comply with all applicable rules and regulations of the Commission, and make generally available to their security holders with regard to any applicable Registration Statement, as soon as practicable, a consolidated earnings statement meeting the requirements of Rule 158 (which need not be audited) covering a twelve-month period beginning after the effective date of the Registration Statement (as such term is defined in paragraph (c) of Rule 158 under the Act); (xx) in the case of a Shelf Registration Statement, make appropriate officers of the Company available to the selling Holders for meetings with prospective purchasers of the Transfer Restricted Securities and prepare and present to potential investors customary "road show" material in a manner consistent with other new issuances of other securities similar to the Transfer Restricted Securities; (xxi) cause the Indenture to be qualified under the TIA not later than the effective date of the first Registration Statement required by this Agreement and, in connection therewith, cooperate with the Trustee and the Holders to effect such changes to the Indenture as may be required for such Indenture to be so qualified in accordance with the terms of the TIA; and execute, and use best efforts to cause the Trustee to execute, all documents that may be required to effect such changes and all other forms and documents required to be filed with the Commission to enable such Indenture to be so qualified in a timely manner; and 17 18 (xxii) provide promptly to each Holder upon request each document filed with the Commission pursuant to the requirements of Section 13 or Section 15(d) of the Exchange Act. (d) RESTRICTIONS ON HOLDERS. Each Holder agrees by acquisition of a Transfer Restricted Security that, upon receipt of the notice referred to in Section 6(c)(iii)(C) or any notice from the Company of the existence of any fact of the kind described in Section 6(c)(iii)(D) hereof (in each case, a "SUSPENSION NOTICE"), such Holder will forthwith discontinue disposition of Transfer Restricted Securities pursuant to the applicable Registration Statement until (i) such Holder has received copies of the supplemented or amended Prospectus contemplated by Section 6(c)(iv) hereof, or (ii) such Holder is advised in writing by the Company that the use of the Prospectus may be resumed, and has received copies of any additional or supplemental filings that are incorporated by reference in the Prospectus (in each case, the "RECOMMENCEMENT DATE"). Each Holder receiving a Suspension Notice hereby agrees that it will either (i) destroy any Prospectuses, other than permanent file copies, then in such Holder's possession which have been replaced by the Company with more recently dated Prospectuses or (ii) deliver to the Company (at the Company's expense) all copies, other than permanent file copies, then in such Holder's possession of the Prospectus covering such Transfer Restricted Securities that was current at the time of receipt of the Suspension Notice. The time period regarding the effectiveness of such Registration Statement set forth in Section 3 or 4 hereof, as applicable, shall be extended by a number of days equal to the number of days in the period from and including the date of delivery of the Suspension Notice to the Recommencement Date. SECTION 7. REGISTRATION EXPENSES All expenses incident to the Company's and the Guarantors' performance of or compliance with this Agreement shall be borne by the Company, regardless of whether a Registration Statement becomes effective, including without limitation: (i) all registration and filing fees and expenses, (ii) all fees and expenses of compliance with federal securities and state Blue Sky or securities laws, (iii) all expenses of printing (including printing certificates for the Series B Notes to be issued in the Exchange Offer and printing of Prospectuses, messenger and delivery services and telephone, (iv) all fees and disbursements of counsel for the Company and the Guarantors and in the event of a Shelf Registration Statement, the reasonable fees and disbursements of one firm of counsel for the Holders of Transfer Restricted Securities (who shall be Latham & Watkins, unless another firm shall be chosen by the Holders of a majority in principal amount of the Transfer Restricted Securities for whose benefit such Shelf Registration Statement is being prepared) and fees and disbursements of the Trustee and counsel, (v) all application and filing fees in connection with listing the Series B Notes on a national securities exchange or automated quotation system pursuant to the requirements hereof and (vi) all fees and disbursements of independent certified public accountants of the Company and the Guarantors (including the expenses of any special audit and comfort letters required by or incident to such performance) but excluding fees and expenses of counsel to the underwriters and underwriting 18 19 discounts and commissions and transfer taxes, if any, relating to the sale or disposition of the Series B Notes by a Holder. The Company shall, in any event, bear its and the Guarantors' internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expenses of any annual audit and the fees and expenses of any Person, including special experts, retained by the Company or the Guarantors. SECTION 8. INDEMNIFICATION (a) The Company and the Guarantors agree, jointly and severally, to indemnify and hold harmless (i) each Holder, (ii) each person, if any, who controls (within the meaning of Section 15 of the Act or Section 20 of the Exchange Act) any Holder (any of the persons referred to in this clause (ii) being hereinafter referred to as a "controlling person") and (iii) the respective officers, directors, partners, employees, representatives and agents of any Holder or any controlling person (any person referred to in clause (i), (ii) or (iii) may hereinafter be referred to as an "INDEMNIFIED HOLDER") from and against any and all losses, claims, damages, liabilities, judgments, (including without limitation, any legal or other expenses incurred in connection with investigating or defending any matter, including any action that could give rise to any such losses, claims, damages, liabilities or judgments) caused by any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement, preliminary prospectus or Prospectus (or any amendment or supplement thereto) provided by the Company to any holder or any prospective purchaser of Series B Notes, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities or judgments are caused by an untrue statement or omission or alleged untrue statement or omission that is based upon information relating to any of the Holders furnished in writing to the Company by any of the Holders. (b) Each Holder of Transfer Restricted Securities agrees, severally and not jointly, to indemnify and hold harmless the Company and the Guarantors, and their respective directors, officers, employees, agents and representatives, and each person, if any, who controls (within the meaning of Section 15 of the Act or Section 20 of the Exchange Act) the Company or the Guarantors, to the same extent as the foregoing indemnity from the Company and the Guarantors to each of the Indemnified Holders, but only with reference to information relating to such Indemnified Holder furnished in writing to the Company by such Indemnified Holder expressly for use in any Registration Statement. In no event shall any Indemnified Holder be liable or responsible for any amount in excess of the amount by which the total amount received by such Indemnified Holder with respect to its sale of Transfer Restricted Securities pursuant to a Registration Statement exceeds the amount of any damages that such Indemnified Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. 19 20 (c) In case any action shall be commenced involving any person in respect of which indemnity may be sought pursuant to Section 8(a) or 8(b) (the "INDEMNIFIED PARTY"), the Indemnified Party shall promptly notify the person against whom such indemnity may be sought (the "INDEMNIFYING PARTY") in writing and the Indemnifying Party shall assume the defense of such action, including the employment of counsel reasonably satisfactory to the Indemnified Party and the payment of all fees and expenses of such counsel, as incurred (except that in the case of any action in respect of which indemnity may be sought pursuant to both Sections 8(a) and 8(b), an Indemnified Holder shall not be required to assume the defense of such action pursuant to this Section 8(c), but may employ separate counsel and participate in the defense thereof, but the fees and expenses of such counsel, except as provided below, shall be at the expense of the Indemnified Holder). Any Indemnified Party shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of the Indemnified Party unless (i) the employment of such counsel shall have been specifically authorized in writing by the Indemnifying Party, (ii) the Indemnifying Party shall have failed to assume the defense of such action or employ counsel reasonably satisfactory to the Indemnified Party or (iii) the named parties to any such action (including any impleaded parties) include both the Indemnified Party and the Indemnifying Party, and the Indemnified Party shall have been advised by such counsel that there may be one or more legal defenses available to it which are different from or additional to those available to the Indemnifying Party (in which case the Indemnifying Party shall not have the right to assume the defense of such action on behalf of the Indemnified Party). In any such case, the Indemnifying Party shall not, in connection with any one action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the fees and expenses of more than one separate firm of attorneys (in addition to any local counsel) for all Indemnified Parties and all such fees and expenses shall be reimbursed as they are incurred. Such firm shall be designated in writing by a majority of the Indemnified Holders, in the case of the parties indemnified pursuant to Section 8(a), and by the Company, in the case of parties indemnified pursuant to Section 8(b). The Indemnifying Party shall indemnify and hold harmless the Indemnified Party from and against any and all losses, claims, damages, liabilities and judgments by reason of any settlement of any action (i) effected with its written consent or (ii) effected without its written consent if the settlement is entered into more than 50 days after the Indemnifying Party shall have received a request from the Indemnified Party for reimbursement for the fees and expenses of counsel (in any case where such fees and expenses are at the expense of the Indemnifying Party) and, prior to the date of such settlement, the Indemnifying Party shall have failed to comply with such reimbursement request. No Indemnifying Party shall, without the prior written consent of the Indemnified Party, effect any settlement or compromise of, or consent to the entry of judgment with respect to, any pending or threatened action in respect of which the Indemnified Party is or could have been a party and indemnity or contribution may be or could have been sought hereunder by the Indemnified Party, unless such settlement, compromise or judgment (i) includes an unconditional release of the Indemnified Party from all liability on claims that are or could 20 21 have been the subject matter of such action and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of the Indemnified Party. (d) To the extent that the indemnification provided for in this Section 8 is unavailable to an Indemnified Party in respect of any losses, claims, damages, liabilities or judgments referred to therein, then each Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such losses, claims, damages, liabilities or judgments (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Guarantors, on the one hand, and the Holders, on the other hand, from their sale of Transfer Restricted Securities or (ii) if the allocation provided by clause 8(d)(i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause 8(d)(i) above but also the relative fault of the Company and the Guarantors, on the one hand, and of the Indemnified Holder, on the other hand, in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or judgments, as well as any other relevant equitable considerations. The relative fault of the Company and the Guarantors, on the one hand, and of the Indemnified Holder, on the other hand, shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or such Guarantors, on the one hand, or by the Indemnified Holder, on the other hand, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities and judgments referred to above shall be deemed to include, subject to the limitations set forth in the second paragraph of Section 8(a), any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any action or claim. The Company, the Guarantors and each Holder agree that it would not be just and equitable if contribution pursuant to this Section 8(d) were determined by pro rata allocation (even if the Holders were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an Indemnified Party as a result of the losses, claims, damages, liabilities or judgments referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such Indemnified Party in connection with investigating or defending any matter, including any action that could have given rise to such losses, claims, damages, liabilities or judgments. Notwithstanding the provisions of this Section 8, no Holder or its related Indemnified Holders shall be required to contribute, in the aggregate, any amount in excess of the amount by which the total received by such Holder with respect to the sale of its Transfer Restricted Securities pursuant to a Registration Statement exceeds the sum of (A) the amount paid by such Holder for such Transfer Restricted Securities plus (B) the amount of any damages which such Holder has otherwise been required to pay by reason of such 21 22 untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Holders' obligations to contribute pursuant to this Section 8(c) are several in proportion to the respective principal amount of Transfer Restricted Securities held by each of the Holders hereunder and not joint. SECTION 9. RULE 144A AND RULE 144 The Company and each Guarantor agrees with each Holder, for so long as any Transfer Restricted Securities remain outstanding and during any period in which the Company or such Guarantor (i) is not subject to Section 13 or 15(d) of the Exchange Act, to make available, upon request of any Holder, to such Holder or beneficial owner of Transfer Restricted Securities in connection with any sale thereof and any prospective purchaser of such Transfer Restricted Securities designated by such Holder or beneficial owner, the information required by Rule 144A(d)(4) under the Act in order to permit resales of such Transfer Restricted Securities pursuant to Rule 144A and (ii) is subject to Section 13 or 15 (d) of the Exchange Act, to make all filings required thereby in a timely manner in order to permit resales of such Transfer Restricted Securities pursuant to Rule 144. SECTION 10. UNDERWRITTEN REGISTRATIONS If any of the Transfer Restricted Securities covered by any Shelf Registration Statement are to be sold in an underwritten offering, the investment banker or investment bankers and manager or managers that will administer the offering ("MANAGING UNDERWRITERS") will be selected by the Holders of a majority in aggregate principal amount of such Transfer Restricted Securities included in such offering; provided, however, that the Managing Underwriters shall be reasonably satisfactory to the Company. No Person may participate in any underwritten registration hereunder unless such Person (i) agrees to sell such Person's Transfer Restricted Securities on the basis reasonably provided in any underwriting arrangements approved by the Persons entitled hereunder to approve such arrangements and (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements. SECTION 11. MISCELLANEOUS (a) REMEDIES. The Company and the Guarantors acknowledge and agree that any failure by the Company and/or the Guarantors to comply with their respective obligations under Sections 3 and 4 hereof may result in material irreparable injury to the Initial Purchasers or the Holders for which there is no adequate remedy at law, that it will not be possible to measure damages for such injuries precisely and that, in the event of any such failure, the Initial 22 23 Purchasers or any Holder may obtain such relief as may be required to specifically enforce the Company's and the Guarantors' obligations under Sections 3 and 4 hereof. The Company and the Guarantors further agree to waive the defense in any action for specific performance that a remedy at law would be adequate. (b) NO INCONSISTENT AGREEMENTS. Neither the Company nor any Guarantor shall, on or after the date of this Agreement, enter into any agreement with respect to its securities that is inconsistent with the rights granted to the Holders in this Agreement or otherwise conflicts with the provisions hereof. The rights granted to the Holders hereunder do not in any way conflict with and are not inconsistent with the rights granted to the holders of the Company's and the Guarantors' securities under any agreement in effect on the date hereof. (c) AMENDMENTS AND WAIVERS. The provisions of this Agreement may not be amended, modified or supplemented, and waivers or consents to or departures from the provisions hereof may not be given, unless (i) in the case of Section 5 hereof and this Section 10(c)(i), the Company has obtained the written consent of Holders of all outstanding Transfer Restricted Securities and (ii) in the case of all other provisions hereof, the Company has obtained the written consent of Holders of a majority of the outstanding principal amount of Transfer Restricted Securities (excluding Transfer Restricted Securities held by the Company or its Affiliates). Notwithstanding the foregoing, a waiver or consent to departure from the provisions hereof that relates exclusively to the rights of Holders whose Transfer Restricted Securities are being tendered pursuant to the Exchange Offer, and that does not affect directly or indirectly the rights of other Holders whose Transfer Restricted Securities are not being tendered pursuant to such Exchange Offer, may be given by the Holders of a majority of the outstanding principal amount of Transfer Restricted Securities subject to such Exchange Offer. (d) THIRD PARTY BENEFICIARY. The Holders of Transfer Restricted Securities participating in the Exchange Offer shall be third party beneficiaries to the agreements made hereunder between the Company and the Guarantors, on the one hand, and the Initial Purchasers, on the other hand, and shall have the right to enforce such agreements directly to the extent they may deem such enforcement necessary or advisable to protect their rights or the rights of Holders hereunder. (e) NOTICES. All notices and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, first-class mail (registered or certified, return receipt requested), telex, telecopier or air courier guaranteeing overnight delivery: (i) if to a Holder, at the address set forth on the records of the Registrar under the Indenture, with a copy to the Registrar under the Indenture; and (ii) if to the Company or the Guarantors: AAi.FosterGrant, Inc. 23 24 500 George Washington Hwy. Smithfield, RI 02917 Telecopier No.: (401) 231-3212 Attention: Chief Financial Officer With a copy to: Hinckley, Allen & Snyder 1500 Fleet Center Providence, RI 02906 Telecopier No.: (401) 277-9600 Attention: Stephen J. Carlotti All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five Business Days after being deposited in the mail, postage prepaid, if mailed; when receipt acknowledged, if telecopied; and on the next business day, if timely delivered to an air courier guaranteeing overnight delivery. Copies of all such notices, demands or other communications shall be concurrently delivered by the Person giving the same to the Trustee at the address specified in the Indenture. Upon the date of filing of the Exchange Offer or a Shelf Registration Statement, as the case may be, notice shall be delivered to the Initial Purchasers in the form attached hereto as Exhibit A. (f) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties, including without limitation and without the need for an express assignment, subsequent Holders; provided, that nothing herein shall be deemed to permit any assignment, transfer or other disposition of Transfer Restricted Securities in violation of the terms hereof or of the Purchase Agreement or the Indenture. If any transferee of any Holder shall acquire Transfer Restricted Securities in any manner, whether by operation of law or otherwise, such Transfer Restricted Securities shall be held subject to all of the terms of this Agreement, and by taking and holding such Transfer Restricted Securities such Holder shall be conclusively deemed to have agreed to be bound by and to perform all of the terms and provisions of this Agreement, including the restrictions on resale set forth in this Agreement and, if applicable, the Purchase Agreement, and such Holder shall be entitled to receive the benefits hereof. (g) COUNTERPARTS. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. 24 25 (h) HEADINGS. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (i) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE CONFLICT OF LAW RULES THEREOF. (j) SEVERABILITY. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. (k) ENTIRE AGREEMENT. This Agreement is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein with respect to the registration rights granted with respect to the Transfer Restricted Securities. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter. 26 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. AAI.FOSTERGRANT, INC. By: /s/ Gerald F. Cerce ----------------------------------- Name: Gerald F. Cerce Title: President and Chief Executive Officer GUARANTORS FOSTER GRANT HOLDINGS, INC. By: /s/ Gerald F. Cerce ----------------------------------- Name: Gerald F. Cerce Title: President THE BONNEAU COMPANY By: /s/ Gerald F. Cerce ----------------------------------- Name: Gerald F. Cerce Title: President OPTI-RAY, INC. By: /s/ Gerald F. Cerce ----------------------------------- Name: Gerald F. Cerce Title: President BONNEAU GENERAL, INC. By: /s/ Gerald F. Cerce ----------------------------------- Name: Gerald F. Cerce Title: President 27 BONNEAU HOLDINGS, INC. By: /s/ Gerald F. Cerce ----------------------------------- Name: Gerald F. Cerce Title: President O-RAY HOLDINGS, INC. By: /s/ Gerald F. Cerce ----------------------------------- Name: Gerald F. Cerce Title: President F.G.G. INVESTMENTS, INC. By: /s/ Gerald F. Cerce ----------------------------------- Name: Gerald F. Cerce Title: President FOSTER GRANT GROUP, L.P. By: /s/ Gerald F. Cerce ----------------------------------- Name: Gerald F. Cerce Title: President AND Chief Executive Officer FANTASMA, LLC By: /s/ Gerald F. Cerce ----------------------------------- Name: Gerald F. Cerce Title: Chairman 28 NATIONSBANC MONTGOMERY SECURITIES LLC By: /s/ J. Scott Holmes ------------------------------ Name: J. Scott Holmes Title: Principal PRUDENTIAL SECURITIES INCORPORATED By: /s/ ------------------------------ Name: Title: BANCBOSTON SECURITIES INC. By: /s/ ------------------------------ Name: Title: 29 NATIONSBANC MONTGOMERY SECURITIES LLC By: /s/ ------------------------------ Name: Title: PRUDENTIAL SECURITIES INCORPORATED By: /s/ Timothy O'Neill ------------------------------ Name: Timothy O'Neill Title: Director BANCBOSTON SECURITIES INC. By: /s/ ------------------------------ Name: Title: 30 NATIONSBANC MONTGOMERY SECURITIES LLC By: /s/ ------------------------------ Name: Title: PRUDENTIAL SECURITIES INCORPORATED By: /s/ ------------------------------ Name: Title: BANCBOSTON SECURITIES INC. By: /s/ Gregory C. Foy ------------------------------ Name: Gregory C. Foy Title: Managing Director 31 EXHIBIT A NOTICE OF FILING OF REGISTRATION STATEMENT To: NationsBanc Montgomery Securities LLC Prudential Securities Incorporated BancBoston Securities Inc. From: AAi.FosterGrant, Inc. Re: 10 3/4% Series A Senior Notes Due 2006 Date: ____________, 199__ For your information only (NO ACTION REQUIRED): Today, ________________, 199__, we filed [an Exchange Registration Statement] [a Shelf Registration Statement] with the Securities and Exchange Commission. We currently expect this registration statement to be declared effective by __________________________, 199__. A-1 EX-9.1 24 LETTER AGREEMENT OF WESTON PRESIDIO CAPITAL II 1 EXHIBIT 9.1 Weston Presidio Capital II, L.P. 40 William Street Suite 300 Wellesley, MA 02181 December 9, 1996 Marlin Capital, L.P. and the other Investors (as such term is defined herein) 555 Theodore Fremd Avenue Suite B-302 Rye, NY 10580 Dear Sirs: In consideration for the investment of $5,000,000 in Series A Redeemable Convertible Preferred Stock ("Series A Preferred Stock") of Accessories Associates, Inc. ("AAi") by Marlin Capital, L.P., First Global Investments Ltd., Ionic Holdings LDC, New Henley Overseas Investments, Oracle Investments Ltd., Brahman Partners II, L.P., B.Y. Partners, L.P., Quota Fund NV, Genesis Cap. Fund and Brahman Partners II Offshore Ltd. (collectively, the "Investors"), Weston Presidio Capital II, L.P. ("WPC") does hereby agree annually and any time a vote of Series A Preferred Stock is taken for the election of directors to (i) use best efforts to cause the nomination of and (ii) vote all of its shares of Series A Preferred Stock (including any and all securities with rights to elect directors of AAi issued upon conversion, exchange, recapitalization, stock split, dividend or other change of or with respect to the Series A Preferred) held and controlled by WPC for the election of Martin E. Franklin (or, in the event of his death or incapacity, the designee of Marlin Capital, L.P.) as a director of AAi, for so long as the Investors, in the aggregate, are the holders of no less than the lesser of (a) ten percent (10%) of the Series A Preferred Stock or (b) 4,750 shares of Series A Preferred Stock. WPC agrees not to take any action which would have the effect of limiting or otherwise reducing its ability to ensure the election of Martin Franklin (or Marlin's designee, as set forth above) as a director of AAi. Weston Presidio Capital II, L.P. By: /s/ Michael Cronin ------------------------------ Michael Cronin Title: General Partner EX-9.2 25 TAG-ALONG TRANSFER RESTRICTION & VOTING AGRMT 1 EXHIBIT 9.2 TAG-ALONG, TRANSFER RESTRICTION AND VOTING AGREEMENT This Agreement, dated as of May 31, 1996, is among Accessories Associates, Inc., a Rhode Island corporation (the "COMPANY"), Weston Presidio Capital II, L.P., and the other Investors listed in SCHEDULE A (collectively, and together with their permitted successors and assigns, the "INVESTORS"), and the other stockholders and stock option holders of the Company listed from time to time in SCHEDULE B. The parties agree as follows: 1. DEFINITIONS. Except as the context otherwise explicitly requires, (a) the capitalized term "Section" refers to sections of this Agreement, (b) the capitalized term "Exhibit" refers to exhibits to this Agreement, (c) references to a particular Section include all subsections thereof and (d) the word "including" shall be construed as "including without limitation". Accounting terms used in this Agreement and not otherwise defined herein shall have the meanings provided in GAAP. Certain capitalized terms are used in this Agreement as specifically defined in this Section 1 as follows: 1.1. "APPRAISED VALUE" means the per share value of Common Stock based on the fair market value of the Company as a going concern, without any discount for a minority stock position, as determined by written opinion of an investment banker selected as follows. Such investment banker shall be selected by the holders of a majority of the Tag-Along Shares from among three nominees submitted by the persons from whom the Restricted Stock is to be purchased, each of which shall be a recognized independent investment banking firm. The holders of a majority of the Tag-Along Shares shall give notice to the Selling Stockholder of their selection no later than 10 days after receipt of the proposed nominees. The fees and expenses of such investment banker shall be paid one half by the Company and one half by the Selling Stockholder. The investment banker shall deliver its written opinion to the Company and the Selling Stockholder no later than 30 days after its selection. 1.2. "COMMON STOCK" means the Company's Common Stock, $0.01 par value. 1.3. "COMPANY" is defined in the preamble. 1.4. "INVESTOR" is defined in the preamble. 1.5. "LIFE INSURANCE" is defined in Section 2.5. 1.6. "OUTSIDE OFFER" is defined in Section 2.1.1. 1.7. "PREFERRED STOCK" means the Company's Series A Redeemable Convertible Preferred Stock, par value $0.01 per share. 2 1.8. "PROPORTIONATE SHARE" means a fraction, the numerator of which is the number of shares of Common Stock (on an as converted basis) owned by the subject Investor and the denominator of which is the aggregate number of shares of Common Stock (on an as converted basis) owned by all Investors. 1.9. "PROPOSED BUYER" is defined in Section 3. 1.10. "PROPOSED SALE" is defined in Section 3.1. 1.11. "PURCHASE AGREEMENT" means the Securities Purchase Agreement dated as of May 31, 1996, as from time to time in effect, among the Company and the Investors. 1.12. "RESTRICTED SHARES" means all shares of any class of capital stock of the Company owned by any Restricted Stockholder, and all shares of capital stock issued with respect to, in exchange for or upon conversion of any such shares; PROVIDED, HOWEVER, that once any such shares shall have been sold in a sale which complies with Sections 2.1 or 2.2, they shall cease to be Restricted Shares. 1.13. "RESTRICTED STOCKHOLDERS" means all stockholders and option holders of the Company listed from time to time as Restricted Stockholders in Schedule B, all other persons who become party to this Agreement pursuant to Section 2.3, transferees pursuant to Section 2.2 and their permitted successors and assigns, but in no event including any Investor. 1.14. "RESTRICTED STOCK TRANSFEREE" is defined in Section 2.3. 1.15. "SELLING STOCKHOLDER" means a Restricted Stockholder selling Restricted Shares under Section 2 or 3. 1.16. "TAG-ALONG NOTICE" is defined in Section 3.1. 1.17. "TAG-ALONG SHARES" means all shares of any class of capital stock of the Company issued to the Investors, and all shares of capital stock issued with respect to, in exchange for or upon conversion of any such shares or upon conversion of the Preferred Stock or upon exercise of the Warrants; PROVIDED, HOWEVER, that once any such shares shall have been sold in a sale that complies with Section 3, they shall cease to be Tag-Along Shares. 1.18. "TRANSFER" means sell, assign, encumber, pledge, hypothecate, give away or dispose of or transfer in any other manner, whether voluntarily, involuntarily, by operation of law, pursuant to judicial process, divorce decree, property settlement, bankruptcy or otherwise. 1.19. "WARRANTS" means the Warrants issuable to the Investors pursuant to the Purchase Agreement in connection with the redemption of Preferred Stock. 2 3 2. TRANSFER RESTRICTIONS AND PURCHASE RIGHTS. 2.1. TRANSFERS OF RESTRICTED SHARES. The Restricted Stockholders will not Transfer Restricted Shares or allow the power to vote Restricted Shares to be exercised by anyone else (except through ordinary proxies, revocable at the option of such Restricted Stockholder) except that a Restricted Stockholder may (a) make a Transfer permitted by Sections 2.2, 2.3 or 2.5 or (b) make a sale on the following terms and in compliance with the tag-along rights provisions in Section 3: 2.1.1. OUTSIDE OFFER. The Selling Stockholder wishing to Transfer Restricted Shares shall prepare an offer (the "OUTSIDE OFFER") that sets forth the number of Restricted Shares proposed to be sold, the minimum purchase price, the proposed method of sale and the proposed purchaser or type of purchaser. 2.1.2. INVESTOR PURCHASE OFFER. The Selling Stockholder shall offer to sell the Restricted Shares described in the Outside Offer to the Investors pro rata according to their Proportionate Shares by delivering to each such Investor a copy of the Outside Offer and a written offer to sell to such Investors all of such Restricted Shares on the terms contained in the Outside Offer. If any Investors elect to purchase Restricted Shares, they shall purchase such shares in accordance with Section 2.4. 2.1.3. REMAINING SHARES. If, within 20 days after receipt by the Investors of the Outside Offer from the Selling Stockholder, the Investors do not elect to purchase all of such Restricted Shares, then the Selling Stockholder may Transfer any remaining Restricted Shares in accordance with the terms of the Outside Offer during the 90-day period immediately following the 20-day notice period referred to above in this Section 2.1.3, subject, however, to the tag-along rights provided in Section 3 in favor of each Investor who has notified the Selling Stockholder in writing within such 20-day notice period of its interest in exercising its tag-along rights with respect to any such sale. If such shares are not so purchased during such 90-day period, they shall again become subject to this Section 2.1. 2.2. TRANSFERS BY OPERATION OF LAW OR IN VIOLATION OF AGREEMENT. If a Restricted Stockholder is subject to a Transfer of Restricted Stock by any bankruptcy or insolvency law or proceeding, any divorce proceeding, or otherwise by operation of law or court order or decree (except as a result of death, in which case Section 2.3 shall apply), or if any Transfer of Restricted Stock is made or attempted contrary to this Agreement, or if an offer to sell Restricted Stock is not delivered to the Company and the Investors as and when required by this Agreement, the Company and the Investors shall have the right to purchase any or all of such shares of Restricted Stock from such Restricted Stockholder, such Restricted Stockholder's legal representative or such Restricted Stockholder's transferees at any time before or after the Transfer, at the Appraised Value. 3 4 2.3. CERTAIN PERMITTED TRANSFERS. 2.3.1. TRANSFERS TO IMMEDIATE FAMILY. Subject to Section 2.5, any Restricted Stockholder may transfer (including by gift, by will or by the laws of intestate succession) any of such Restricted Stockholder's Restricted Shares to members of such Restricted Stockholder's immediate family or to a trust for the benefit of members of such Restricted Stockholder's immediate family or to a trust controlled by such Restricted Stockholder (each of the foregoing persons being referred to as a "RESTRICTED STOCK TRANSFEREE") so long as (a) each Restricted Stock Transferee executes a counterpart of this Agreement as a Restricted Stockholder, (b) Restricted Shares are not held by more than 10 members (including trusts as members) of the same immediate family, and (c) for purposes of Section 2.2, all Restricted Shares owned by or for the benefit of a single immediate family shall be deemed owned at all times by the original Restricted Stockholder within each immediate family. 2.3.2. PUBLIC OFFERING. A Selling Stockholder may sell any Restricted Shares in a public offering registered under the federal Securities Act of 1933, as amended, or in a transaction permitted by Rule 144 thereunder, whereupon the shares shall no longer be Restricted Shares. 2.4. PURCHASES OF COMMON STOCK. 2.4.1. ELECTION BY COMPANY AND INVESTORS. In the event of purchases under Section 2.2, the Company shall have the right to determine whether to purchase any or all shares of Restricted Stock available for purchase by delivering written notice of the number of shares to be purchased to the Selling Stockholder and the Investors within 30 days after the Company's actual knowledge of when such right arises. The Selling Stockholder shall not vote as a director on the question whether the Company should purchase his or her Restricted Stock or any matter relating thereto, but for purposes of establishing a quorum he or she shall attend any directors meetings at which such question or matter is considered. Promptly after a determination by the Board of Directors of the Company not to purchase all such shares, the Company shall make the right to purchase any shares it does not purchase available to the Investors on the basis of their Proportionate Shares. Investors may purchase any remaining Restricted Stock not purchased by the Company and the other Investors pro rata based on the respective Proportionate Shares of Investors wishing to purchase additional shares, or as they may otherwise agree. 2.4.2. CLOSING ON STOCK SALES. The acceptance of any offer or exercise of any right to purchase hereunder shall be by notice given in accordance with Section 6.2 and shall specify a date of closing not earlier than 10 business days nor later than 15 business days after the receipt of such notice. At the closing, the purchaser shall pay the purchase price by certified or bank check drawn on immediately available funds and payable to the order of the Selling Stockholder. Certificates for the Restricted Shares to be purchased, duly endorsed or accompanied by duly executed stock powers, in each case with signatures guaranteed, shall be delivered at the closing by the seller. In addition, the purchaser may reasonably request 4 5 waivers of any tax liens and evidence of good title and authority of any representative before tendering payment. 2.5. SPECIAL PROVISIONS REGARDING PURCHASE OF SHARES OF A DECEASED RESTRICTED STOCKHOLDER. 2.5.1. LIFE INSURANCE. The Restricted Stockholders have transferred to the Company and the Company now owns and is the beneficiary of the life insurance policies on the lives of the Restricted Stockholders in the amount set forth on Schedule C (the "LIFE INSURANCE"). Effective as of the date hereof, the Restricted Stockholders in the Company terminated that certain Voting Trust and Certificate Holders Agreement dated as of April 30, 1992, as amended, and in connection therewith, the Restricted Stockholders transferred the Life Insurance to the Company. The Company shall pay, and is solely responsible for the payment of, all premiums with respect to the Life Insurance. The Company may not decrease the Life Insurance without the prior written consent of the affected Restricted Stockholder. 2.5.2. PURCHASE OF RESTRICTED SHARES HELD BY A RESTRICTED STOCKHOLDER UPON SUCH STOCKHOLDERS DEATH. Notwithstanding anything in this Agreement to the contrary, following the death of a Restricted Stockholder, the personal representative of such Restricted Stockholder and any Restricted Stock Transferee shall, within 30 days of the appointment of the personal representative, submit to the holders of a majority of the Tag-Along Shares a list of three nominees to determine Appraised Value. The list of nominees shall be determined by the holders of a majority of the Restricted Shares then owned by such personal representative and the Restricted Stock Transferees. Within 10 days of the receipt of the report of the appraiser, the personal representative and the Restricted Stock Transferees shall sell to the Company a number of Restricted Shares equal to the greater of the following: (a) If the proceeds of the Life Insurance equal or exceed the Appraised Value of the Restricted Shares owned by such personal representative and each such Restricted Stock Transferee, then all of the shares owned by such personal representative and the Restricted Stock Transferee shall be sold for an amount equal to the Appraised Value; or (b) If the proceeds of the Life Insurance are less than the Appraised Value of all of the Restricted Shares owned by such personal representative and each such Restricted Stock Transferee, then a number of shares equal to the ratio that the proceeds of the Life Insurance bear to the Appraised Value of all such shares to be allocated amongst the personal representative and each such Restricted Stock Transferee in a proportion that the number of shares owned by such person bears to the total number of 5 6 shares owned by such personal representative and each Restricted Stock Transferee. The closing of such sale shall be held at the principal offices of the Company at which time the personal representative and each Restricted Stock Transferee shall deliver the Restricted Shares duly endorsed or accompanied by duly executed stock powers, in each case with signatures guaranteed, free and clear of all liens and encumbrances. In addition, the Company may request waivers of any tax liens and evidence of good title and authority of any representative before tendering payment. The Company shall pay the purchase price by certified or bank check drawn on immediately available funds and payable to the order of each such personal representative and Restricted Stock Transferee. 3. TAG-ALONG RESTRICTIONS. A Restricted Stockholder may sell any Restricted Shares in accordance with Section 2.1 to any other Person (the "PROPOSED BUYER") only if the Investors who notified the Selling Stockholder of their interest in exercising tag-along rights as contemplated by Section 2.1.3 are offered the chance to participate in such sale in the manner and on the terms set forth in this Section 3. 3.1. OFFER. A notice (the "TAG-ALONG NOTICE") shall be delivered by the Selling Stockholder to each such Investor. The Tag-Along Notice shall include: (a) A copy of a bona fide offer from the Proposed Buyer, which shall set forth the complete terms of the proposed sale, including the number of Restricted Shares proposed to be purchased, the purchase price, the name and address of the Proposed Buyer and the other principal terms of the proposed transaction (the "PROPOSED SALE"); (b) An offer by the Selling Stockholder to include in the Proposed Sale to the Proposed Buyer, at the option of such Investors, that number of the Investors' Tag-Along Shares as is determined in accordance with Section 3.2, on the same terms and conditions as the Selling Stockholder shall sell the Restricted Shares; and (c) An agreement from the Proposed Buyer to purchase such number of the Investors' Tag-Along Shares as shall be includable in such Proposed Sale pursuant to Section 3.2. 3.2. TIME AND MANNER OF EXERCISE. If any of the Investors desires to accept the offer contained in the Tag-Along Notice, such Investor shall notify the Selling Stockholder in writing within 20 days after receipt of the Tag-Along Notice. If none of the Investors has so accepted such offer in writing, they shall be deemed to have waived all of their rights with respect to the Proposed Sale, and the Selling Stockholder shall thereafter be free to sell the Restricted Shares specified in the Tag-Along Notice pursuant to the Proposed Sale. Any acceptance by any Investor of the offer contained in the Tag-Along Notice shall be irrevocable except as hereinafter provided. Each Investor who has elected to participate in such Proposed Sale shall be entitled to sell in the Proposed Sale, on the same terms and conditions as the Selling Stockholder, such number of its Tag-Along Shares equal to the proportion (rounded to the nearest whole share) of 6 7 all shares to be included in the Proposed Sale equal to a fraction, the numerator of which is the total number of Tag-Along Shares of Investors who notified the Restricted Stockholder of their interest in exercising tag-along rights as contemplated by Section 2.1.3 (on an as converted basis) immediately before the Proposed Sale and the denominator of which is the sum of the total number of Restricted Shares to be sold pursuant to the Proposed Sale plus the total number of such Tag-Along Shares (on an as converted basis). 3.3. TIME AND MANNER OF CLOSING. Each of the Investors participating in any Proposed Sale shall take such actions and execute such documents and instruments as shall be reasonably necessary in order to consummate the Proposed Sale expeditiously on the same terms as the Selling Stockholder. If at the end of 180 days following the date on which the Tag-Along Notice was given the Selling Stockholder has not completed the Proposed Sale in accordance with the terms hereof, the Investors shall be released from their obligations hereunder. All costs and expenses incurred by the Selling Stockholder in connection with any sale, including without limitation all attorneys' fees and disbursements and any finders' or brokerage fees or commissions, shall be allocated pro rata among the Selling Stockholder and the Investors according to the number of shares sold by each. The portion of such costs and expenses allocable to each Investor shall be remitted to the Selling Stockholder at the Closing on notice thereof demonstrating reasonable supporting calculations. At the closing of any sale under this Section 3.3, each Investor shall deliver certificates representing the Tag-Along Shares to be sold by it, duly endorsed for transfer and (if requested in writing by the Proposed Buyer) with signature guaranteed, free and clear of all liens and encumbrances, and with any stock transfer tax stamps affixed, against delivery of the applicable purchase price. Any shares sold to the Proposed Buyer in accordance with this Section 3.3 shall no longer be subject to this Agreement. 4. VOTING AGREEMENT. Each party hereto agrees (a) to cause the Board of Directors to consist of seven directors until a Remedy Event (as defined in the Company's Certificate of Incorporation) occurs and thereafter to consist of the number of directors contemplated by such Certificate of Incorporation and (b) to vote all shares of the Company's capital stock owned by such party, as the case may be, (i) to refrain from violating the rights of the Investors as set forth in the Purchase Agreement and the Investor Agreements (each as defined in the Purchase Agreement) or the rights of the other Investors under the Warrants, (ii) to elect as directors two persons nominated by the Investors, and five directors nominated by the Restricted Stockholders and (iii) after a Remedy Event has occurred, to elect as additional directors of the Company such persons nominated by the Investors as is contemplated by the Certificate of Incorporation and to continue to vote for such persons (or any successors nominated by the Investors, as the case may be) as directors of the Company as is contemplated by the Certificate of Incorporation, provided that the foregoing clause (b) shall not prevent any party from voting on any other matter that may properly be taken up by the stockholders of the Company. 5. LEGEND. Each certificate evidencing Restricted Shares shall contain the following legend: THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN TRANSFER RESTRICTIONS AS SET FORTH IN A TAG-ALONG, TRANSFER RESTRICTION AND VOTING AGREEMENT 7 8 DATED AS OF MAY 31, 1996 A COPY OF WHICH IS ON FILE IN THE OFFICES OF THE CORPORATION AND WILL BE FURNISHED TO THE HOLDER HEREOF WITHOUT CHARGE UPON WRITTEN REQUEST 6. GENERAL. 6.1. REMEDIES. The parties shall have all remedies for breach of this Agreement available to them provided by law or equity. Without limiting the generality of the foregoing, in addition to all other rights and remedies available at law or in equity, the parties shall be entitled to obtain specific performance of the obligations of each party to this Agreement and immediate injunctive relief. In the event any action or proceeding is brought in equity to enforce the same, neither the Company nor any party will urge, as a defense, that an adequate remedy at law exists. 6.2. NOTICES. All notices or other communications required or permitted to be delivered hereunder shall be in writing and shall be delivered to each of the parties at their respective addresses as set forth in Schedules A or B. Any party to this Agreement may at any time change the address to which notice to such party shall be delivered by giving notice of such change to the other parties and such notice shall be deemed given when received by the other parties. Notices shall be deemed effectively given when personally delivered or sent to the recipient at the address set forth above by telex or a facsimile transmission, one business day after having been delivered to a receipted, nationally recognized courier, properly addressed or five business days after having been deposited into the United States mail, postage prepaid, PROVIDED, that any notice to any party outside of the United States shall be sent by telecopy and confirmed by overnight or two-day courier. 6.3. AMENDMENTS, WAIVER AND CONSENTS. Any provision in this Agreement to the contrary notwithstanding, changes in or additions to this Agreement may be made, and compliance with any covenant or provision herein set forth may be omitted or waived, if the Company (a) shall obtain consent thereto in writing from Investors holding an aggregate of at least a majority of the Tag-Along Shares, on an as converted basis and (b) shall, in each such case, deliver copies of such consent in writing to any parties who did not execute the same; PROVIDED, HOWEVER, that any such amendment or waiver adversely effecting the Restricted Stockholders in a manner distinct from the effect of such amendment or waiver on the Investors shall require the written consent of the Restricted Stockholders holding a majority of the Restricted Shares. 6.4. BINDING EFFECT; ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the personal representatives, successors and assigns of the respective parties hereto. The Company shall not have the right to assign its rights or obligations hereunder or any interest herein without obtaining the prior written consent of the Investors holding an aggregate of at least a majority of the Tag-Along Shares, on an as converted basis. The Restricted Stockholders and the Investors may assign or transfer their rights under this Agreement to the extent permitted herein and by the other agreements between the respective parties and the Company. 6.5. TERMINATION. This Agreement shall terminate on the first to occur of (a) the time immediately prior to the consummation of a Qualified Public Offering (as defined in the Certificate 8 9 of Designation for the Company's Preferred Stock issued to the Investors on or about the date hereof) or (b) when no shares of the Preferred Stock and no Warrants are outstanding, except as a result of the conversion, exchange or exercise of the Preferred Stock or Warrants. 6.6. SEVERABILITY. If any provision of this Agreement shall be found by any court of competent jurisdiction to be invalid or unenforceable, the parties waive such provision to the extent that it is found to be invalid or unenforceable. Such provision shall, to the maximum extent allowable by law, be modified by such court so that it becomes enforceable and, as modified, shall be enforced as any other provision hereof, all the other provisions hereof continuing in full force and effect. 6.7. HEADINGS. The headings contained in this Agreement are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. 6.8. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof and supersedes all prior and contemporaneous understandings, whether written or oral. 6.9. COUNTERPARTS. This Agreement may be executed in counterparts, all of which together shall constitute one and the same instrument. 6.10. CHOICE OF LAW. This Agreement shall be governed by and construed in accordance with the laws (other than the conflict of laws rules) of The Commonwealth of Massachusetts. The parties hereto have executed this Agreement under seal as of the date first above written. ACCESSORIES ASSOCIATES, INC. By /s/ Gerald F. Cerce -------------------------------- Title: Chairman WESTON PRESIDIO CAPITAL II, L.P. By: WESTON PRESIDIO CAPITAL MANAGEMENT II, L.P. By /s/ Michael F. Cronin -------------------------------- General Partner: 9 10 BANCBOSTON VENTURES, INC. By /s/ Charles Grant -------------------------------- Title: Vice President ST. PAUL FIRE AND MARINE INSURANCE COMPANY By /s/ Everett V. Cox -------------------------------- Title: Authorized Representative NATIONAL CITY CAPITAL CORPORATION By /s/ Carl E. Baldassarre -------------------------------- Title: Managing Director 10 11 SCHEDULE A TO TAG-ALONG, TRANSFER RESTRICTION AND VOTING AGREEMENT ---------------- Number of Preferred Number of Common Stock Shares Held Stock Shares Held Investors and Address on Date Hereof on Date Hereof - --------------------- ------------------- ----------------- Weston Presidio Capital II, L.P. 17,100 19,000 40 William Street - Suite 300 Wellesley, MA 02181 Telephone: (617) 237-4700 Telecopy: (617) 237-6270 BancBoston Ventures, Inc. 6,840 7,600 100 Federal Street - 31st Floor Boston, Massachusetts 02110 Telephone: (617) 434-2442 Telecopy: (617) 434-1153 St. Paul Fire and Marine 6,840 7,600 Insurance Company c/o St. Paul Venture Capital, Inc. 8500 Normandale Lake Blvd. Suite 1940 Bloomington, Minnesota 55437 Telephone: (612) 830-7474 Telecopy: (612) 830-7475 National City Capital Corporation 3,420 3,800 1965 E. 6th Street ------ ------ Suite 1010 Cleveland, OH 44114 Telephone: (216) 575-9482 Telecopy: (216) 575-9965 TOTAL: 34,200 38,000 11 12 SCHEDULE B TO TAG-ALONG TRANSFER RESTRICTION AND VOTING AGREEMENT ---------------- Restricted Stockholders Number of Common Stock and Address Shares Held on Date Hereof - ----------------------- -------------------------- John H. Flynn, Jr. 28,500 shares 52 Second Street Newport, RI 02840 Felix A. Porcaro, Jr. 171,000 shares 5 Lori Ellen Drive Lincoln, RI 02865 Robert V. Lallo 28,500 shares 132 Division Street East Greenwich, RI 02818 Gerald F. Cerce 342,000 shares 143 Meeting Street Providence, RI 02906 12 13 SCHEDULE C TO TAG-ALONG TRANSFER RESTRICTION AND VOTING AGREEMENT LIFE INSURANCE POLICIES INSURED POLICY NUMBER/AMOUNT - ------- -------------------- A. Gerald F. Cerce Fidelity Kemper/$8,820,000 143 Meeting Street #FL0419936 Providence, RI 02906 Mass Mutual/$4,380,000 #8828803 Fidelity Kemper/$3,000,000 #FL0430618 B. Felix Porcaro, Jr. Prudential/$3,000,000 5 Lori Ellen Drive #79658599 Lincoln, RI 02865 Mass Mutual/$2,190,000 #8828807 Pacific Mutual/$2,910,000 #1A2304136-0 C. Robert V. Lallo Fidelity Kemper/$735,000 132 Division Street #FL0419920 E. Greenwich, RI 01818 Mass Mutual/$365,000 #8828804 Fidelity Kemper/$250,000 #FL0430617 D. John H. Flynn, Jr. Fidelity Kemper/$735,000 52 Second Street #FL0419937 Newport, RI 02840 Mass Mutual/$365,000 #8828812 Fidelity Kemper/$250,000 #FL0430616 13 14 EXHIBIT 9.2 FIRST AMENDMENT TO TAG-ALONG, TRANSFER RESTRICTION AND VOTING RIGHTS AGREEMENT This First Amendment to Tag-Along, Transfer Restriction and Voting Agreement made and entered into as of this 11th day of December, 1996 by and between Accessories Associates, Inc., a Rhode Island corporation (the "Company"), Weston Presidio Capital II, L.P. and the other Investors executing this First Amendment (collectively, and together with their permitted successors and assigns the "Investors") and the other Stockholders and Stock Optionholders of the Company listed in Schedule B. RECITALS On May 31, 1996, the Company and Weston Presidio Capital II, L.P, BancBoston Ventures, Inc., St. Paul Fire and Marine Insurance Company and National City Corporation (the "Initial Investors") together with the persons listed in Schedule B attached hereto entered into a Tag-Along, Transfer Restriction and Voting Agreement (the "Agreement") granting to the Initial Investors certain tag-along rights and transfer restrictions. The Initial Investors have authorized the issuance of ninety-five hundred (9,500) additional shares of the Company's Series A Redeemable Convertible Preferred Stock, par value $0.01 per share (the "Shares"). The Company proposes to issue the ninety-five hundred (9,500) Shares in the amounts indicated to the persons listed hereto on Schedule C hereto (collectively referred to as the "Subsequent Investors"). As consideration in part for their purchase of the Shares, the Subsequent Investors have requested to become parties to the Tag-Along, Transfer Restriction and Voting Agreement. The Company, the Initial Investors and the persons listed on Schedule B are willing to do so. NOW THEREFORE, in consideration of the promises and agreements herein contained and for other good and valuable consideration, the receipt and sufficiency whereof is hereby acknowledged, it is agreed as follows: 1. Effective upon the execution of this Agreement, each Subsequent Investor shall become, and shall be, a party to the Agreement and the term "Investors" wherever set forth in the Agreement shall be deemed to include each of the Initial Investors and the Subsequent Investors. 2. Except as modified herein, the Agreement is hereby ratified, confirmed and approved. 15 IN WITNESS WHEREOF, the parties have executed this agreement as of the day and date first above written. ACCESSORIES ASSOCIATES, INC. By: /s/ Gerald F. Cerce --------------------------------------- INITIAL INVESTORS: WESTON PRESIDIO CAPITAL II, L.P. By: WESTON PRESIDIO CAPITAL MANAGEMENT II, L.P. General Partner By: /s/ Michael F. Cronin ---------------------------------- BANCBOSTON VENTURES, INC. By: /s/ Charles Grant --------------------------------------- ST. PAUL FIRE AND MARINE INSURANCE COMPANY By: /s/ Everett V. Cox --------------------------------------- NATIONAL CITY CAPITAL CORPORATION By: /s/ Carl E. Baldassarre --------------------------------------- 2 16 SUBSEQUENT INVESTORS: MARLIN CAPITAL, L.P. By: MARLIN HOLDINGS, INC., General Partner By: /s/ Ian Ashken ---------------------------- FIRST GLOBAL INVESTMENTS LIMITED By: /s/ Elizabeth LePoidevin --------------------------------- IONIC HOLDINGS L.D.C. By: /s/ Elizabeth LePoidevin --------------------------------- NEW HENLEY OVERSEAS INVESTMENTS, INC. By: /s/ Elias S. Zilkha --------------------------------- ORACLE INVESTMENTS AND HOLDINGS, LIMITED By: /s/ Elizabeth LePoidevin --------------------------------- BRAHMAN PARTNERS II, L.P. By: /s/ Peter A. Hochfelder --------------------------------- 3 17 B.Y. PARTNERS, L.P. By: /s/ Peter A. Hochfelder --------------------------------- QUASAR INTERNATIONAL PARTNERS CV By: /s/ Peter A. Hochfelder --------------------------------- BRAHMAN PARTNERS II OVERSHORE LTD. By: /s/ Peter A. Hochfelder --------------------------------- SCHEDULE B PERSONS /s/ Gerald F. Cerce ------------------------------------- Gerald F. Cerce /s/ John H. Flynn, Jr. ------------------------------------- John H. Flynn, Jr. /s/ Robert V. Lallo ------------------------------------- Robert V. Lallo /s/ Felix A. Poccaro ------------------------------------- Felix A. Poccaro /s/ Michael Aviles ------------------------------------- Michael Aviles 4 18 /s/ Duane M. DeSisto ---------------------------------- Duane M. DeSisto /s/ Thomas E. McCarthy ---------------------------------- Thomas E. McCarthy /s/ Daniel A. Triangolo ---------------------------------- Daniel A. Triangolo 5 19 SCHEDULE B Stockholders/Optionholders Number of Common Shares Address Held on Option Gerald F. Cerce 342,000 143 Meeting Street Providence, RI 02906 John H. Flynn 28,500 52 Second Street Newport, RI 02840 Robert V. Lallo 28,500 132 Division Street East Greenwich, RI 02818 Felix A. Poccaro, Jr. 171,000 5 Lori Ellen Drive Lincoln, RI 02865 Michael Aviles* 2,000 Duane M. DeSisto* 2,000 Thomas E. McCarthy* 2,000 Daniel A. Triangolo* 2,000 *Options Only 6 20 SCHEDULE C INVESTOR NO. OF SHARES - -------- ------------- Marlin Capital, L.P. P-5 4,750 c/o Marlin Capital Holdings, Inc. 555 Theodore Fremd Avenue Rye, New York 10580 New Henley Overseas Investments Corp. 237 53rd East Street Urbanizacion Obarrio P.O. Box 7284 Panama 5, Panama First Global Capital Holdings Limited 237 La Motte Chambers La Motte Street St. Heuer, Jersey Channel Islands JE11BJ Oracle Investments and Holdings Limited 237 La Motte Chambers La Motte Street St. Heuer, Jersey Channel Islands JE11BJ 7 21 INVESTORS NO. OF SHARES - --------- ------------- Ionic Holdings LDC 238 La Motte Chambers La Motte Street St. Heuer Jersey Channel Islands, JE11BJ Brahman Partners II, L.P. 1,672 c/o Brahman Capital Corp. 277 Park Avenue - 26th Floor New York, New York 10017 B.Y. Partners, L.P. 989 c/o Brahman Capital Corp. 277 Park Avenue - 26th Floor New York, New York 10017 Quota Fund N.V. 684 c/o Brahman Capital Corp. 277 Park Avenue - 26th Floor New York, New York 10017 Genisis Capital Fund L.P. 152 c/o Brahman Capital Corp. 277 Park Avenue - 26th Floor New York, New York 10017 Brahman Partners II Offshore Ltd. 304 c/o Brahman Capital Corp. 277 Park Avenue - 26th Floor New York, New York 10017 8 EX-10.1 26 2ND AMENDED & RESTATED FINANCING & SECURITY AGMT 1 Exhibit 10.1 ------------ SECOND AMENDED AND RESTATED FINANCING AND SECURITY AGREEMENT BY AND AMONG AAi.FOSTERGRANT, INC. AND NATIONSBANK, N.A., AGENT AND NATIONSBANK, N.A., AND OTHER LENDERS DATED: JULY 21, 1998 2 TABLE OF CONTENTS ARTICLE I DEFINITIONS 2 Section 1.1 Certain Defined Terms. 2 Section 1.2 Accounting Terms and Other Definitional Provisions. 29 ARTICLE II THE CREDIT FACILITIES 29 Section 2.1 The Revolving Credit Facility. 29 2.1.1 Revolving Credit Facility. 29 2.1.2 Procedure for Making Advances Under the Revolving Loan; Lender Protection Loans. 30 2.1.3 Borrowing Base. 31 2.1.4 Borrowing Base Report. 32 2.1.5 Revolving Credit Notes. 33 2.1.6 Mandatory Prepayments of Revolving Loan. 33 2.1.7 Optional Prepayments of Revolving Loan. 34 2.1.8 The Collateral Account. 34 2.1.9 Revolving Loan Account. 35 2.1.10 Revolving Credit Unused Line Fee. 35 2.1.11 Early Termination Fee. 36 2.1.12 Required Availability under the Revolving Credit Facility. 36 Section 2.2 The Letter of Credit Facility. 37 2.2.1 Letters of Credit. 37 2.2.2 Letter of Credit Fees. 37 2.2.3 Terms of Letters of Credit. 37 2.2.4 Procedure for Letters of Credit. 38 2.2.5 Participations in the Letters of Credit. 38 2.2.6 Payments by the Lenders to the Agent. 38 Section 2.3 Interest. 39 2.3.1 Applicable Interest Rates. 39 2.3.2 Selection of Interest Rates. 40 2.3.3 Inability to Determine LIBOR Base Rate. 42 2.3.4 Indemnity. 42 2.3.5 Payment of Interest. 43 Section 2.4 General Financing Provisions. 44 2.4.1 Communications and Inter-Company Advances. 44 2.4.2 Use of Proceeds of the Loan. 44 2.4.3 Field Examination Fees. 44 2.4.4 Computation of Interest and Fees. 45 2.4.5 Payments. 45 2.4.6 Liens; Setoff. 45 2.4.7 Requirements of Law. 46 2.4.8 Funds Transfer Services. 46 2.4.9 Guaranty. 47 3 2.4.10 No Novation. 50 Section 2.5 Settlement Among Lenders. 51 2.5.1 Revolving Loan. 51 2.5.2 Settlement Procedures as to Revolving Loan. 51 2.5.3 Settlement of Other Obligations. 53 2.5.4 Presumption of Payment. 54 ARTICLE III THE COLLATERAL 55 Section 3.1 Debt and Obligations Secured. 55 Section 3.2 Grant of Liens. 55 Section 3.3 Collateral Disclosure List. 55 Section 3.4 Inventory and Receivables. 56 3.4.1 Chattel Paper, Promissory Notes, etc. 56 3.4.2 Trademarks. 56 Section 3.5 Record Searches. 57 Section 3.6 Costs. 57 Section 3.7 Release. 57 Section 3.8 Inconsistent Provisions. 58 ARTICLE IV REPRESENTATIONS AND WARRANTIES 58 Section 4.1 Representations and Warranties. 58 4.1.1 Ownership Interests. 58 4.1.2 Good Standing. 58 4.1.3 Power and Authority. 58 4.1.4 Binding Agreements. 59 4.1.5 No Conflicts. 59 4.1.6 No Defaults, Violations. 59 4.1.7 Compliance with Laws. 59 4.1.8 Margin Stock. 60 4.1.9 Investment Company Act; Margin Securities. 60 4.1.10 Litigation. 60 4.1.11 Financial Condition. 60 4.1.12 Full Disclosure. 61 4.1.13 Indebtedness for Borrowed Money. 61 4.1.14 Taxes. 61 4.1.15 ERISA. 62 4.1.16 Title to Properties. 62 4.1.17 Patents, Trademarks, Etc. 62 4.1.18 Employee Relations. 62 4.1.19 Presence of Hazardous Materials or Hazardous Materials Contamination. 63 ii 4 4.1.20 Perfection and Priority of Collateral. 63 4.1.21 Places of Business and Location of Collateral. 63 4.1.22 Business Names and Addresses. 64 4.1.23 Inventory. 64 4.1.24 Accounts. 64 4.1.25 Compliance with Eligibility Standards. 64 4.1.26 Original Financing Agreement. 65 4.1.27 Year 2000. 65 Section 4.2 Survival; Updates of Representations and Warranties. 65 ARTICLE V CONDITIONS PRECEDENT 65 Section 5.1 Conditions to the Initial Advance and Initial Letter of Credit. 65 5.1.1 Organizational Documents - Borrower, Foster Grant and Fantasma. 66 5.1.2 Opinion of Obligors' Counsel. 67 5.1.3 Organizational Documents - Corporate Guarantors. 67 5.1.4 Consents, Licenses, Approvals, Etc. 68 5.1.5 Notes. 68 5.1.6 Financing Documents and Collateral. 68 5.1.7 Other Financing Documents. 69 5.1.8 Other Documents, Etc. 69 5.1.9 Payment of Fees. 69 5.1.10 Collateral Disclosure List. 69 5.1.11 Recordings and Filings. 69 5.1.12 Insurance Certificate. 69 5.1.13 Landlord's Waivers. 69 5.1.14 Bailee Acknowledgements. 70 5.1.15 Field Examination. 70 5.1.16 Credit Insurance. 70 5.1.17 Senior Notes. 70 Section 5.2 Conditions to all Extensions of Credit. 70 5.2.1 Compliance. 70 5.2.2 Borrowing Base. 70 5.2.3 Default. 71 5.2.4 Representations and Warranties. 71 5.2.5 Material Adverse Change. 71 5.2.6 Legal Matters. 71 ARTICLE VI COVENANTS OF THE BORROWER 71 Section 6.1 Affirmative Covenants. 71 6.1.1 Financial Statements. 71 6.1.2 Recordkeeping, Rights of Inspection, Field Examination, Etc. 73 6.1.3 Existence. 74 6.1.4 Compliance with Laws. 74 6.1.5 Preservation of Properties. 75 6.1.6 Line of Business. 75 6.1.7 Insurance. 75 6.1.8 Taxes. 75 iii 5 6.1.9 ERISA. 76 6.1.10 Notification of Events of Default and Adverse Developments. 76 6.1.11 Hazardous Materials; Contamination. 77 6.1.12 Disclosure of Significant Transactions. 78 6.1.13 Financial Covenants. 78 6.1.14 Collection of Receivables. 79 6.1.15 Assignments of Receivables. 80 6.1.16 Government Accounts. 80 6.1.17 Inventory. 81 6.1.18 Insurance With Respect to and Inventory. 81 6.1.19 Credit Insurance. 82 6.1.20 Maintenance of the Collateral. 82 6.1.21 Defense of Title and Further Assurances. 82 6.1.22 Business Names; Locations. 83 6.1.23 Subsequent Opinion of Counsel as to Recording Requirements. 83 6.1.24 Use of Premises and Equipment. 83 6.1.25 Protection of Collateral. 84 Section 6.2 Negative Covenants. 84 6.2.1 Capital Structure, Merger, Acquisition or Sale of Assets. 84 6.2.2 Subsidiaries. 85 6.2.3 Issuance of Stock. 85 6.2.4 Purchase or Redemption of Securities, Distribution Restrictions; Payment of Indebtedness for Borrowed Money. 85 6.2.5 Indebtedness. 86 6.2.6 Investments, Loans and Other Transactions. 86 6.2.7 Capital Expenditures. 87 6.2.8 Subordinated Indebtedness. 88 6.2.9 Liens. 88 6.2.10 Transactions with Affiliates. 88 6.2.11 Other Businesses. 89 6.2.12 ERISA Compliance. 89 6.2.13 Prohibition on Hazardous Materials. 89 6.2.14 Method of Accounting; Fiscal Year. 89 6.2.15 Compensation. 90 6.2.16 Transfer of Collateral. 90 6.2.17 Sale and Leaseback. 90 6.2.18 Disposition of Collateral. 90 ARTICLE VII DEFAULT AND RIGHTS AND REMEDIES 90 Section 7.1 Events of Default. 90 7.1.1 Failure to Pay. 91 7.1.2 Breach of Representations and Warranties. 91 7.1.3 Failure to Comply with Covenants. 91 7.1.4 Default Under Other Financing Documents or Obligations. 91 7.1.5 Receiver; Bankruptcy. 91 7.1.6 Involuntary Bankruptcy, etc. 92 7.1.7 Judgment. 92 7.1.8 Execution; Attachment. 92 7.1.9 Default Under Other Borrowings. 92 7.1.10 Challenge to Agreements. 92 iv 6 7.1.11 Change in Ownership. 93 7.1.12 Liquidation, Termination, Dissolution, Change in Management, etc. 93 Section 7.2 Remedies. 93 7.2.1 Acceleration. 93 7.2.2 Further Advances. 93 7.2.3 Uniform Commercial Code. 94 7.2.4 Specific Rights With Regard to Collateral. 94 7.2.5 Application of Proceeds. 95 7.2.6 Performance by Agent. 96 7.2.7 Other Remedies. 96 Section 7.3 Consent. 96 ARTICLE VIII THE AGENT 97 Section 8.1 Appointment. 97 Section 8.2 Nature of Duties. 97 8.2.1 In General. 97 8.2.2 Express Authorization. 97 Section 8.3 Rights, Exculpation, Etc. 98 Section 8.4 Reliance. 99 Section 8.5 Indemnification. 99 Section 8.6 NationsBank Individually. 100 Section 8.7 Successor Agent. 100 8.7.1 Resignation. 100 8.7.2 Appointment of Successor. 100 8.7.3 Successor Agent. 100 Section 8.8 Collateral Matters. 101 8.8.1 Release of Collateral. 101 8.8.2 Confirmation of Authority, Execution of Releases. 101 8.8.3 Absence of Duty. 102 Section 8.9 Agency for Perfection. 102 Section 8.10 Exercise of Remedies. 102 Section 8.11 Consents. 102 Section 8.12 Circumstances Where Consent of all of the Lenders is Required. 103 Section 8.13 Dissemination of Information. 104 v 7 Section 8.14 Discretionary Advances. 104 ARTICLE IX MISCELLANEOUS 104 Section 9.1 Notices. 104 Section 9.2 Amendments; Waivers. 105 Section 9.3 Cumulative Remedies. 106 Section 9.4 Severability. 107 Section 9.5 Assignments by Lenders. 107 Section 9.6 Participations by Lenders. 108 Section 9.7 Disclosure of Information by Lenders. 108 Section 9.8 Successors and Assigns. 108 Section 9.9 Continuing Agreements. 109 Section 9.10 Enforcement Costs. 109 Section 9.11 Applicable Law; Jurisdiction. 109 9.11.1 Applicable Law. 109 9.11.2 Submission to Jurisdiction. 109 9.11.3 Appointment of Agent for Service of Process. 110 9.11.4 Consent to Service of Process. 110 Section 9.12 Duplicate Originals and Counterparts. 110 Section 9.13 Headings. 110 Section 9.14 No Agency. 111 Section 9.15 Date of Payment. 111 Section 9.16 Entire Agreement. 111 Section 9.17 Waiver of Trial by Jury. 111 Section 9.18 Liability of the Agent and the Lenders. 111 vi 8 SECOND AMENDED AND RESTATED FINANCING AND SECURITY AGREEMENT THIS SECOND AMENDED AND RESTATED FINANCING AND SECURITY AGREEMENT (this "Agreement") is made as of the 21st day of July, 1998, by and among AAi.FOSTERGRANT, INC. (formerly known as Accessories Associates, Inc.), a corporation organized and existing under the laws of the State of Rhode Island ("the Borrower"); FOSTER GRANT GROUP, L.P., a limited partnership organized under the laws of the State of Delaware ("Foster Grant") and FANTASMA, LLC, a limited liability company organized under the laws of the State of Delaware ("Fantasma"); F.G.G. INVESTMENTS, INC., a corporation organized and existing under the laws of the State of Delaware, THE BONNEAU COMPANY, a corporation organized and existing under the laws of the State of Texas, BONNEAU HOLDINGS, INC., a corporation organized and existing under the laws of the State of Delaware, BONNEAU GENERAL, INC., a corporation organized and existing under the laws of the State of Delaware, FOSTER GRANT HOLDINGS, INC., a corporation organized and existing under the laws of the State of Delaware, and O-RAY HOLDINGS, INC., a corporation organized and existing under the laws of the State of Delaware (the "Corporate Guarantors"): NATIONSBANK, N.A., a national banking association ("NationsBank") and each other financial institution which is a party to this Agreement, whether by execution of this Agreement or otherwise (collectively, the "Lenders" and individually, a "Lender"); and NATIONSBANK, N.A., a national banking association, in its capacity as both collateral and administrative agent for each of the Lenders (the "Agent"). RECITALS A. The Borrower, together with certain other related entities, the Agent and NationsBank (as sole Lender) entered into an Amended and Restated Financing and Security Agreement dated May 9, 1997 (the same, as amended by First Amendment to Amended and Restated Financing and Security Agreement dated March 4, 1998, the "Original Financing Agreement"). The Original Financing Agreement provides for some of the agreements between the Borrower and the other related entities party thereto and the Lenders with respect to the "Credit Facilities" (as that term is defined in the Original Financing Agreement), including the Revolving Credit Facility (as that term is defined in the Original Financing Agreement) in an amount not to exceed $60,000,000 and the Letter of Credit Facility which is part of the Revolving Credit Facility. B. In connection with the sale of senior debt by the Borrower, the Obligors (as hereinafter defined) have requested that the Lenders agree to recast the Credit Facilities to consist of a revolving credit facility in the maximum principal amount of $60,000,000, including a letter 9 of credit facility in the amount of $3,000,000 to be used by the Borrower for the Permitted Uses described in this Agreement and guaranteed by the Guarantors. C. The Lenders are willing to make the recast credit facilities available to the Borrower upon the terms and subject to the conditions set forth in this Agreement. AGREEMENTS NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, receipt of which is hereby acknowledged, the Agent, the Borrower, Foster Grant or Fantasma and the Lenders agree as follows: ARTICLE I DEFINITIONS Section 1.1 CERTAIN DEFINED TERMS. As used in this Agreement, the terms defined in the Preamble and Recitals hereto shall have the respective meanings specified therein, and the following terms shall have the following meanings: "Account" individually and "Accounts" collectively mean all presently existing or hereafter acquired or created accounts, accounts receivable, contract rights, notes, drafts, instruments, acceptances, Chattel Paper, leases and writings evidencing a monetary obligation or a security interest in, or a lease of, goods, all rights to receive the payment of money or other consideration under present or future contracts (including, without limitation, all rights to receive payments under presently existing or hereafter acquired or created letters of credit), or by virtue of merchandise sold or leased, services rendered, loans and advances made or other considerations given, by or set forth in or arising out of any present or future chattel paper, note, draft, lease, acceptance, writing, bond, insurance policy, instrument, document or general intangible, and all extensions and renewals of any thereof, all rights under or arising out of present or future contracts, agreements or general interest in merchandise which gave rise to any or all of the foregoing, including all goods, all claims or causes of action now existing or hereafter arising in connection with or under any agreement or document or by operation of law or otherwise, all collateral security of any kind (including, without limitation, real property mortgages and deeds of trust) and letters of credit given by any Person with respect to any of the foregoing, all books and records in whatever media (paper, electronic or otherwise) recorded or stored, with respect to any or all of the foregoing and all rights of access to all equipment and general intangibles necessary or beneficial to retain, access and/or process the information contained in those books and records, and all proceeds (cash and non-cash) of the foregoing. "Account Debtor" means any Person who is obligated on a Receivable and "Account Debtors" mean all Persons who are obligated on the Receivables. "Additional Obligor" means any Person (a) that becomes a Subsidiary of the Borrower in connection with a Permitted Acquisition and has executed and delivered an Additional Obligor 2 10 Joinder Supplement and (b) any other Person that has executed and delivered an Additional Obligor Joinder Supplement that has been accepted and approved by the Agent. "Additional Obligor Joinder Supplement" means an Additional Obligor Joinder Supplement in substantially the form attached hereto as EXHIBIT "D", with the blanks appropriately completed and executed and delivered by the Additional Obligor and accepted by the Borrower. "Affiliate" means, with respect to any designated Person, any other Person, (a) directly or indirectly controlling, directly or indirectly controlled by, or under direct or indirect common control with the Person designated, (b) directly or indirectly owning or holding five percent (5%) or more of any equity interest in such designated Person, or (c) five percent (5%) or more of whose stock or other equity interest is directly or indirectly owned or held by such designated Person. For purposes of this definition, the term "control" (including with correlative meanings, the terms "controlling", "controlled by" and "under common control with") means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of voting securities or other equity interests or by contract or otherwise. "Agent" means the Person defined as the "Agent" in the preamble of this Agreement and shall also include any successor Agent appointed pursuant to Section 8.7 (Successor Agent). "Agent's Obligations" shall mean any and all Obligations payable solely to and for the exclusive benefit of the Agent by any or all of the Borrower, Foster Grant and Fantasma under the terms of this Agreement and/or any of the other Financing Documents, including, without limitation, any and all Field Examination Fees. "Agreement" means this Second Amended and Restated Financing and Security Agreement (which amends and restates the Original Financing Agreement), as amended, restated, supplemented or otherwise modified in writing in accordance with the provisions of Section 9.2 (Amendments; Waivers). "AAi Group" means collectively each of the Borrower, AAi Company of Canada, AAi Foster Grant Limited and Fantasma and each of the Foster Group, and their respective successors and assigns. "Applicable Interest Rate" means (a) the LIBOR Rate, or (b) the Base Rate, as the case may be. "Applicable Margin" means the applicable rate per annum to be added to the LIBOR Base Rate or the Prime Rate, as set forth in Section 2.3.1 (Applicable Interest Rates). "Asset Disposition" means the disposition of any or all of the Assets of any of the Borrower, Foster Grant or Fantasma, whether by sale, lease, transfer or other disposition (including any such disposition effected by way of merger or consolidation) other than Permitted Asset Dispositions. 3 11 "Assets" means at any date all assets that, in accordance with GAAP consistently applied, should be classified as assets on a consolidated balance sheet of the Borrower and its Subsidiaries. "Assignee" means any Person to which any Lender assigns all or any portion of its interests under this Agreement, any Commitment, and any Loan, in accordance with the provisions of Section 9.5 (Assignments by Lenders), together with any and all successors and assigns of such Person; "Assignees" means the collective reference to all Assignees. "Assignment of Credit Insurance" means (a) that certain assignment of credit insurance as collateral dated May 9, 1997 (and as amended, restated, reissued, supplemented or otherwise modified in writing at any time and from time to time) from the Borrower to the Agent for the benefit of the Lenders ratably and the Agent, which assignment of credit insurance assigns to the Agent all of the right, title and interest of the Borrower in, and to, that certain Accounts Servicing and Purchase Agreement dated November 27, 1995 (as amended, restated, reissued, supplemented or otherwise modified in writing at any time and from time to time) between the Borrower and Congress Talcott Corporation (b) that certain assignment of credit insurance as collateral dated May 9, 1997 (and as amended, restated, reissued, supplemented or otherwise modified in writing at any time and from time to time) from Foster Grant to the Agent for the benefit of the Lenders ratably and the Agent, which assignment of credit insurance assigns to the Agent all of the right, title and interest of Foster Grant in, and to, that certain Accounts Servicing and Purchase Agreement dated November 27, 1995 (as amended, restated, reissued, supplemented or otherwise modified in writing at any time and from time to time) between Foster Grant and Congress Talcott Corporation and (c) any subsequent assignment of credit insurance as collateral executed by Fantasma (and as amended, restated, reissued, supplemented or otherwise modified in writing at any time and from time to time) from Fantasma to the Agent for the benefit of the Lenders ratably and the Agent, which assignment of credit insurance shall assign to the Agent all of the right, title and interest of Fantasma in, and to, any Accounts Servicing and Purchase Agreement (as amended, restated, reissued, supplemented or otherwise modified in writing at any time and from time to time). "Assignment of Trademarks" means that certain collateral assignment of trademarks as security dated as of the Original Closing Date from BEC and Foster Grant to the Agent for the benefit of the Lenders ratably and the Agent, as amended, restated, supplemented or otherwise modified in writing at any time and from time to time, including, but not limited to, an amendment of even date herewith limiting the Agent's rights thereunder to non-exclusive use of the trademarks in the disposition of the Inventory to which such trademarks are attached. "Assignment of Trademarks (Borrower)" means that certain collateral assignment of trademarks as security dated May 9, 1997 from Borrower to the Agent for the benefit of the Lenders ratably and the Agent, as amended, restated, supplemented or otherwise modified in writing at any time and from time to time, including, but not limited to, an amendment of even date herewith limiting the Agent's rights thereunder to non-exclusive use of the trademarks in the disposition of the Inventory to which such trademarks are attached. "Bankruptcy Code" means the United States Bankruptcy Code, as amended from time to time, and any successor Laws. 4 12 "Base Rate" means the sum of (a) the Prime Rate, plus (b) the Applicable Margin. "Base Rate Loan" means any Loan for which interest is to be computed with reference to the Base Rate. "BEC" means F.G.G. Investments, Inc., a corporation organized and existing under the laws of the State of Delaware formerly known as "BEC Distribution, Inc.", and its successors and assigns. "BEC Licensing Agreements" means all of the licensing agreements by and between Foster Grant, as licensee, and BEC, as licensor, pursuant to which BEC grants to Foster Grant a non-exclusive license to use certain Trademarks owned by BEC and necessary or desirable for the successful operation of Foster Grant's business, all as amended, restated, supplemented or otherwise modified. "Bonneau Company" means The Bonneau Company, a corporation organized and existing under the laws of the State of Texas, and its successors and assigns. "Bonneau General" means Bonneau General, Inc., a corporation organized and existing under the laws of the State of Delaware, and its successors and assigns. "Bonneau Holdings" means Bonneau Holdings, Inc., a corporation organized and existing under the laws of the State of Delaware, and its successors and assigns. "Borrowing Base" has the meaning described in Section Borrowing Base. (Borrowing Base). "Borrowing Base Deficiency" has the meaning described in Section 2.1.3 (Borrowing Base). "Borrowing Base Report" has the meaning described in Section 2.1.4 (Borrowing Base Report). "Business Day" means any day other than a Saturday, Sunday or other day on which (a) in the case of NationsBank (as Agent and Lender), commercial banks in the State are authorized or required to close and (b) in the case of the Lenders other than NationsBank, those Lenders are open for the transaction of business at the addresses stated after their names on the signature pages of this Agreement. "Buybacks" means collective reference to displays, racks, trade fixtures and inventory which a Secured Debtor, in the ordinary course of its business, purchases from a customer as an inducement to the customer to discontinue the sale of the inventory purchased. "Capital Expenditure" means an expenditure (whether payable in cash or other property or accrued as a liability) for Fixed or Capital Assets, including, without limitation, the entering into of a Capital Lease. 5 13 "Capital Lease" means with respect to any Person any lease of real or personal property, for which the related Lease Obligations have been or should be, in accordance with GAAP consistently applied, capitalized on the balance sheet of that Person. "Cash Equivalents" means (a) securities with maturities of one year or less from the date of acquisition issued or fully guaranteed or insured by the United States Government or any agency thereof, (b) certificates of deposit with maturities of one (1) year or less from the date of acquisition of, or money market accounts maintained with, the Agent, any Affiliate of the Agent, or any other domestic commercial bank having capital and surplus in excess of One Hundred Million Dollars ($100,000,000.00) or such other domestic financial institutions or domestic brokerage houses to the extent disclosed to, and approved by, the Agent and (c) commercial paper of a domestic issuer rated at least either A-1 by Standard & Poor's Corporation (or its successor) or P-1 by Moody's Investors Service, Inc. (or its successor) with maturities of six (6) months or less from the date of acquisition. "Chattel Paper" means a writing or writings which evidence both a monetary obligation and a security interest in or lease of specific goods; any returned, rejected or repossessed goods covered by any such writing or writings and all proceeds (in any form including, without limitation, accounts, contract rights, documents, chattel paper, instruments and general intangibles) of such returned, rejected or repossessed goods; and all proceeds (cash and non-cash) of the foregoing. "Closing Date" means the Business Day, in any event not later than July __, 1998, on which the Agent shall be satisfied that the conditions precedent set forth in Section 5.1 (Conditions to Initial Advance) have been fulfilled or otherwise waived by the Agent. "Collateral" means all property of each and every Secured Debtor subject from time to time to the Liens of this Agreement, any of the Security Documents and/or any of the other Financing Documents, together with any and all cash and non-cash proceeds and products thereof. "Collateral Account" has the meaning described in Section 2.1.8 (The Collateral Account). "Collateral Disclosure List" has the meaning described in Section 3.3 (Collateral Disclosure List). "Collection" means each check, draft, cash, money, instrument, item, and other remittance in payment or on account of payment of the Accounts or otherwise with respect to any Collateral, including, without limitation, cash proceeds of any returned, rejected or repossessed goods, the sale or lease of which gave rise to an Account, and other proceeds of Collateral; and "Collections" means the collective reference to all of the foregoing. "Commitment" means with respect to each Lender, such Lender's Revolving Credit Commitment or Letter of Credit Commitment, as the case may be, and "Commitments" means the collective reference to the Revolving Credit Commitments and the Letter of Credit Commitments of all of the Lenders. 6 14 "Committed Amount" means with respect to each Lender, such Lender's Revolving Loan Committed Amount or Letter of Credit Committed Amount, as the case may be, and "Committed Amounts" means collectively the Revolving Loan Committed Amount and the Letter of Credit Committed Amount of each of the Lenders. "Compliance Certificate" means a periodic Compliance Certificate described in Section 6.1.1 (Financial Statements). "Commonly Controlled Entity" means an entity, whether or not incorporated, which is under common control with any Obligor within the meaning of Section 414(b) or (c) of the Internal Revenue Code. "Consolidated Net Income" means, for any period, the net income (or net loss) of the Borrower and its Subsidiaries for such period, after all expenses, taxes and other proper charges, determined in accordance with GAAP and after eliminating (a) all intercompany items, (b) all earnings attributable to equity interests in Persons other than Subsidiaries unless actually received by the Borrower or its Subsidiaries, (c) all income arising from the forgiveness, adjustment or negotiated settlement of any Indebtedness, (d) any extraordinary items of income or expense (including any one-time charges or write-offs associated with the discontinuance of operations at the Texas Property) and (e) any increase or decrease of income arising from any change in the method of accounting for any item from that employed in the preparation of the financial statements. "Copyrights" means and includes, in each case whether now existing or hereafter arising, all of each of the Borrower's, Foster Grant's and Fantasma's rights, title and interest in and to (a) all copyrights, rights and interests in copyrights, works protectable by copyright, copyright registrations, copyright applications, and all renewals of any of the foregoing and (b) all rights corresponding to any of the foregoing throughout the world. "Corporate Guarantor" means BEC, Bonneau Company, Bonneau Holdings, Bonneau General, Foster Holdings and O-Ray Holdings, as the case may be and each of their respective successors and assigns, and "Corporate Guarantors" means BEC, Bonneau Company, Bonneau Holdings, Bonneau General, Foster Holdings and O-Ray Holdings and each of their respective successors and assigns. "Corporate Guaranty" means that certain guaranty of payment dated as of the Original Closing for the benefit of the Lenders ratably and the Agent to the Agent, as agent, from the Corporate Guarantors, as the same may from time to time be amended, restated, supplemented or otherwise modified. "Credit Facility" means with respect to each Lender, such Lender's Pro Rata Share of the Revolving Credit Facility or the Letter of Credit Facility, as the case may be, and "Credit Facilities" means collectively the Revolving Credit Facility and Letter of Credit Facility of each of the Lenders and any and all other credit facilities now or hereafter extended under or secured by this Agreement. 7 15 "Default" means an event that, with the giving of notice or lapse of time, or both, would constitute an Event of Default under the provisions of this Agreement. "Early Termination Fee" has the meaning described in Section 2.1.11 (Early Termination Fee). "EBITDA" means for any period, the Consolidated Net Income of the Borrower and its Subsidiaries for such period after all expenses except depreciation, interest, amortization and taxes. "Eligible Inventory" means all of the Secured Debtors' Inventory held for sale in the ordinary course of business, valued at the lowest of (i) net acquisition cost (exclusive of purchase accounting) or (ii) any ceiling prices which may be established by any Law of any Governmental Authority, EXCLUDING, however, any Inventory which consists of: (a) any goods located outside of the United States except for goods in transit subject to negotiable bills of lading which have been delivered and negotiated to the Agent, (b) any goods located outside of a state, in which the Agent has properly and unavoidably perfected the security interests of the Agent and the Lenders by filing in that state, free and clear of all other Liens, (c) any goods not in the actual possession of a Secured Debtor, except to the extent provided in subsection (a) above or (d) below, (d) any goods in the possession of a bailee, warehouseman, consignee or similar third party, except to the extent that such bailee, warehouseman, consignee or similar third party has entered into an agreement with the Agent in which such bailee, warehouseman, consignee or similar third party consents and agrees to the Lien of the Agent and the Lenders on such goods and to such other terms and conditions as may be reasonably required by the Agent, (e) any goods located on premises leased or rented to a Secured Debtor or otherwise not owned by a Secured Debtor, unless, the Agent has received a waiver and consent from the lessor, landlord and/or owner, in form and substance reasonably satisfactory to the Agent and from any mortgagee of such lessor, landlord or owner to the extent required by the Agent, (f) any goods the sale or other disposition of which has given rise to a Receivable, (g) any goods which fail to meet in any material respect all standards and requirements imposed by any Governmental Authority over such goods, their production, storage, use or sale, 8 16 (h) Buybacks, work-in-process (other than finished goods which are not carded or packaged and for which the Agent has received any information requested), supplies, displays, packaging and promotional materials, and (i) any goods which the Agent in the good faith exercise of its sole and absolute discretion has deemed to be ineligible because the Agent otherwise considers the collateral value to the Agent and the Lenders to be impaired or its or their ability to realize such value to be insecure. In the event of any dispute under the foregoing criteria, as to whether goods are, or have ceased to be, Eligible Inventory, the decision of the Agent in the good faith exercise of its sole and absolute discretion shall control. "Eligible Receivable" and "Eligible Receivables" mean, at any time of determination thereof, the unpaid portion of each account receivable in United States Dollars of each of the Borrower, Foster Grant and Fantasma, provided each account receivable conforms and continues to conform to the following criteria to the satisfaction of the Agent: (a) the account arose in the ordinary course of business of a Secured Debtor from a bona fide outright sale of goods by a Secured Debtor or from services performed by a Secured Debtor; (b) the account is a valid, legally enforceable obligation of the Account Debtor and requires no further act on the part of any Person under any circumstances to make the account payable by the Account Debtor; (c) the account is based upon an enforceable order or contract, written or oral, for goods shipped or for services performed, and the same were shipped or performed in accordance with such order or contract; (d) if the account arises from the sale of goods, the goods the sale of which gave rise to the account have been shipped or delivered to the Account Debtor on an absolute sale basis (except for the effect of seasonal accounts and returns, to the extent the same arise in the ordinary course of business) and not on a bill and hold sale basis, a consignment sale basis, a guaranteed sale basis, or on the basis of any other similar understanding; (e) if the account arises from the performance of services, such services have been fully rendered and do not relate to any warranty claim or obligation; (f) the account is evidenced by an invoice or other documentation in form reasonably acceptable to the Agent, dated no later than the date of shipment or performance and containing only terms normally offered by a Secured Debtor; 9 17 (g) the amount shown on the books of any Secured Debtor and on any invoice, certificate, schedule or statement delivered to the Agent is owing to the Secured Debtor, as applicable, and no partial payment has been received unless reflected with that delivery; (h) meets the requirements of either (i) the account is covered by the credit insurance acceptable to the Agent and covered by the Assignment of Credit Insurance; or (ii) the account is not covered by the credit insurance acceptable to the Agent, and is not past due more than ninety (90) days after its due date (which shall not be later than thirty (30) days after the invoice date) or (iii) the account is net of any applicable reserve; (i) the Account Debtor has not returned, rejected or refused to retain, or otherwise notified the Secured Debtor of any dispute concerning, or claimed nonconformity of, any of the goods or services from the sale or furnishing of which the account arose, provided that the account shall be excluded from Eligible Receivables only to the extent of the amount owing with respect to those returned, rejected or refused goods or services; (j) the account is not subject to any present or contingent (and no facts exist which are the basis for any future) offset, claim, deduction or counterclaim, dispute or defense in law or equity on the part of such Account Debtor, or any claim for credits, allowances, or adjustments by the Account Debtor because of returns outside of the ordinary course of business, inferior, or damaged goods or unsatisfactory services, or for any other reason including, without limitation, those arising on account of a breach of any express or implied representation or warranty (provided that the account shall be excluded from Eligible Receivables only to the extent the Account Debtor is refusing to pay because of those returned, inferior, or damaged goods or unsatisfactory services); (k) the Account Debtor is not a partner or Affiliate of a Secured Debtor or an employee, officer, director of shareholder of a Secured Debtor or any partner or Affiliate of a Secured Debtor; (l) the Account Debtor is not incorporated or primarily conducting business or otherwise located in any jurisdiction outside of the United States of America or any other country approved by the Agent; (m) unless the Account Debtor has obtained adequate financing under Chapter 11 of the Bankruptcy Code (or similar bankruptcy laws of other jurisdictions) and is operating as a going concern, the Account Debtor with respect to such account is not insolvent or the subject of any bankruptcy or insolvency proceedings of any kind or of any other proceeding or action, threatened or pending; 10 18 (n) the Account Debtor is not a Governmental Authority, unless the applicable Secured Debtor, is in compliance with Section 0 (Government Accounts); (o) no Secured Debtor is indebted in any manner to the Account Debtor (as creditor, lessor, supplier or otherwise), with the exception of customary credits, adjustments and/or discounts given to an Account Debtor by the Secured Debtors in the ordinary course of their business; (p) the account does not arise from services under or related to any warranty obligation of any of the Secured Debtors or out of service charges, finance charges or other fees for the time value of money; (q) the account is not evidenced by chattel paper or an instrument of any kind and is not secured by any letter of credit; (r) except for the Assignment of Credit Insurance, the title of the Secured Debtor to the account is absolute and is not subject to any prior assignment, claim, Lien, or security interest; (s) no bond or other undertaking by a guarantor or surety has been or is required to be obtained, supporting the performance of the Secured Debtor in respect of any its agreements with the Account Debtor; (t) no bond or other undertaking by a guarantor or surety has been or is required to be obtained, supporting the account and any of the Account Debtor's obligations in respect of the account; (u) the Secured Debtor has the full and unqualified right and power to assign and grant a security interest in, and Lien on, the account to the Agent and the Lenders as security and collateral for the payment of the Obligations; (v) the account does not arise out of a contract with, or order from, an Account Debtor that, by its terms, forbids or makes void or unenforceable the assignment or grant of a security interest by the Secured Debtor to the Agent and the Lenders of the account arising from such contract or order; (w) the account is subject to a Lien in favor of the Lender, which Lien is perfected as to the account by the filing of financing statements and which Lien upon such filing constitutes a first priority security interest and Lien; (x) the goods giving rise to the account were not, at the time of the sale thereof, subject to any Lien, except those in favor of the Agent and the Lenders; 11 19 (y) the Agent in the good faith exercise of its discretion has not deemed the account ineligible because of uncertainty as to the creditworthiness of the Account Debtor or because the Agent otherwise considers the collateral value of such account to the Agent and the Lenders to be impaired or its or their ability to realize such value to be insecure. In determining the amount receivable, the Agent shall be satisfied that the Secured Debtors have made appropriate allowances for returns, discounts, claims, credits, charges, accrued rebates or other allowances, offsets, deductions, counterclaims, disputes or other defenses and reserves. In the event of any dispute, under the foregoing criteria, as to whether an account is, or has ceased to be, an Eligible Receivable, the decision of the Agent in the good faith exercise of its discretion shall control. "Enforcement Costs" means all expenses, charges, costs and fees whatsoever (including, without limitation, reasonable outside counsel attorney's fees and expenses) of any nature whatsoever paid or incurred by or on behalf of the Agent and/or any of the Lenders in connection with (a) any or all of the Obligations, this Agreement and/or any of the other Financing Documents, (b) the creation, perfection, collection, maintenance, preservation, defense, protection, realization upon, disposition, sale or enforcement of all or any part of the Collateral, this Agreement or any of the other Financing Documents, including, without limitation, those costs and expenses more specifically enumerated in Section 3.6 (Costs) and/or Section 9.10 (Enforcement Costs), and (c) the monitoring, administration, processing and/or servicing of any or all of the Obligations, the Financing Documents, and/or the Collateral. "Equipment" means all equipment, machinery, computers, chattels, tools, parts, machine tools, furniture, furnishings, fixtures and supplies of every nature, presently existing or hereafter acquired or created and wherever located, whether or not the same shall be deemed to be affixed to real property, together with all accessions, additions, fittings, accessories, special tools, and improvements thereto and substitutions therefor and all parts and equipment which may be attached to or which are necessary or beneficial for the operation, use and/or disposition of such personal property. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. "Eurodollar Business Day" means any Business Day on which dealings in United States Dollar deposits are carried out on the London interbank market and on which commercial banks are open for domestic and international business (including dealings in Dollar deposits) in London, England. "Eurodollar Lending Office" means with respect to each Lender such branch or office of that Lender as designated by that Lender, as applicable, from time to time as the branch or office at which the LIBOR Loans are to be made or maintained. "Event of Default" has the meaning described in ARTICLE VII (Defaults and Rights and Remedies). 12 20 "Fantasma Agreements" means and includes that certain Member Agreement dated as of June 23, 1998 by and among the Borrower, Roger D. Dreyer and Houdini Capital LTD and that certain Member Agreement dated as of June 23, 1998 by and between the Borrower and Paul Michaels. "Federal Funds Rate" means for any day of determination, 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) by the Federal Reserve Bank for the next preceding Business Day) by the Federal Reserve Bank of Richmond or, if such rate is not so published for any day that is a Business Day, the average of quotations for such day on such transactions received by the Agent from three (3) Federal funds brokers of recognized standing selected by the Agent. "Fees" means the collective reference to each fee payable to the Agent, for its own account or for the ratable benefit of the Lenders, under the terms of this Agreement or under the terms of any of the other Financing Documents, including, without limitation, any and all Revolving Credit Unused Line Fees, any and all Letter of Credit Fees, the Early Termination Fee any and all Field Examination Fees. "Field Examination Fee" and "Field Examination Fees" have the meanings described in Section 2.4.3 (Field Examination Fees). "Financial Institution" means bank, finance company or other Person or other Governmental Authority that in the ordinary course of business makes or purchases interests in commercial credit facilities. "Financing Documents" means at any time collectively this Agreement, the Notes, the Security Documents, the Letter of Credit Documents and any other instrument, agreement or document previously, simultaneously or hereafter executed and delivered by the Borrower, Foster Grant or Fantasma, any Obligor and/or any other Person, singly or jointly with another Person or Persons, evidencing, securing, guarantying or in connection with this Agreement, any Note, any of the Security Documents, and/or any of the Obligations. "Fixed or Capital Assets" of a Person at any date means all assets which would, in accordance with GAAP consistently applied, be classified on the balance sheet of such Person as property, plant or equipment at such date and displays included in other Assets which are depreciated in accordance with GAAP consistently applied to the Borrower and its Subsidiaries. "Fixed Charge Coverage Ratio" means for the period of any determination thereof the ratio of (a) EBITDA to (b) Fixed Charges. "Fixed Charges" means for any period of determination thereof, the scheduled or required payments (including, without limitation, principal and interest) made in cash on all Indebtedness for Borrowed Money of the Borrower and its Subsidiaries, plus Capital Expenditures made in cash (and Permitted Acquisitions to the extent not included in Capital Expenditures) of the Borrower and its Subsidiaries, plus cash payments of Taxes. 13 21 "Foreign Exchange Protection Agreement" means any foreign exchange, currency spot, foreign exchange forward contracts and other similar agreements and arrangements between any Obligor and a Person, acceptable to the Agent in its reasonable credit judgement, providing for the transfer or mitigation of foreign exchange currency risks either generally or under specific contingencies. "Foreign Exchange Exposure" means at any time and from time to time of determination, the amount of the obligations and liabilities of any or all of the Obligors with respect to each Foreign Exchange Protection Agreement with a Person who is the Agent, a Lender or an Affiliate of the Agent or any Lender arising as a result of a determination of the amount of Dollars required at such time to purchase such amount of the foreign currency covered by such Foreign Exchange Protection Agreement at the spot rate. "Foster Group" means collectively each of Foster Grant, each of the Corporate Guarantors and Opti-Ray, Inc., and their respective successors and assigns. "Foster Holdings" means Foster Grant Holdings, Inc., a corporation organized and existing under the laws of the State of Delaware, and its successors and assigns. "Funded Debt" means Indebtedness for Borrowed Money MINUS any obligation under a employee stock ownership plan or other similar employee benefit plan. "GAAP" means generally accepted accounting principles in the United States of America in effect on the date of this Agreement. "Governmental Authority" means any nation or government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government and any department, agency or instrumentality thereof. "Gross Receivables" means, at any time of determination thereof, the amount equal to the sum of (a) the amount shown under the caption "Trade Receivables" in the most recent balance sheet of the Borrower and its Subsidiaries on a consolidated basis furnished to the Agent in accordance with Section 6.1.1(c) (Monthly Statements and Certificates), but only to the extent such Trade Receivables are shown to the Agent's reasonable satisfaction to be owing to the Secured Debtors, plus (b) the Secured Debtors' reserve for returns for the same date as the balance sheet and prepared in accordance with GAAP applied on a consistent basis to the Borrower and its Subsidiaries. "Guarantors" means the Corporate Guarantors, Foster Grant and Fantasma. "Hazardous Materials" means (a) any "hazardous waste" as defined by the Resource Conservation and Recovery Act of 1976, as amended from time to time, and regulations promulgated thereunder; (b) any "hazardous substance" as defined by the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended from time to time, and regulations promulgated thereunder; (c) any substance the presence of which on any property now or hereafter owned, acquired or operated by any of the Borrower, Foster Grant or Fantasma 14 22 is prohibited by any Law similar to those set forth in this definition; and (d) any other substance which by Law requires special handling in its collection, storage, treatment or disposal. "Hazardous Materials Contamination" means the contamination (whether presently existing or occurring after the date of this Agreement) by Hazardous Materials of any property owned, operated or controlled by any of the Borrower, Foster Grant or Fantasma or for which any of the Borrower, Foster Grant or Fantasma has responsibility, including, without limitation, improvements, facilities, soil, ground water, air or other elements on, or of, any property now or hereafter owned, acquired or operated by any of the Borrower, Foster Grant or Fantasma, and any other contamination by Hazardous Materials for which any of the Borrower, Foster Grant or Fantasma is, or is claimed to be, responsible. "Headquarters Property" means (a) that certain real estate known as 500 George Washington Highway, Smithfield, Rhode Island, and includes, without limitation, the office and warehouse buildings now thereon, all other buildings, structures and improvements now or hereafter located thereon, the rights, alleys, ways, tenements, easements, appurtenances, passages, riparian rights, liberties, advantages, accessions and privileges now or hereafter appertaining thereto, condemnation awards and the rents, royalties, issues, profits, revenues, income, accounts and other benefits thereof, or derived from or arising out of the use or enjoyment of all or any portion thereof, or from any lease, sublease, contract of sale or other agreement pertaining thereto, (b) all building materials, fixtures, equipment (including, without limitation, conveyors, shelving and racks), whether now owned or hereafter acquired, which is used in the construction of, or is placed upon or used in connection with the maintenance, use, occupancy or enjoyment of, such real estate and/or the expansions or improvements now or hereafter located thereon, and (c) Borrower's interest in all building materials and fixtures located on, contained in or upon or attached to those buildings, together with all replacements thereof, substitutions therefor and additions thereto and all proceeds thereof. "Indebtedness" of a Person means at any date the total Liabilities of such Person at such time determined in accordance with GAAP consistently applied. "Indebtedness for Borrowed Money" of a Person means at any time the sum at such time of (a) Indebtedness of such Person for borrowed money or for the deferred purchase price of property or services, (b) any obligations of such Person in respect of letters of credit, banker's acceptances or similar obligations issued or created for the account of such Person, (c) Lease Obligations of such Person with respect to Capital Leases, (d) all liabilities secured by any Lien on any property owned by such Person, to the extent attached to such Person's interest in such property, even though such Person has not assumed or become personally liable for the payment thereof, (e) obligations of third parties which are being guarantied or indemnified against by such Person or which are secured by the property of such Person; (f) any obligation of such Person under a employee stock ownership plan or other similar employee benefit plan; (g) any obligation of such Person or a Commonly Controlled Entity to a Multi-employer Plan; and (h) any obligations, liabilities or indebtedness, contingent or otherwise (on an estimated "marked-to market" basis), under or in connection with, each Foreign Exchange Protection Agreement and each Interest Rate Protection Agreement, net of liabilities owed to the respective Obligor or Obligors by the counterparties on any such Foreign Exchange Protection Agreement and/or 15 23 Interest Rate Protection Agreement; but excluding trade and other accounts payable in the ordinary course of business in accordance with the Obligors' customary trade terms and which are not overdue (as determined in accordance with the Obligors' customary trade practices) or which are being disputed in good faith by such Person and for which adequate reserves are being provided on the books of such Person in accordance with GAAP. "Indenture" means that certain Indenture dated as of July __, 1998 (as amended, supplemented or otherwise modified from time to time), between the Borrower, the Borrower's domestic Subsidiaries, and the Trustee. "Instrument" means a negotiable instrument (as defined under Article 3 of the Uniform Commercial Code), a "certificated security" (as defined under Article 8 of the Uniform Commercial Code), or any other writing which evidences a right to payment of money and is not itself a security agreement or lease and is of a type which is in the ordinary course of business negotiated by transfer and delivery with any necessary indorsement. "Interest Payment Date" means the first day of each calendar month commencing on August 1, 1998 and continuing thereafter until the Obligations have been irrevocably paid in full. "Internal Revenue Code" means the Internal Revenue Code of 1986, as amended from time to time, and the Income Tax Regulations issued and proposed to be issued thereunder. "Interest Period" means as to any LIBOR Loan, the period commencing on and including the date such LIBOR Loan is made (or on the effective date of the Borrower's election to convert any Base Rate Loan to a LIBOR Loan in accordance with the provisions of this Agreement) and ending on and including the day which is 30, 60, 90 or 180 days thereafter, as selected by the Borrower in accordance with the provisions of this Agreement, and thereafter, each period commencing on the last day of the then preceding Interest Period for such LIBOR Loan and ending on and including the day which is 30, 60, 90 or 180 days thereafter, as selected by the Borrower in accordance with the provisions of this Agreement; provided, however that: (a) the first day of any Interest Period shall be a Eurodollar Business Day; (b) if any Interest Period would end on a day that shall not be a Eurodollar Business Day, such Interest Period shall be extended to the next succeeding Eurodollar Business Day unless such next succeeding Eurodollar Business Day would fall in the next calendar month, in which case, such Interest Period shall end on the next preceding Eurodollar Business Day; and (c) no Interest Period shall extend beyond the Revolving Credit Expiration Date. "Interest Rate Election Notice" has the meaning described in Section 2.3.2(e) (Selection of Interest Rates). 16 24 "Interest Rate Protection Agreement" means any interest rate exchange, swap, cap, future, protection, floor, collar or similar agreements between any Obligor and any Person, acceptable to the Agent in its reasonable credit judgement, providing for the transfer or mitigation of interest rate risks either generally or under specific contingencies. "Interest Rate Protection Reserve" means at any time of determination, the aggregate of the obligations of any or all of the Obligors under all Interest Rate Protection Agreements to which any Obligor is a party with a Person who is the Agent, a Lender or an Affiliate of the Agent or any of the Lenders in the event of a termination of any such Interest Rate Protection Agreements on an estimated "marked-to market" basis. "Inventory" means all inventory of each of the Secured Debtors and all right, title and interest of each of the Secured Debtors in and to all of its now owned and hereafter acquired goods, merchandise and other personal property furnished under any contract of service or intended for sale or lease, including, without limitation, all raw materials, work-in-progress, finished goods and materials and supplies of any kind, nature or description which are used or consumed in the any of the Secured Debtors' business or are or might be used in connection with the manufacture, packing, shipping, advertising, selling or finishing of such goods, merchandise and other licenses, warranties, franchises, general intangibles, personal property and all documents of title or documents relating to the same and all proceeds (cash and non-cash) of the foregoing. "Item of Payment" means each check, draft, cash, money, instrument, item, and other remittance in payment or on account of payment of the Receivables or otherwise with respect to any Collateral, including, without limitation, cash proceeds of any returned, rejected or repossessed goods, the sale or lease of which gave rise to a Receivable, and other proceeds of Collateral; and "Items of Payment" means the collective reference to all of the foregoing. "Laws" means all ordinances, statutes, rules, regulations, orders, injunctions, writs, or decrees of any Governmental Authority or political subdivision or agency thereof, or any court or similar entity established by any thereof. "Lease Obligations" of a Person means for any period the rental commitments of such Person for such period under leases for real and/or personal property (net of rent from subleases thereof, but including taxes, insurance, maintenance and similar expenses which such Person, as the lessee, is obligated to pay under the terms of said leases, except to the extent that such taxes, insurance, maintenance and similar expenses are payable by sublessees), including rental commitments under Capital Leases. "Lender" and "Lenders" shall have meaning set forth at the beginning of this Agreement. "Lender" and "Lenders" shall also include, without limitation, each other Person which becomes a party to this Agreement as a "Lender", whether by execution of this Agreement or otherwise. "Letter of Credit" and "Letters of Credit" shall have the meanings described in Section 2.2.1 (Letters of Credit). 17 25 "Letter of Credit Agreement" means the collective reference to each letter of credit application and agreement substantially in the form of the Agent's then standard form of application for letter of credit or such other form as may be approved by the Agent, executed and delivered by the Borrower in connection with the issuance of a Letter of Credit, as the same may from time to time be amended, restated, supplemented or modified; and "Letter of Credit Agreements" means all of the foregoing in effect at any time and from time to time. "Letter of Credit Documents" means any and all drafts under or purporting to be under a Letter of Credit, any Letter of Credit Agreement, and any other instrument, document or agreement executed and/or delivered by the Borrower or any other Person under, pursuant to or in connection with a Letter of Credit or any Letter of Credit Agreement. "Letter of Credit Facility" means the facility established pursuant to Section 2.2 (Letter of Credit Facility). "Letter of Credit Fee" and "Letter of Credit Fees" have the meanings described in Section 2.2.2 (Letter of Credit Fees). "Letter of Credit Obligations" means the collective reference to all Obligations of any one or more of the Borrower, Foster Grant and Fantasma with respect to the Letters of Credit and the Letter of Credit Agreements. "Liabilities" means at any date all liabilities that in accordance with GAAP consistently applied should be classified as liabilities on a balance sheet of the Borrower and its Subsidiaries on a consolidated basis. "LIBOR Base Rate" means for any Interest Period with respect to any LIBOR Loan, the rate per annum (rounded upward, if necessary, to the nearest next 1/100 of 1%) appearing on Telerate Page 3750 (or any successor page) as the London interbank offered rate for deposits in United States Dollars at approximately 11:00 a.m. (London time) two (2) Eurodollar Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period. If for any reason such rate is not available, the term "LIBOR Base Rate" shall mean, for any LIBOR Loan for any Interest Period therefor, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on Reuters Screen LIBO Page as the London interbank offered rate for deposits in United States Dollars at approximately 11:00 a.m. (London time) two (2) Eurodollar Business Days prior to the first day of such Interest Period; PROVIDED, HOWEVER, if more than one rate is specified on Reuters Screen LIBO Page, the applicable rate shall be the arithmetic mean of all such rates. For purposes of this definition, Telerate Page 3750 refers to the British Bankers Association Libor Rates (determined at approximately 11:00 a.m. (London time)) that are published by Dow Jones Telerate, Inc. "LIBOR Loan" means any Loan for which interest is to be computed with reference to the LIBOR Rate. 18 26 "LIBOR Rate" means for any Interest Period with respect to any LIBOR Loan, (a) the Applicable Margin, PLUS (b) the per annum rate of interest calculated pursuant to the following formula: LIBOR BASE RATE ------------------------- 1.00 - Reserve Percentage "Lien" means any mortgage, deed of trust, deed to secure debt, grant, pledge, security interest, assignment, encumbrance, judgment, lien, hypothecation, provision in any instrument or other document for confession of judgment, cognovit or other similar right or remedy, claim or charge of any kind, whether perfected or unperfected, avoidable or unavoidable, including, without limitation, any conditional sale or other title retention agreement, any lease in the nature thereof, and the filing of or agreement to give any financing statement under the Uniform Commercial Code of any jurisdiction, excluding the precautionary filing of any financing statement by any lessor in a true lease transaction, by any bailor in a true bailment transaction or by any consignor in a true consignment transaction under the Uniform Commercial Code of any jurisdiction or the agreement to give any financing statement by any lessee in a true lease transaction, by any bailee in a true bailment transaction or by any consignee in a true consignment transaction. "Line of Business" has the meaning described in Section 6.1.6 (Line of Business). "Loan" means the Revolving Loan. "Loan Notice" has the meaning described in Section 2.1.2 (Procedure for Making Advances). "Lockbox" has the meaning described in Section 2.1.8 (The Collateral Account). "Material Adverse Effect" means an effect, either in any case or in the aggregate, which would result in a material adverse change (a) in the business, condition, affairs or operations of the Borrower and its Subsidiaries taken as a whole, (b) to any of the material properties or assets of the Borrower and its Subsidiaries on a consolidated basis, (c) in the right or ability of the Borrower and its Subsidiaries on a consolidated basis to carry on a substantial portion of their operations as now conducted or proposed to be conducted, or (d) to the value of, or the ability of the Agent or any of the Lenders to realize upon, the Collateral in any material respect. "Maximum Amount" means an amount equal to ninety five percent (95%) of the amount by which (a) the present fair saleable value of a Guarantor's assets exceeds (b) the total liabilities of such Guarantor (including the maximum amount reasonably expected to come due in respect of contingent liabilities other than contingent liabilities of such Guarantor hereunder), in each case determined on the date of the first advance under the Revolving Loan under this Agreement or on the day any demand is made under this Agreement or the Corporate Guaranty, whichever date results in the higher amount. "Multi-employer Plan" means a Plan that is a multi-employer plan as defined in Section 4001(a)(3) of ERISA. 19 27 "Net Book Value of Receivables" means, at any time of determination thereof, the amount shown under the caption "Trade Receivables-Net" in the most recent balance sheet of the Borrower and its Subsidiaries on a consolidated basis furnished to the Agent in accordance with Section 0 (Financial Statements) and prepared in accordance with GAAP applied on a consistent basis to the Borrower and its Subsidiaries, but only to the extent such Trade Receivables are shown to the Agent's reasonable satisfaction to be owing to the Borrower or one of its Subsidiaries. "Net Proceeds" means gross proceeds (cash and non-cash) or other consideration paid to, or received by, any of the Borrower, Foster Grant or Fantasma from any Asset Disposition (including, without limitation, issuance or assumption of Indebtedness or the issuance of Securities), net of customary and reasonable settlement costs, fees and expenses of such Asset Disposition. "Net Outstandings" of any Lender means, at any time, the sum of (a) all amounts paid by such Lender (other than pursuant to Section 8.5 (Indemnification)) to the Agent in respect to the Revolving Loan or otherwise under this Agreement, minus (b) all amounts paid by the Agent to such Lender which are received by the Agent and which, pursuant to this Agreement, are paid over to such Lender for application in reduction of the outstanding principal balance of the Revolving Loan. "Non-Ratable Loan" means an advance under the Revolving Loan made by NationsBank in accordance with the provisions of Section 2.5.2(c) (Non-Ratable Loans and Payments). "Note" means any Revolving Credit Note, and "Notes" means collectively each Revolving Credit Note, and any other promissory note which may from time to time evidence all or any portion of the Obligations. "Obligations" means all present and future indebtedness, duties, obligations, and liabilities, whether now existing or contemplated or hereafter arising, of any one or more of the Borrower, Foster Grant or Fantasma to the Lenders and/or the Agent under, arising pursuant to, in connection with and/or on account of the provisions of this Agreement, each Note, each Security Document, and/or any of the other Financing Documents, and/or the Loan, including, without limitation, the principal of, and interest on, each Note, late charges, the Fees, Enforcement Costs, and prepayment fees (if any), letter of credit fees or fees charged with respect to any guaranty of any letter of credit, any Interest Rate Protection Agreement with the Agent, any Lender or any Affiliate of the Agent or any of the Lenders, and any Foreign Exchange Protection Agreement with the Agent, any Lender or any Affiliate of the Agent or any of the Lenders; also means all other present and future indebtedness, liabilities and obligations, whether now existing or contemplated or hereafter arising, of any one or more of the Obligors to the Agent and/or to NationsBank or its Affiliates of any nature whatsoever regardless of whether such debts, obligations and liabilities be direct, indirect, primary, secondary, joint, several, joint and several, fixed or contingent; and also means any and all renewals, extensions, substitutions, amendments, restatements and rearrangements of any such debts, obligations and liabilities. 20 28 "Obligors" means the Borrower and the Guarantors and "Obligor" means any of the Borrower or any Guarantor. "Offering Memorandum" means Borrower's Offering Memorandum dated July __, 1998, pursuant to which the Senior Notes are offered. "Offering Transaction" means the sale of the Senior Notes as described in the Offering Memorandum. "O-Ray Holdings" means O-Ray Holdings, Inc., a corporation organized and existing under the laws of the State of Delaware, and its successors and assigns. "Original Closing Date" means December 12, 1996. "Outstanding Letter of Credit Obligations" has the meaning described in Section 2.2.3 (Terms of Letters of Credit). "Patents" means and includes, in each case whether now existing or hereafter arising, all of each of the Borrower's, Foster Grant's and Fantasma's rights, title and interest in and to (a) any and all patents and patent applications, (b) any and all inventions and improvements described and claimed in such patents and patent applications, (c) reissues, divisions, continuations, renewals, extensions and continuations-in-part of any patents and patent applications and (d) all rights corresponding to any of the foregoing throughout the world. "PBGC" means the Pension Benefit Guaranty Corporation. "Permitted Acquisitions" means the acquisition or purchase of, or investment in, any Person, any operating division or unit of any Person engaged substantially in the Line of Business, or the stock or assets of any Person; provided, however that (a) the aggregate purchase price of, investment in, and/or expenditures relating to, acquisitions, purchases, or investments cannot exceed in any fiscal year the amount by which the Borrowing Base is increased as a result of such acquisition, purchase or investment by more than Seven Million Dollars ($7,000,000), (b) such acquisition, purchase or investment cannot otherwise constitute or give rise to a Default or an Event of Default, (c) the Borrower shall have furnished financial projections to the Agent and the Lenders which give effect to such acquisition, purchase or investment and which indicate that such acquisition, purchase and/or investment could not or would not cause a Default or Event of Default, (d) all Accounts, Inventory, Chattel Paper, Instruments, rights to non-exclusive use of the Trademarks in the disposition of the Inventory to which such Trademarks are attached and any real property and fixtures so acquired (except those which are held by a Person organized under the Laws of a country other than the United States or securing debt that was incurred prior to the acquisition and not in contemplation thereof), whether acquired directly or indirectly through the acquisition of stock of another Person, shall be subject to a first priority security interest, perfected by filing or possession, in favor of the Agent and the Lenders securing the Obligations and the Agent's Obligations, and (e) a Phase I environmental assessment of any real property to be acquired or purchased by any of the Borrower, Foster Grant or 21 29 Fantasma or owned by any Person to be acquired or purchased by any of the Borrower, Foster Grant or Fantasma or owned by any Person in which any of the Borrower, Foster Grant or Fantasma intends to make an investment, has been performed by a reputable and recognized environmental consulting firm reasonably acceptable to the Lender and has revealed no Material Hazardous Materials Contamination or Material violations of any Environmental Laws. "Permitted Affiliate Distributions" shall mean (a) an amount permitted to be paid under Section 5.10.6 of the Securities Purchase Agreement, (b) dividends provided for on the date of this Agreement under the Borrower's preferred stock, (c) distributions or dividends by, or transfer of assets by, any Subsidiary to its parent or, if different, to the Borrower, (d) the following distributions by Foster Grant to any partner of Foster Grant or by Fantasma to any member of Fantasma, that is not within the scope of the preceding subsection (c) (and any further distribution of such amounts by any such partner to any direct or indirect shareholders of such partner): (i) Distributions to each of its partners/members in an amount sufficient to cover that partner's/member's actual tax liability due and payable by such partner/member as a result of income attributed to such partner/member by virtue of its ownership interest in the partnership/limited liability company; (ii) Distributions to Foster Holdings to enable Foster Holdings to pay actual out-of-pocket expenses reasonably incurred by Foster Holdings in connection with the preparation of financial statements and compliance with all financial reporting requirements; but only to the extent such expenses are payable to Persons other than Affiliates of any Obligor or any member of the AAi Group; and (iii) Distributions by Foster Grant to BEC to pay royalties due BEC with respect to any Trademarks licensed to Foster Grant by BEC; and (e) redemption of preferred stock of FosterGrant Holdings, redemption of the Borrower's Series A Preferred Stock and redemption or purchase of the Borrower's or any Subsidiary's stock or other ownership interest on death, disability or termination of employment of shareholders under stockholder and other agreements; (f) payments by any Subsidiary under tax sharing arrangements with the Borrower and other Subsidiaries; and (g) payments by any Obligor to another Obligor. "Permitted Asset Disposition" means the following Asset Dispositions: (a) an Asset Disposition (excluding any Asset Disposition permitted under subsections (b), (c) or (d) below), for which the sum of (i) the Net Proceeds to be paid to or received by any or all of the Obligor (individually and collectively) with respect to such Asset Disposition, plus (ii) the aggregate amount of all Net Proceeds paid to or received by any or all of the Obligor (individually and collectively) with respect to all other Asset Dispositions (excluding all Asset Dispositions permitted under subsections (b), (c) or (d) below) made during the then current fiscal year, is less than or equal to Five Hundred Thousand Dollars ($500,000) for such fiscal year, 22 30 (b) sales of Inventory (including, without limitation, the liquidation of slow moving and obsolete Inventory) in the ordinary course of business, (c) the licensing of business names, Patents, Trademarks and/or Copyrights, in the ordinary course of business, (d) sales or other dispositions of worn, used, surplus or obsolete Equipment in the ordinary course of business, including, without limitation, dispositions of conveyors, racks and shelving at formerly leased locations, (e) sales, liquidations or other dispositions of Buybacks in the ordinary course of business, and (f) sales of membership interests in Fantasma to existing members in accordance with the Fantasma Agreements. provided that no Asset Dispositions shall be permitted at any time following the occurrence and during the continuance of an Event of Default. "Permitted Liens" means: (a) Liens existing as of the date hereof and as set forth in SCHEDULE 4.1.20 attached hereto, including, but not limited to, renewals and extensions that do not increase the amount secured by or subject to the lien, PROVIDED, HOWEVER, that any such Lien that is released after the date hereof may not thereafter re-attach or otherwise become permitted by this Section item (a); (b) Liens imposed by law for Taxes of any Governmental Authority for claims not yet due or which (i) the Borrower, Foster Grant and Fantasma, as appropriate, is contesting in good faith by appropriate proceedings diligently conducted and with respect to which adequate reserves or other appropriate provisions are being maintained in accordance with GAAP, (ii) the Borrower, Foster Grant and Fantasma, as appropriate, has the financial ability to pay, with all penalties and interest, at all times without materially and adversely affecting the Borrower, Foster Grant and Fantasma, and (iii) are not, and will not be with appropriate filing, the giving of notice and/or the passage of time, entitled to priority over any Lien of the Agent and the Lenders; (c) Liens in respect of purchase money indebtedness in connection with the acquisition of tangible personal property and real property; PROVIDED that (i) the original principal balance of the Indebtedness secured by such Lien constitutes not more than 80% of the purchase price of the property acquired and (ii) such Lien extends only to the property acquired with the proceeds of the Indebtedness so secured; (d) statutory Liens of landlords and Liens of carriers, warehousemen, mechanics, materialmen and other Liens imposed by law or created in the ordinary course of business and in existence less than ninety (90) days from the date of creation thereof for amounts not yet due or which are being contested in good faith by appropriate 23 31 proceedings diligently conducted and with respect to which adequate reserves or other appropriate provisions are being maintained in accordance with GAAP; (e) Liens incurred or deposits made in the ordinary course of business (including, without limitation, surety bonds and appeal bonds) in connection with workers' compensation, unemployment insurance and other types of social security benefits or to secure the performance of tenders, bids, leases, contracts (other than for the repayment of Indebtedness), statutory obligations and other similar obligations or arising as a result of progress payments under government contracts; (f) leases, subleases, licenses, easements (including, without limitation, reciprocal easement agreements and utility agreements), rights-of-way, covenants, contests, reservations, encroachments, variations and zoning and other restrictions, charges or encumbrances (whether or not recorded), which do not interfere with the ordinary conduct of the business of the Borrower, Foster Grant and Fantasma and do not impair the use of the property to which they attach to the extent that such interference or impairment could reasonably be expected to have a Material Adverse Effect; (g) Liens incurred in connection with Capital Lease obligations permitted hereunder; (h) Liens imposed by environmental laws which (i) the Borrower, Foster Grant or Fantasma, as appropriate, is contesting in good faith by appropriate proceedings diligently conducted and with respect to which adequate reserves or other appropriate provisions are being maintained in accordance with GAAP and (ii) the Borrower, Foster Grant or Fantasma, as appropriate, has the financial ability to pay, with all penalties and interest, at all times without materially and adversely affecting the Borrower; and (i) Liens granted on the assets of any Subsidiary of any of Borrower, Foster Grant or Fantasma, which Subsidiary is organized under the laws of a jurisdiction other than the United States. "Permitted Senior Note Purchases" means the collective reference to each purchase by the Borrower of Senior Notes provided, however that (i) the aggregate purchase price of all such purchases (net of cash proceeds received on resales of the same) cannot exceed Five Million Dollars ($5,000,000) in the aggregate unless the Agent and the Lenders have given their prior written consent to such excess, (ii) such purchase cannot otherwise constitute or give rise to a Default or an Event of Default and shall not be made at any time when a Default or Event of Default exists; and (iii) the Borrower has furnished financial projections in form and content reasonably acceptable to the Agent and the Lenders which give effect to such purchase and which indicate that such purchase could not or would not cause a Default or Event of Default. "Permitted Uses" means (a) re-evidence, without novation, of amounts outstanding under the Original Financing Agreement, (b) the furnishing of working capital (including the sale of inventory) to AAi/Joske's S. de R.L. de C.V. in an aggregate amount outstanding not to exceed $750,000, (c) the furnishing of working capital to Vendome Accessories Ltd. in an aggregate 24 32 amount outstanding not to exceed $250,000, (d) loans and advances to the Subsidiaries and for other general corporate purposes other than those not permitted under this Agreement, (e) Permitted Affiliate Distributions and (f) Permitted Acquistions. "Person" means and includes an individual, a corporation, a partnership, a joint venture, a limited liability company or partnership, a trust, an unincorporated association, a Governmental Authority, or any other organization or entity. "Plan" means any pension plan that is covered by Title IV of ERISA and in respect of which any Obligor or a Commonly Controlled Entity is an "employer" as defined in Section 3 of ERISA. "Post-Default Rate" means with respect to the principal balance of any of the Obligations, the then Applicable Interest Rate, plus two percent (2%) per annum. "Prepayment" means a Revolving Loan Mandatory Prepayment or a Revolving Loan Optional Prepayment, as the case may be, and "Prepayments" mean collectively all Revolving Loan Mandatory Prepayments and all Revolving Loan Optional Prepayments. "Pricing Ratio" means the Fixed Charge Coverage Ratio. "Prime Rate" means the floating and fluctuating per annum prime commercial lending rate of interest of the Agent, as established and declared by the Agent at any time or from time to time. The Prime Rate shall be adjusted automatically, without notice, as of the effective date of any change in such prime commercial lending rate. The Prime Rate does not necessarily represent the lowest rate of interest charged by the Agent or any of the Lenders to borrowers. "Pro Rata Share" means at any time and as to any Lender, the percentage derived by dividing the unpaid principal amount of the Loan and Letter of Credit Obligations owing to that Lender by the aggregate unpaid principal amount of all Loan and Letter of Credit Obligations then outstanding; or if no Loan or Letter of Credit Obligations are outstanding, by dividing the total amount of such Lender's Commitments by the total amount of the Commitments of the Agent and all of the Lenders. "Receivable" means each of the Secured Debtors' now owned and hereafter owned, acquired or created Accounts, Chattel Paper and Instruments; and "Receivables" means all of each of the Secured Debtors' now or hereafter owned, acquired or created Accounts, Chattel Paper and Instruments, and all cash and non-cash proceeds and products thereof. "Reportable Event" means any of the events set forth in Section 4043(c) of ERISA or the regulations thereunder. "Requisite Lenders" means at any time of determination one or more of the Lenders holding at least sixty-six and two-thirds percent (66-2/3%) of the Commitments. "Reserve Percentage" means, at any time, the then current maximum rate for which reserves (including any basic, supplemental, marginal and emergency reserves) are required to be 25 33 maintained by member banks of the Federal Reserve System under Regulation D of the Board of Governors of the Federal Reserve System against "Eurocurrency liabilities", as that term is defined in Regulation D. The LIBOR Rate shall be adjusted automatically on and as of the effective date of any change in the Reserve Percentage. "Responsible Officer" means the Chairman, Chief Executive Officer or Chief Financial Officer of the Borrower or, with respect to financial matters, the Chief Financial Officer of the Borrower. "Revolving Credit Commitment" means the agreement of a Lender relating to the making the Revolving Loan and advances thereunder subject to and in accordance with the provisions of this Agreement; and "Revolving Credit Commitments" means the collective reference to the Revolving Credit Commitment of each of the Lenders. "Revolving Credit Commitment Period" means the period of time from the Closing Date to the Business Day preceding the Revolving Credit Termination Date. "Revolving Credit Committed Amount" has the meaning described in Section 2.1.1 (Revolving Credit Facility). "Revolving Credit Expiration Date" means July 31, 2003, extending automatically for successive periods of one (1) year each, unless any of the Lenders in the exercise of its sole and absolute discretion has notified the Borrower or the Borrower in the exercise of its sole and absolute discretion has notified the Agent, no later than the date which is sixty (60) days immediately preceding the next scheduled Revolving Credit Expiration Date, of its intention to terminate the Revolving Credit Facility as of the next scheduled Revolving Credit Expiration Date. Neither the Borrower nor any of the Lenders has any obligation or commitment to extend the Revolving Credit Expiration Date for any successive one (1) year period. "Revolving Credit Facility" means the facility established by the Lenders pursuant to Section 2.1 (Revolving Credit Facility). "Revolving Credit Note" and "Revolving Credit Notes" have the meanings described in Section 2.1.5 (Revolving Credit Notes). "Revolving Credit Pro Rata Share" has the meaning described in Section 2.1.1 (Revolving Credit Facility). "Revolving Credit Termination Date" means the earlier of (a) the Revolving Credit Expiration Date, or (b) the date on which the Revolving Credit Commitments are terminated pursuant to Section 7.2 (Remedies) or otherwise. "Revolving Credit Unused Line Fee" and "Revolving Credit Unused Line Fees" have the meanings described in Section 2.1.10 (Revolving Credit Unused Line Fee). "Revolving Loan" has the meaning described in Section 2.1.1 (Revolving Credit Facility). 26 34 "Revolving Loan Account" has the meaning described in Section 2.1.9 (Revolving Loan Account). "Revolving Loan Mandatory Prepayment" and "Revolving Loan Mandatory Prepayments" have the meanings described in Section 2.1.6 (Mandatory Prepayments of Revolving Loan). "Revolving Loan Optional Prepayment" and "Revolving Loan Optional Prepayments" have the meanings described in Section 2.1.7 (Optional Prepayments of Revolving Loan). "Secured Debtor" means any of the Borrower, Foster Grant, Fantasma or any Additional Obligor and "Secured Debtors" means the Borrower, Foster Grant, Fantasma and all Additional Obligors, collectively. "Securities" means the collective reference to each and every certificated or uncertificated security which constitutes a "security" under the provisions of Title 8 of the Uniform Commercial Code, and all proceeds (cash and non-cash) of the foregoing. "Securities Purchase Agreement" means that certain Securities Purchase Agreement dated May 31, 1996, among the Borrower, Weston Presidio Capital II, L.P., and certain other "Investors." "Security Documents" means collectively any assignment, pledge agreement, security agreement, mortgage, deed of trust, deed to secure debt, financing statement and any similar instrument, document or agreement under or pursuant to which a Lien is now or hereafter granted to, or for the benefit of, the Agent and/or the Lenders on any real or personal property of any Person to secure all or any portion of the Obligations, all as the same may from time to time be amended, restated, supplemented or otherwise modified, including, without limitation, this Agreement, the Corporate Guaranty, the Assignment of Credit Insurance, the Assignment of Trademarks and the Assignment of Trademarks (Borrower). "Security Procedures" means the rules, policies and procedures adopted and implemented by the Agent and its Affiliates at any time and from time to time with respect to security procedures and measures relating to electronic funds transfers, all as the same may be amended, restated, supplemented, terminated, or otherwise modified at any time and from time to time by the Agent in its sole and absolute discretion. "Senior Notes" means any and all 10 3/4% Senior Notes due 2006 to be issued from time to time under the Indenture, in the principal amount of $75,000,000. "Senior Notes Documents" means, collectively, the Indenture and the Senior Notes. "Settlement Date" means each Business Day after the Closing Date selected by the Agent in its sole discretion subject to and in accordance with the provisions of Section 2.5.2(a) (Settlement Procedures; In General) as of which a Settlement Report is delivered by the Agent and on which settlement is to be made among the Lenders in accordance with the provisions of Section 2.5.2 (Settlement Procedures as to Revolving Loan). 27 35 "Settlement Report" means each report prepared by the Agent and delivered to each Lender and setting forth, among other things, as of the Settlement Date indicated thereon and as of the next preceding Settlement Date, the aggregate outstanding principal balance of the Revolving Loan, each Lender's Revolving Credit Pro Rata Share thereof, each Lender's Net Outstandings and all Non-Ratable Loans made, and all payments of principal, interest and Fees received by the Agent from the Borrower during the period beginning on such next preceding Settlement Date and ending on such Settlement Date. "State" means the State of Maryland. "Subordinated Indebtedness" means all Indebtedness, incurred at any time by any one or more of the Borrower, Foster Grant or Fantasma, which is in amounts, subject to repayment terms, and subordinated to the Obligations, as set forth in one or more written agreements, all in form and substance satisfactory to the Agent in its sole and absolute discretion. "Subsidiary" means any corporation, company or other entity the majority of the voting shares or interests of which at the time are owned directly by any of the Borrower, Foster Grant and Fantasma and/or by one or more Subsidiaries of any of the Borrower, Foster Grant and Fantasma. "Taxes" means all taxes and assessments whether general or special, ordinary or extraordinary, or foreseen or unforeseen, of every character (including all penalties or interest thereon), which at any time may be assessed, levied, confirmed or imposed by any Governmental Authority on any or all of the Borrower, Foster Grant or Fantasma or any of its or their properties or assets or any part thereof or in respect of any of its or their franchises, businesses, income or profits. "Texas Property" means the real property and fixtures located at Valley View Lane, Farmers Branch, Texas, which are leased by Foster Grant. "Total Revolving Credit Committed Amount" has the meaning described in Section 2.1.1 (Revolving Credit Facility). "Trademarks" means and includes in each case whether now existing or hereafter arising, all of each of the Borrower's, Foster Grant's or Fantasma's rights, title and interest in and to (a) any and all trademarks (including service marks), trade names and trade styles, and applications for registration thereof and the goodwill of the business symbolized by any of the foregoing, (b) any and all licenses of trademarks, service marks, trade names and/or trade styles, whether as licensor or licensee, (c) any renewals of any and all trademarks, service marks, trade names, trade styles and/or licenses of any of the foregoing and (d) all rights corresponding to any of the foregoing throughout the world. "Trustee" has the meaning given to such term in the Indenture. "Uniform Commercial Code" means, unless otherwise provided in this Agreement, the Uniform Commercial Code as adopted by and in effect from time to time in the State or in any other jurisdiction, as applicable. 28 36 "Wire Transfer Procedures" means the rules, policies and procedures adopted and implemented by the Agent and its Affiliates at any time and from time to time with respect to electronic funds transfers, including, without limitation, the Security Procedures, all as the same may be amended, restated, supplemented, terminated or otherwise modified at any time and from time to time by the Agent in its sole and absolute discretion. "Year 2000 Problem" has the meaning set forth in Section 4.1.27 (Year 2000). Section 1.2 ACCOUNTING TERMS AND OTHER DEFINITIONAL PROVISIONS. Unless otherwise defined herein, as used in this Agreement and in any certificate, report or other document made or delivered pursuant hereto, accounting terms not otherwise defined herein, and accounting terms only partly defined herein, to the extent not defined, shall have the respective meanings given to them under GAAP. Unless otherwise defined herein, all terms used herein which are defined by the Uniform Commercial Code shall have the same meanings as assigned to them by the Uniform Commercial Code unless and to the extent varied by this Agreement. The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and article, section, subsection, schedule and exhibit references are references to articles, sections or subsections of, or schedules or exhibits to, as the case may be, this Agreement unless otherwise specified. As used herein, the singular number shall include the plural, the plural the singular and the use of the masculine, feminine or neuter gender shall include all genders, as the context may require. Reference to any one or more of the Financing Documents shall mean the same as the foregoing may from time to time be amended, restated, substituted, extended, renewed, supplemented or otherwise modified. Reference in this Agreement and the other Financing Documents to the "Obligor", the "Obligors", "each Obligor" or otherwise with respect to any one or more of the Obligors shall mean each and every Obligor and any one or more of the Obligors, jointly and severally, unless a specific Obligor is expressly identified. ARTICLE II THE CREDIT FACILITIES Section 2.1 THE REVOLVING CREDIT FACILITY. 2.1.1 REVOLVING CREDIT FACILITY. Subject to and upon the provisions of this Agreement, the Lenders collectively, but severally, establish a revolving credit facility in favor of the Borrower. The aggregate of all advances under the Revolving Credit Facility is sometimes referred to in this Agreement collectively as the "Revolving Loan". The amount set forth below opposite each Lender's name is herein called such Lender's "Revolving Credit Committed Amount" and the total of each Lender's Revolving Credit Committed Amount is herein called the "Total Revolving Credit Committed Amount". 29 37 The proportionate share set forth below opposite each Lender's name is herein called such Lender's "Revolving Credit Pro Rata Share": Revolving Credit Revolving Credit Lender Committed Amount Pro Rata Share ------ ---------------- ---------------- NationsBank $27,692,340 46% LaSalle $18,461,520 31% PNC $13,846,140 23% Total Revolving Credit $60,000,000 100% Committed Amount Neither the Agent nor any of the Lenders shall be responsible for the Revolving Credit Commitment of any other Lender, nor will the failure of any Lender to perform its obligations under its Revolving Credit Commitment in any way relieve any other Lender from performing its obligations under its Revolving Credit Commitment. During the Revolving Credit Commitment Period, the Borrower may request advances under the Revolving Credit Facility in accordance with the provisions of this Agreement; provided that after giving effect to the Borrower's request: (a) the outstanding principal balance of each Lender's Pro Rata Share of the Revolving Loan and of the Letter of Credit Obligations would not exceed the lesser of (i) such Lender's Revolving Credit Committed Amount or (ii) such Lender's Pro Rata Share of the then most current Borrowing Base; and, (b) the aggregate outstanding principal balance of the Revolving Loan and all Letter of Credit Obligations would not exceed the lesser of (i) the Total Revolving Credit Committed Amount or (ii) the then most current Borrowing Base. If at any time the unpaid principal balance of the Revolving Loan exceeds the Total Revolving Credit Committed Amount in effect from time to time, the Borrower shall pay such excess to the Agent for the benefit of the Lenders ON DEMAND. 2.1.2 PROCEDURE FOR MAKING ADVANCES UNDER THE REVOLVING LOAN; LENDER PROTECTION LOANS. The Borrower may borrow under the Revolving Credit Facility on any Business Day. Advances under the Revolving Loan shall be deposited to a demand deposit account of the Borrower with the Agent or shall be otherwise applied as directed by the Borrower, which direction the Agent may require to be in writing. Not later than 1:30 p.m. (Baltimore City Time) on the date of the requested borrowing, the Borrower shall give the Agent 30 38 oral or written notice (a "Loan Notice") of the amount and (if requested by the Agent) the purpose of the requested borrowing. Any oral Loan Notice shall be confirmed in writing by the Borrower within three (3) Business Days after the making of the requested advance under the Revolving Loan. Upon receipt of any such Loan Notice, the Agent shall promptly notify each Lender of the amount of each advance to be made by such Lender on the requested borrowing date. Not later than 2:30 p.m. (Baltimore City Time) on each requested borrowing date for the making of advances under the Revolving Loan, each Lender shall, if it has received timely notice from the Agent of the Borrower's request for such advances, make available to the Agent, in funds immediately available to the Agent at the Agent's office set forth in Notices. (Notices), such Lender's Pro Rata Share of the advances to be made on such date. In addition, the Borrower hereby irrevocably authorizes the Lenders at any time and from time to time, without further request from or notice to the Borrower, to make advances under the Revolving Loan which the Agent, in its sole and absolute discretion, deems necessary or appropriate to protect the interests of the Agent and/or any or all of the Lenders under this Agreement, including, without limitation, advances under the Revolving Loan made to cover debit balances in the Revolving Loan Account, principal of, and/or interest on, the Loan, any of the Obligations any Letter of Credit Obligations, and/or Enforcement Costs, prior to, on, or after the termination of other advances under this Agreement, regardless of whether the outstanding principal amount of the Revolving Loan which the Lenders may advance hereunder exceeds the Total Revolving Credit Committed Amount. The Agent agrees to give the Borrower notice of any such advances made by the Lenders promptly after the making of any such advance; the Agent agrees to use its best efforts to give such notice to the Borrower on the same day that any such advance is made. 2.1.3 BORROWING BASE. As used in this Agreement, "Borrowing Base" means at any time, an amount equal to the aggregate of (a) eighty-five percent (85%) of the amount of Eligible Receivables, PLUS (b) the lesser of (i) (A) fifty-five percent (55%) of the amount of Eligible Inventory (other than optical Inventory) PLUS (B) sixty-five (65%) of the amount of Eligible Inventory consisting of optical Inventory; or (ii) Thirty Million Dollars ($30,000,000) 31 39 LESS (c) the Interest Rate Protection Reserve and the Foreign Exchange Exposure. The Borrowing Base shall be computed based on the Borrowing Base Report most recently delivered to and accepted by the Agent in its discretion. In the event the Borrower fails to furnish a Borrowing Base Report required by Section 2.1.4 (Borrowing Base Report), or in the event the Agent believes that a Borrowing Base Report is no longer accurate, the Agent may, in its good faith discretion exercised from time to time and without limiting other rights and remedies under this Agreement, direct the Lenders to suspend the making of or limit advances under the Revolving Loan. The Borrowing Base shall be subject to reduction by amounts credited to the Collateral Account since the date of the most recent Borrowing Base Report and by the amount of any Receivable or any Inventory which was included in the Borrowing Base but which the Agent in good faith determines fails to meet the respective criteria applicable from time to time for Eligible Receivables or Eligible Inventory. If at any time the total of the aggregate principal amount of the Revolving Loan and Outstanding Letter of Credit Obligations exceeds the Borrowing Base, a borrowing base deficiency ("Borrowing Base Deficiency") equal to the amount of such excess shall exist. Each time a Borrowing Base Deficiency exists, the Borrower at the sole and absolute discretion of the Agent exercised from time to time shall pay the Borrowing Base Deficiency ON DEMAND to the Agent for the benefit of the Lenders from time to time. Without implying any limitation on the Agent's discretion with respect to the Borrowing Base, the criteria for Eligible Receivables and for Eligible Inventory contained in the respective definitions of Eligible Receivables and of Eligible Inventory are in part based upon the business operations of the Borrower, Foster Grant and Fantasma existing on or about the Closing Date and upon information and records furnished to the Agent by the Borrower. If at any time or from time to time hereafter, the business operations of the Borrower, Foster Grant and Fantasma change or such information and records furnished to the Agent is incorrect or misleading, the Agent in its good faith discretion, may at any time and from time to time during the duration of this Agreement change such criteria or add new criteria; provided, however, if the inclusion of new criteria would immediately result in a reduction to the Borrowing Base of $500,000 or more, the Agent agrees to give the Borrower no less than two (2) Business Days prior notice thereof. The Agent shall communicate such changed or additional criteria to the Borrower from time to time either orally or in writing. 2.1.4 BORROWING BASE REPORT. The Borrower will furnish to the Agent no less frequently than the 10th Business Day after the last day of each month and at such other times as may be requested by the Agent or any of the Lenders a report of the Borrowing Base (each a "Borrowing Base Report"; collectively, the "Borrowing Base Reports") in the form required from time to time by the Agent, appropriately completed and duly signed. The Borrowing Base Report shall contain the amount and payments on the Receivables (with a detailed breakdown as between Gross Receivables and Net Book Value of Receivables, unless the Agent consents otherwise from time to time), the 32 40 value of Inventory, and the calculations of the Borrowing Base, all in such detail, and accompanied by such supporting and other information, as the Agent may from time to time request. Upon the Agent's request and upon the creation of any Receivables, or at such intervals as the Agent may require, the Borrower will provide the Agent with (a) confirmatory assignment schedules; (b) copies of Account Debtor invoices; (c) evidence of shipment or delivery; and (d) such further schedules, documents and/or information regarding the Receivables and the Inventory as the Agent may reasonably require. The items to be provided under this subsection shall be in form satisfactory to the Agent, and certified as true and correct by a Responsible Officer, and delivered to the Agent from time to time solely for the Agent's convenience in maintaining records of the Collateral. The Borrower's failure to deliver any of such items to the Agent shall not affect, terminate, modify, or otherwise limit the Liens of the Agent and the Lenders in the Collateral. 2.1.5 REVOLVING CREDIT NOTES. The obligation of the Borrower to pay each Lender's Pro Rata Share of the Revolving Loan, with interest, shall be evidenced by a series of promissory notes (as from time to time extended, amended, restated, supplemented or otherwise modified, collectively the "Revolving Credit Notes" and individually a "Revolving Credit Note") substantially in the form of EXHIBIT "A" attached hereto and made a part hereof, with appropriate insertions. Each Lender's Revolving Credit Note shall be dated as of the Closing Date, shall be payable to the order of such Lender at the times provided in the Revolving Credit Note, and shall be in the principal amount of such Lender's Revolving Credit Pro Rata Share. The Borrower acknowledges and agrees that, if the outstanding principal balance of the Revolving Loan outstanding from time to time exceeds the aggregate face amount of the Revolving Credit Notes, the excess shall bear interest at the rates provided from time to time for advances under Revolving Loan evidenced by the Revolving Credit Notes and shall be payable, with accrued interest, ON DEMAND. The Revolving Credit Notes shall not operate as a novation of any of the Obligations or nullify, discharge, or release any such Obligations or the continuing contractual relationship of the parties hereto in accordance with the provisions of this Agreement. 2.1.6 MANDATORY PREPAYMENTS OF REVOLVING LOAN. Subject to the provisions of Section 2.1.11 (Early Termination Fee) and Section 2.3.4 (Indemnity), the Borrower shall make the mandatory prepayments of the Revolving Loan (each a "Revolving Loan Mandatory Prepayment" and collectively, the "Revolving Loan Mandatory Prepayments") in the following amounts and at the following times: (a) The Borrower shall make a Revolving Loan Mandatory Prepayment at any time and from time to time in such amounts requested by the Agent pursuant to Section 2.1.3 (Borrowing Base) in order to cover any Borrowing Base Deficiency; and (b) The Borrower shall make a Revolving Loan Mandatory Prepayment on such dates and in such amounts to achieve compliance with the provisions of Section 2.1.12 (Required Availability). 33 41 2.1.7 OPTIONAL PREPAYMENTS OF REVOLVING LOAN. Subject to the provisions of Section 2.1.11 (Early Termination Fee) and Section 2.3.4 (Indemnity), the Borrower shall have the option at any time and from time to time prepay (each a "Revolving Loan Optional Prepayment" and collectively the "Revolving Loan Optional Prepayments") the Revolving Loan, in whole or in part without premium or penalty. 2.1.8 THE COLLATERAL ACCOUNT. The Borrower, Foster Grant and Fantasma will deposit, or cause to be deposited, all Items of Payment to a bank account designated by the Agent and from which the Agent alone has power of access and withdrawal (the "Collateral Account"). Each deposit shall be made not later than the next Business Day after the date of receipt of the Items of Payment. The Items of Payment shall be deposited in precisely the form received, except for the endorsements of the Borrower, Foster Grant or Fantasma where necessary to permit the collection of any such Items of Payment, which endorsement the Borrower, Foster Grant and Fantasma hereby jointly and severally agree to make. In the event the Borrower, Foster Grant and Fantasma fail to do so, the Borrower, Foster Grant and Fantasma hereby authorize the Agent to make the endorsement in the name of any or all of the Borrower, Foster Grant and Fantasma. Prior to such a deposit, the Borrower, Foster Grant and Fantasma will not commingle any Items of Payment with any of the Borrower's, Foster Grant's or Fantasma's other funds or property, but will hold them separate and apart in trust and for the account of the Agent for the benefit of the Lenders ratably and the Agent. In addition, if so directed by the Agent, the Borrower, Foster Grant and Fantasma shall direct the mailing of all Items of Payment from their Account Debtors to one or more post-office boxes designated by the Agent, or to such other additional or replacement post-office boxes pursuant to the request of the Agent from time to time (collectively, the "Lockbox") monitored by the Agent or by a commercial bank chosen by the Borrower and accepted by the Agent in writing, which acceptance shall not be unreasonably withheld. The Agent shall have unrestricted and exclusive access (through such commercial bank, if applicable) to the Lockbox. The Borrower, Foster Grant and Fantasma hereby authorize the Agent to inspect all Items of Payment, endorse all Items of Payment in the name of any or all of the Borrower, Foster Grant and Fantasma, and deposit such Items of Payment in the Collateral Account. The Agent reserves the right, exercised in its sole and absolute discretion from time to time, to provide to the Collateral Account credit prior to final collection of an Item of Payment and to disallow credit for any Item of Payment which is unsatisfactory to the Agent. In the event Items of Payment are returned to the Agent for any reason whatsoever, the Agent may, in the exercise of its discretion from time to time, forward such Items of Payment a second time. Any returned Items of Payment shall be charged back to the Collateral Account, the Revolving Loan Account, or other account, as appropriate. The Agent will apply the whole or any part of the collected funds credited to the Collateral Account against the Revolving Loan (or with respect to Items of Payment which are not proceeds of Accounts or Inventory or after a Default or an Event of Default, against any of the Obligations) or credit such collected funds to a depository account of any or all of the 34 42 Borrower, Foster Grant or Fantasma with the Agent, the order and method of such application to be in the sole discretion of the Agent. IN CONSIDERATION FOR THE AGENT'S AGREEMENT TO CREDIT THE COLLATERAL ACCOUNT AS OF THE BUSINESS DAY ON WHICH THE AGENT RECEIVES ITEMS OF PAYMENT AND TO REIMBURSE THE AGENT FOR THE COST OF DELAYS IN THE COLLECTION AND CLEARANCE OF ITEMS OF PAYMENT, THE BORROWER, FOSTER GRANT AND FANTASMA HEREBY CONSENT AND AGREE THAT IN COMPUTING INTEREST ON THE OBLIGATIONS ALL ITEMS OF PAYMENT SHALL BE DEEMED RECEIVED BY THE AGENT ONE (1) BUSINESS DAY AFTER THE AGENT'S ACTUAL RECEIPT THEREOF. 2.1.9 REVOLVING LOAN ACCOUNT. The Agent will establish and maintain a loan account on its books (the "Revolving Loan Account") to which the Agent will (a) DEBIT (i) the principal amount of each advance under the Revolving Loan made by the Lenders hereunder as of the date made, (ii) the amount of any interest accrued on the Revolving Loan as and when due, and (iii) any other amounts due and payable by the Borrower to the Agent and/or the Lenders from time to time under the provisions of this Agreement in connection with the Revolving Loan, including, without limitation, Enforcement Costs, Fees, late charges, and service, collection and audit fees, as and when due and payable, and (b) CREDIT all payments made by the Borrower to the Agent on account of the Revolving Loan as of the date made including, without limitation, funds credited to the Revolving Loan Account from the Collateral Account. The Agent may debit the Revolving Loan Account for the amount of any Item of Payment that is returned to the Agent unpaid. All credit entries to the Revolving Loan Account are conditional and shall be readjusted as of the date made if final and indefeasible payment is not received by the Agent in cash or solvent credits. Any and all periodic or other statements or reconciliations, and the information contained in those statements or reconciliations, of the Revolving Loan Account shall be final, binding and conclusive upon the Borrower in all respects, absent manifest error, unless the Agent receives specific written objection thereto from the Borrower within ninety (90) Business Days after such statement or reconciliation shall have been sent by the Agent. 2.1.10 REVOLVING CREDIT UNUSED LINE FEE. The Borrower shall pay to the Agent for the ratable benefit of the Lenders a monthly revolving credit facility fee (collectively, the "Revolving Credit Unused Line Fees" and individually, a "Revolving Credit Unused Line Fee") in an amount equal to three-eighths of one percent (.375%) per annum on the average daily unused and undisbursed portion of the Total Revolving Credit Committed Amount in effect from time to time accruing during each calendar month, minus the average amount by which borrowings under the Revolving Loan were reduced due to the operation of Section 2.1.12 (Required Availability). The accrued and unpaid portion of the Revolving Credit Unused Line Fee shall be paid in arrears by the Borrower to the Agent on the first day of each month, commencing on the first such date following the date hereof, and on the Revolving Credit Termination Date. 35 43 2.1.11 EARLY TERMINATION FEE. In the event of the termination by, or on behalf of, the Borrower, of the Revolving Credit Commitments at any time prior to the Revolving Credit Expiration Date (as extended from time to time in accordance with the provisions of this Agreement), the Borrower shall pay a fee (the "Early Termination Fee") equal to following amount at the following times: - ------------------------------------------------------------------------------- Period Early Termination Fee - ------------------------------------------------------------------------------- Closing Date, through and including, day $500,000 preceding the first anniversary date of the Closing Date - ------------------------------------------------------------------------------- First anniversary date of the Closing Date, $300,000 through and including, day preceding the second anniversary date of the Closing Date - ------------------------------------------------------------------------------- At any time on or after the second anniversary $100,000 date of the Closing Date - ------------------------------------------------------------------------------- Payment of the Revolving Loan in whole or in part by or on behalf of the Borrower, by court order or otherwise, following and as a result of the institution of any bankruptcy proceeding by or against the Borrower, shall be deemed to be a prepayment of the Revolving Loan subject to the Early Termination Fee provided in this subsection. Notwithstanding the foregoing, the Borrower shall not be required to pay the Early Termination Fee in connection with a termination of the Revolving Credit Commitments if the repayment of all Obligations is from (a) the proceeds of an issuance of common stock by Foster Holdings, (b) the proceeds of an issuance of common stock by the Borrower, (c) a replacement credit facility extended by NationsBank, or its successors, to the Borrower, which generates sufficient proceeds and is in fact used to repay all Obligations (including all Letter of Credit Obligations) in full and, if, in connection with such repayment of all Obligations, all Letters of Credit are terminated or (d) a replacement credit facility extended by another lender to the Borrower on terms and conditions that the Agent and the Lenders did not offer to the Borrower after having been provided a copy of such other lender's commitment and having had not less than thirty (30) days to review, approve and commit to in writing a comparable credit facility. 2.1.12 REQUIRED AVAILABILITY UNDER THE REVOLVING CREDIT FACILITY. (a) The Borrower shall not at any time after the Closing Date permit the outstanding principal amount of the Revolving Loan plus the Outstanding Letter of Credit Obligations to exceed an amount equal to the lesser of (i) the Total Revolving Credit Committed Amount or (ii) the Borrowing Base, minus (A) on the Closing Date One Million Dollars ($1,000,000) or (B) after the Closing Date Seven Hundred Fifty Thousand Dollars ($750,000). (b) The Borrower shall make a Revolving Loan Mandatory Prepayment pursuant to the provisions of Section 2.1.6 (Mandatory Prepayments of Revolving Loan) to the extent necessary to achieve compliance with this Section. 36 44 Section 2.2 THE LETTER OF CREDIT FACILITY. 2.2.1 LETTERS OF CREDIT. Subject to and upon the provisions of this Agreement, and as a part of the Revolving Credit Commitments, the Borrower, upon the prior approval of the Agent, may obtain standby and documentary letters of credit (as the same may from time to time be amended, supplemented or otherwise modified, each a "Letter of Credit" and collectively the "Letters of Credit") from the Agent from time to time from the Closing Date until the Business Day preceding the Revolving Credit Termination Date. The Borrower will not be entitled to obtain a Letter of Credit hereunder unless (a) after giving effect to the request, the outstanding principal balance of the Revolving Loan and of the Letter of Credit Obligations would not exceed the lesser of (i) the Total Revolving Credit Committed Amount, or (ii) the most current Borrowing Base, and (b) the sum of the aggregate face amount of the then outstanding Letters of Credit (including the face amount of the requested Letter of Credit) does not exceed Three Million Dollars ($3,000,000). The Agent confirms that the amount available for borrowing under the Revolving Credit Facility is not reduced except to the extent Letters of Credit and/or Letter of Credit Obligations are outstanding. 2.2.2 LETTER OF CREDIT FEES. Prior to or simultaneously with the opening of each Letter of Credit, the Borrower shall pay to the Agent for the ratable benefit of the Lenders, a letter of credit fee (each a "Letter of Credit Fee" and collectively the "Letter of Credit Fees") in an amount equal to two hundred fifty (250) basis points per annum of the face amount of the Letter of Credit. The Letter of Credit Fees shall be paid upon the opening of each Letter of Credit and upon each anniversary thereof. In addition, the Borrower shall pay to the Agent, for its own account, any and all additional issuance, negotiation, processing, transfer or other fees to the extent and as and when required by the provisions of any Letter of Credit Agreement. All such additional fees are included in and are a part of the "Fees" payable by the Borrower under the provisions of this Agreement and are for the sole and exclusive benefit of the Agent and are a part of the Agent's Obligations. 2.2.3 TERMS OF LETTERS OF CREDIT. Each Letter of Credit shall (a) be opened pursuant to a Letter of Credit Agreement, and (b) expire on a date not later than the Business Day preceding the Revolving Credit Expiration Date; provided, however, if any Letter of Credit does have an expiration date later than the Business Day preceding the Revolving Credit Termination Date, as of the Business Day preceding the Revolving Credit Termination Date an advance of the Revolving Loan Credit Facility shall be made by the Lenders in the face amount of such Letter of Credit (or Letters of Credit) and the proceeds thereof shall be deposited in an account titled in the name of the Agent as trustee for the Borrower. The proceeds of the trustee account referred to in the immediately preceding sentence shall be held as collateral for the Letter of Credit (or Letters of Credit) and in the event of a draw under the Letter of Credit (or Letters of Credit) used to pay any such draw. The aggregate face amount of all Letters of Credit at any one time outstanding and issued by the Agent pursuant to the provisions of this Agreement, plus the amount of any unpaid Letter of 37 45 Credit Fees accrued or scheduled to accrue thereon, and less the aggregate amount of all drafts issued under or purporting to have been issued under such Letters of Credit that have been paid by the Agent, is herein called the "Outstanding Letter of Credit Obligations". 2.2.4 PROCEDURE FOR LETTERS OF CREDIT. The Borrower shall give the Agent written notice at least three (3) Business Days prior to the date on which a Letter of Credit is requested to be opened of its request for a Letter of Credit. Such notice shall be accompanied by a duly executed and delivered Letter of Credit Agreement. Upon receipt of the Letter of Credit Agreement and the Letter of Credit Fee, the Agent shall process such Letter of Credit Agreement in accordance with its customary procedures and open such Letter of Credit on the Business Day specified in such notice. 2.2.5 PARTICIPATIONS IN THE LETTERS OF CREDIT. Each Lender hereby irrevocably authorizes the Agent to issue Letters of Credit in accordance with the provisions of this Agreement. As of the date each Letter of Credit is opened or issued by the Agent pursuant to the provisions of this Agreement, each Lender shall have an undivided participating interest in (i) the rights and obligations of the Agent under such Letter of Credit, and (ii) the Outstanding Letter of Credit Obligations of the Borrower with respect to such Letter of Credit, in an amount equal to each Lender's Revolving Credit Pro Rata Share of such Outstanding Letter of Credit Obligations. 2.2.6 PAYMENTS BY THE LENDERS TO THE AGENT. If the Borrower fails to pay to the Agent any Current Letter of Credit Obligations as and when due and payable, the Agent shall promptly notify each of the Lenders and shall demand payment from each of the Lenders such Lender's Revolving Credit Pro Rata Share of such unpaid Current Letter of Credit Obligations. In addition, if any amount paid to the Agent on account of Current Letter of Credit Obligations is rescinded or required to be restored or turned over by the Agent upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of the Borrower or upon or as a result of the appointment of a receiver, intervenor, trustee, conservator or similar officer for the Borrower, or is otherwise not indefeasibly covered by an advance under the Revolving Loan, the Agent shall promptly notify each of the Lenders and shall demand payment from each of the Lenders of its Revolving Credit Pro Rata Share of its portion of the Current Letter of Credit Obligations to be remitted to the Borrower. Each of the Lenders irrevocably and unconditionally agrees to honor any such demands for payment under this Section and promises to pay to the Agent's account on the same Business Day as demanded the amount of its Revolving Credit Pro Rata Share of the Current Letter of Credit Obligations in immediately available funds, without any setoff, counterclaim or deduction of any kind. Any payment by a Lender hereunder shall in no way release, discharge or lessen the obligation of the Borrower to pay Current Letter of Credit Obligations to the Agent in accordance with the provisions of this Agreement. The obligation of each of the Lenders to remit the amounts of its Revolving Credit Pro Rata Share of Current Letter of Credit Obligations for the account of the Agent 38 46 pursuant to this Section shall be unconditional and irrevocable under any and all circumstances and may not be terminated, suspended or delayed for any reason whatsoever, provided that all payments of such amounts by each of the Lenders shall be without prejudice to the rights of each of the Lenders with respect to the Agent's alleged willful misconduct. Any claim any Lender may have against the Agent as a result of the Agent's alleged willful misconduct may be brought by such Lender in a separate action against the Agent but may not be used as a defense to payment under the provisions of this Section. No failure of any Lender to remit the amount of its Revolving Credit Pro Rata Share of Current Letter of Credit Obligations to the Agent pursuant to this Section shall affect the obligations of the Agent under any Letter of Credit, and if any Lender does not remit to the Agent the amount of its Revolving Credit Pro Rata Share of Current Letter of Credit Obligations on the same day as demanded, then without limiting such Lender's obligation to transmit funds on the same Business Day as demanded, such Lender shall be obligated to pay, on demand of the Agent and without setoff, counterclaim or deduction of any kind whatsoever interest on the unpaid amount at the Federal Funds Rate for each day from the date such amount shall be due and payable to the Agent until the date such amount shall have been paid in full to the Agent by such Lender. Section 2.3 INTEREST. 2.3.1 APPLICABLE INTEREST RATES. (a) Each Loan shall bear interest until maturity (whether by acceleration, declaration, extension or otherwise) at either the Base Rate or the LIBOR Rate, as selected and specified by the Borrower in an Interest Rate Election Notice furnished to the Agent in accordance with the provisions of Section 2.3.2(e) (Selection of Interest Rates), or as otherwise determined in accordance with the provisions of this Section 2.3 (Interest), and as may be adjusted from time to time in accordance with the provisions of Section 2.3.3 (Inability to Determine LIBOR Base Rate). (b) Notwithstanding the foregoing, following the occurrence and during the continuance of an Event of Default, at the option of the Agent, all Loan and other Obligations shall bear interest at the Post-Default Rate. (c) With resect to the Revolving Loans, the Applicable Margin for (i) LIBOR Loans shall be two (2%) per annum, and (ii) Base Rate Loans shall be one-quarter (.25%) per annum. (d) Changes in the Applicable Margin shall be made not more frequently than quarterly based on the Borrower's Pricing Ratio, determined by the Agent in the exercise of its sole and absolute discretion from the monthly reports required by Section 6.1.1(c)) (Monthly Statements and Certificates) commencing with the statements for the period ending October 3, 1998. The Applicable Margin shall vary depending upon the Borrower's Pricing Ratio, as follows: 39 47 - ------------------------------------------------------------------------------- Applicable Margin for Applicable Margin for Base Rate Revolving Pricing Ratio LIBOR Revolving Loans Loans - ------------------------------------------------------------------------------- Greater than 1.0 to 1.0 but less than 1.15 to 1.0 225 basis points 50 basis points - ------------------------------------------------------------------------------- Greater than 1.15 to 1.0 but less than 1.6 to 1.0 200 basis points 25 basis points - ------------------------------------------------------------------------------- Greater than 1.6 to 1.0 but less than 2.0 to 1.0 175 basis points 0 basis points - ------------------------------------------------------------------------------- Greater than 2.0 to 1.0 150 basis points 0 basis points - ------------------------------------------------------------------------------- 2.3.2 SELECTION OF INTEREST RATES. (a) The Borrower may select the initial Applicable Interest Rate or Applicable Interest Rates to be charged on the Loan. (b) From time to time after the date of this Agreement as provided in this Section, by a proper and timely Interest Rate Election Notice furnished to the Agent in accordance with the provisions of Section 2.3.1(c)(e), the Borrower may select an initial Applicable Interest Rate or Applicable Interest Rates for the Loan or may convert the Applicable Interest Rate and, when applicable, the Interest Period, for any existing Loan to any other Applicable Interest Rate or, when applicable, any other Interest Period. (c) The Borrower's selection of an Applicable Interest Rate and/or an Interest Period, the Borrower's election to convert an Applicable Interest Rate and/or an Interest Period to another Applicable Interest Rate or Interest Period, and any other adjustments in an interest rate are subject to the following limitations: (i) the Borrower shall not at any time select or change to an Interest Period that extends beyond the Revolving Credit Expiration Date, (ii) except as otherwise provided in Section 2.3.4 (Indemnity), no change from the LIBOR Rate to the Base Rate shall become effective on a day other than a Business Day and on a day which is the last day of the then current Interest Period, no change of an Interest Period shall become effective on a day other than the last day of the then current Interest Period, and no change from the Base Rate to the LIBOR Rate shall become effective on a day other than a day which is a Eurodollar Business Day. (iii) any Applicable Interest Rate change for any Loan to be effective on a date on which any principal payment on account of such Loan is scheduled to be paid shall be made only after such payment shall have been made, 40 48 (iv) no more than eight (8) different LIBOR Rates may be outstanding at any time and from time to time, (v) the first day of each Interest Period shall be a Eurodollar Business Day, (vi) as of the effective date of a selection, there shall not exist a Default or an Event of Default, and (vii) the minimum principal amount of a LIBOR Loan shall be Five Hundred Thousand Dollars ($500,000). (d) If a request for an advance under the Loan is not accompanied by an Interest Rate Election Notice or does not otherwise include a selection of an Applicable Interest Rate and, if applicable, an Interest Period, or if, after having made a selection of an Applicable Interest Rate and, if applicable, an Interest Period, the Borrower fails or is not otherwise entitled under the provisions of this Agreement to continue such Applicable Interest Rate or Interest Period, the Borrower shall be deemed to have selected the Base Rate as the Applicable Interest Rate until such time as the Borrower has selected a different Applicable Interest Rate and specified an Interest Period in accordance with, and subject to, the provisions of this Section. (e) The Lenders will not be obligated to make advances of the Loan, to convert the Applicable Interest Rate on advances of the Loan to another Applicable Interest Rate, or to change Interest Periods, unless the Agent shall have received an irrevocable written or telephonic notice (an "Interest Rate Election Notice") from the Borrower specifying the following information: (i) the amount to be borrowed or converted, (ii) a selection of the Base Rate or the LIBOR Rate, (iii) the length of the Interest Period if the Applicable Interest Rate selected is the LIBOR Rate, and (iv) the requested date on which such election is to be effective. Any telephonic notice must be confirmed in writing within three (3) Business Days. Each Interest Rate Election Notice must be received by the Agent not later than 1:30 p.m. (Baltimore City time) on the Business Day of any requested borrowing or conversion in the case of a selection of the Base Rate and not later than 1:30 p.m. (Baltimore City time) on the third Business Day before the effective date of any requested borrowing or conversion in the case of a selection of the LIBOR Rate. 41 49 2.3.3 INABILITY TO DETERMINE LIBOR BASE RATE. In the event that (a) the Agent shall have determined that, by reason of circumstances affecting the London interbank eurodollar market, adequate and reasonable means do not exist for ascertaining the LIBOR Base Rate for any requested Interest Period with respect to a Loan the Borrower has requested to be made as or to be converted to a LIBOR Loan or (b) the Agent shall determine that the LIBOR Base Rate for any requested Interest Period with respect to a Loan the Borrower has requested to be made as or to be converted to a LIBOR Loan does not adequately and fairly reflect the cost to the Agent and/or any of the Lenders of funding or converting such Loan, the Agent shall give telephonic notice, followed by prompt written notice, or written notice of such determination to the Borrower at least one (1) Business Day prior to the proposed date for funding or converting such Loan. If such notice is given, any request for a LIBOR Loan shall be made as or converted to a Base Rate Loan. Until such notice has been withdrawn by the Agent, the Borrower will not request that any Loan be made as or converted to a LIBOR Loan. 2.3.4 INDEMNITY. The Borrower agrees to indemnify and reimburse the Agent and each of the Lenders and to hold the Agent and each of the Lenders harmless from any loss, cost (including administrative costs) or expense which the Agent and/or any of the Lenders may sustain or incur as a consequence of (a) a default by the Borrower in payment when due of the principal amount of or interest on any LIBOR Loan, (b) the failure of the Borrower to make, or convert the Applicable Interest Rate of, a Loan after the Borrower has given a Loan Notice or an Interest Rate Election Notice, (c) the failure of the Borrower to make any prepayment of a LIBOR Loan after the Borrower has given notice of such intention to make such a prepayment, and/or (d) the making by the Borrower of a prepayment of a LIBOR Loan on a day which is not the last day of the Interest Period for such LIBOR Loan, calculated as provided in the following paragraph, including, without limitation, any such loss or expense arising from the reemployment of funds obtained by the Agent and/or any of the Lenders to maintain any LIBOR Loan or from fees payable to terminate the deposits from which such funds were obtained. This agreement and covenant of the Borrower shall survive termination or expiration of this Agreement and payment of the other Obligations. Contemporaneously with any prepayment of principal of a LIBOR Loan on a date which is not the last date of the applicable Interest Period, a prepayment fee shall be due and payable to the Lenders in an amount equal to the PRODUCT of (A) the amount so prepaid MULTIPLIED BY (B) THE DIFFERENCE (but not less than zero) of (i) the constant maturity 360-day interest yield (as of the first day of the then effective Interest Period and expressed as a decimal) for a United States Treasury bill, note, or bond (a "Treasury obligation") selected by the Lender, in an aggregate amount comparable to the amount prepaid, 42 50 and having, as of the first day of the then effective Interest Period, a remaining term approximately equal to the original Interest Period, MINUS (ii) the 360-day interest yield (as of the Business Day immediately preceding the prepayment date and expressed as a decimal) on such Treasury obligation and having, as of the Business Day immediately preceding the prepayment date, a remaining term until maturity approximately equal to the unexpired portion of the Interest Period, MULTIPLIED BY (C) THE QUOTIENT of (y) the number of calendar days in the unexpired portion of the Interest Period, DIVIDED BY (x) 360. The applicable yields on the Treasury obligations described above shall be determined based upon the Federal Reserve statistical release H.15 published for the applicable determination dates set forth above. Any Treasury obligation selected when the related Interest Period is one year or less shall be United States Treasury Bills. Neither the Agent nor any of the Lenders shall be obligated or required to have actually reinvested the prepaid amount of the LIBOR Loan in any such Treasury obligation as a condition precedent to the Borrower's being obligated to pay a prepayment fee as outlined above. Neither the Agent nor any of the Lenders shall be obligated to accept any prepayment of principal unless it is accompanied by the prepayment fee, if any, due in connection therewith as calculated pursuant to the provisions of this paragraph. No prepayment fee payable in connection herewith shall in any event or under any circumstances be deemed or construed as a penalty. 2.3.5 PAYMENT OF INTEREST. (a) Unpaid and accrued interest on any advance of the Revolving Loan which consists of a Base Rate Loan shall be paid monthly, in arrears, on the first day of each calendar month, commencing on the first such date after the date of this Agreement, and on the first day of each calendar month thereafter, and at maturity (whether by acceleration, declaration, extension or otherwise). (b) Unpaid and accrued interest on any LIBOR Loan shall be paid on the last Business Day of each Interest Period for such LIBOR Loan and at maturity (whether by acceleration, declaration, extension or otherwise); provided, however that any and all unpaid and accrued interest on any LIBOR Loan prepaid prior to expiration of the then current Interest Period for such LIBOR Loan shall be paid immediately upon prepayment; and provided further, further that with respect to any LIBOR Loan for which the Interest Period is one hundred and eighty (180) days, unpaid and accrued interest shall be paid quarterly of the first day of each quarterly period during such Interest Period. 43 51 Section 2.4 GENERAL FINANCING PROVISIONS. 2.4.1 COMMUNICATIONS AND INTER-COMPANY ADVANCES. (a) Neither the Agent nor any of the Lenders assumes any responsibility or liability for any errors, mistakes, and/or discrepancies in the oral, telephonic, written or other transmissions of any instructions, orders, requests and confirmations between the Agent and the Borrower, Foster Grant or Fantasma or the Agent and any of the Lenders in connection with the Credit Facilities, any Loan, any Letter of Credit or any other transaction in connection with the provisions of this Agreement. (b) Without implying any limitation on the joint and several nature of the Obligations, the Lenders agree that, notwithstanding any other provision of this Agreement, the Obligors may create reasonable inter-company indebtedness between or among the Obligors with respect to the allocation of the benefits and proceeds of the advances and Credit Facilities under this Agreement. Each of the Obligors hereby waives all rights of counterclaim, recoupment and offset between or among themselves arising on account of that indebtedness and otherwise. None of the Borrower, Foster Grant and Fantasma shall evidence the inter-company indebtedness or rights of contribution by note or other instrument, and shall not secure such indebtedness or rights of contribution with any Lien or security, even though any such Lien and security shall be part of the Collateral. Notwithstanding anything contained in this Agreement to the contrary, the amount covered by each of the Obligors under the Obligations (including, without limitation, Section 2.4.9 (Guaranty)) shall be limited to an aggregate amount (after giving effect to any collections from, rights to receive contribution from or payments made by or on behalf of any other of the Obligors in respect of the Obligations) which, together with other amounts owing by the Obligors to the Agent and the Lenders under the Obligations, is equal to the largest amount that would not be subject to avoidance under the Bankruptcy Code or any applicable provisions of any applicable, comparable state or other Laws. 2.4.2 USE OF PROCEEDS OF THE LOAN. The proceeds of the Loan shall be used by the Borrower for Permitted Uses, and for no other purposes except as may otherwise be agreed by the Agent in writing. The Borrower understands and agrees that payment of management bonuses may not be paid with the proceeds of the Loan at any time following the occurrence and during the continuance of a Default or an Event of Default. The Borrower shall use the proceeds of the Loan promptly. 2.4.3 FIELD EXAMINATION FEES. The Borrower shall cause to be paid to the Agent for the exclusive benefit of the Agent a field examination and loan administration fee (collectively, the "Field Examination Fees" and individually a "Field Examination Fee"), which Field Examination Fees shall be payable quarterly on the first day of each calendar quarter commencing on the first such date following the Closing Date, and continuing until the last such date prior to which all Obligations arising out of, or under, the Credit Facilities then outstanding have been paid in full. Each Field Examination Fee shall be in the amount equal to the sum of (a) Fifteen Thousand Dollars ($15,000), plus (b) all reasonable out-of-pocket expenses, if any, reasonably incurred by the Agent in connection with the conduct and review of the field examination conducted during such quarter. The Borrower 44 52 agrees that it shall be required to pay a Field Examination Fee to the Agent for each quarterly period regardless of whether the Agent actually conducts a field examination during or with respect to such quarterly period, but that no additional fees for field examination (other than out-of-pocket expenses) or loan administration shall be payable by the Borrower. 2.4.4 COMPUTATION OF INTEREST AND FEES. All applicable Fees and interest shall be calculated on the basis of a year of 360 days for the actual number of days elapsed. Any change in the interest rate on any of the Obligations resulting from a change in the Base Rate shall become effective as of the opening of business on the day on which such change in the Base Rate is announced. 2.4.5 PAYMENTS. All payments of the Obligations, including, without limitation, principal, interest, Prepayments, and Fees, shall be paid by the Borrower without setoff or counterclaim to the Agent (except as otherwise provided herein) at the Agent's office specified in Section 9.1 (Notices) in immediately available funds not later than 1:30 p.m. (Baltimore City Time) on the due date of such payment. All payments received by the Agent after such time shall be deemed to have been received by the Agent for purposes of computing interest and Fees and otherwise as of the next Business Day. Payments shall not be considered received by the Agent until such payments are paid to the Agent in immediately available funds. Alternatively, at its discretion, the Agent may charge any deposit account of the Borrower at the Agent or any Affiliate of the Agent with all or any part of any amount due to the Agent and/or any of the Lenders under this Agreement or under any of the other Financing Documents to the extent that the Borrower shall have not otherwise tendered payment to the Agent. All payments shall be applied first to any unpaid Fees, second to any and all accrued and unpaid late charges and Enforcement Costs, third to any and all accrued and unpaid interest on the Agent's Obligations, fourth to the then unpaid principal balance of the Agent's Obligations, fifth to any and all accrued and unpaid interest on the other Obligations, and then to the then unpaid principal balance of the other Obligations, all in such order and manner as shall be determined by Agent in its sole and absolute discretion. 2.4.6 LIENS; SETOFF. The Borrower, Foster Grant and Fantasma hereby grant to the Agent and to the Lenders a continuing Lien for all of the Obligations (including, without limitation, the Agent's Obligations) upon any and all monies, Securities, and other personal property of the Borrower, Foster Grant and Fantasma and the proceeds thereof, now or hereafter held or received by or in transit to, the Agent, any of the Lenders, and/or any Affiliate of the Agent and/or any of the Lenders, from or for the Borrower, Foster Grant and Fantasma, and also upon any and all depository accounts (whether general or special) and credits of the Borrower, Foster Grant and Fantasma, if any, with the Agent, any of the Lenders or any Affiliate of the Agent or any of the Lenders, at any time existing, excluding any depository accounts held by the Borrower, Foster Grant and Fantasma in their capacity as trustee for other Persons who are not one of them or Affiliates of one of them. Without implying any limitation on any other rights the Agent and/or the Lenders may have under the Financing Documents or applicable Laws, during the continuance of an Event of Default, the Agent is hereby authorized by the Borrower, Foster Grant and 45 53 Fantasma at any time and from time to time, at the Agent's option, without notice to, or consent of, the Obligors, to set off, appropriate, seize, freeze and apply any or all items hereinabove referred to against all Obligations (including, without limitation, the Agent's Obligations) then outstanding, all in such order and manner as shall be determined by the Agent in its sole and absolute discretion. 2.4.7 REQUIREMENTS OF LAW. In the event that any Lender shall have determined in good faith that (a) the adoption of any Laws regarding capital adequacy, or (b) any change in such Laws or in the interpretation or application thereof or (c) compliance by such Lender or any corporation controlling such Lender with any request or directive regarding capital adequacy (whether or not having the force of law) from any central bank or Governmental Authority, does or shall 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 the obligations of the such Lender hereunder to a level below that which such Lender or any corporation controlling such Lender would have achieved but for such adoption, change or compliance (taking into consideration the policies of such Lender and the corporation controlling such Lender, with respect to capital adequacy) by an amount deemed by such Lender to be material, then from time to time, after submission by such Lender to the Borrower of a written request therefor and a statement of the basis for such determination, the Borrower shall pay to such Lender ON DEMAND such additional amount or amounts in order to compensate such Lender or its controlling corporation for such reduction. 2.4.8 FUNDS TRANSFER SERVICES. (a) The Borrower, Foster Grant and Fantasma have requested that the Agent and its Affiliates make available to the Borrower, Foster Grant and Fantasma electronic funds transfer services and related security measures in connection with the Obligations. Each of the Borrower Foster Grant and Fantasma acknowledge that the Agent has made available to the Borrower, Foster Grant and Fantasma its Wire Transfer Procedures, a copy of which is attached to this Agreement as EXHIBIT "B" and which include a description of security procedures regarding funds transfers executed by the Agent or an Affiliate bank at the request of the Borrower, Foster Grant and Fantasma (the "Security Procedures"). The Borrower, Foster Grant and Fantasma and the Agent agree that the Security Procedures are commercially reasonable. Each Borrower, Foster Grant and Fantasma further acknowledges that the full scope of the Security Procedures which the Agent or such Affiliate bank offers and strongly recommends for funds transfers is available only if the Borrower, Foster Grant and Fantasma communicate directly with the Agent or such Affiliate bank as applicable in accordance with said procedures. If the Borrower, Foster Grant or Fantasma attempts to communicate by any other method or otherwise not in accordance with the Security Procedures, the Agent or such Affiliate bank, as applicable, shall not be required to execute such instructions, but if the Agent or such Affiliate bank, as applicable, does so, the Borrower, Foster Grant and Fantasma will be deemed to have refused the Security Procedures that the Agent or such Affiliate bank as applicable offers and strongly recommends, and the Borrower, Foster Grant and Fantasma will be bound by any funds transfer, whether or not authorized, which is issued in any Borrower's, Foster Grant's or Fantasma's name and accepted by the Agent or such Affiliate bank, as applicable, in good faith. The Agent or such Affiliate bank, as applicable, may modify Wire Transfer Procedures including, 46 54 without limitation, the Security Procedures at such time or times and in such manner as the Agent or such Affiliate bank, as applicable, in its sole discretion, deems appropriate to meet prevailing standards of good banking practice. By continuing to use the Agent's or such Affiliate bank's, as applicable, wire transfer services after receipt of any modification of the Wire Transfer procedures including, without limitation, the Security Procedures, each of the Borrower, Foster Grant and Fantasma agrees that the Security Procedures, as modified, are likewise commercially reasonable. Each of the Borrower, Foster Grant and Fantasma further agrees to establish and maintain procedures to safeguard the Security Procedures and any information related thereto. Neither the Agent nor any Affiliate of the Agent is responsible for detecting any error in payment order sent by any of the Borrower, Foster Grant and Fantasma to the Agent or any of the Lenders. (b) The Agent or such Affiliate bank, as applicable, will generally use the Fedwire funds transfer system for domestic funds transfers, and the funds transfer system operated by the Society for Worldwide International Financial Telecommunication (SWIFT) for international funds transfers. International funds transfers may also be initiated through the Clearing House InterBank Payment System (CHIPs) or international cable. However, the Agent or such Affiliate bank, as applicable, may use any means and routes that the Agent or such Affiliate bank, as applicable, in its sole discretion, may consider suitable for the transmission of funds. Each payment order, or cancellation thereof, carried out through a funds transfer system or a clearinghouse will be governed by all applicable funds transfer system rules and clearing house rules and clearing arrangements, whether or not the Agent or such Affiliate bank, as applicable, is a member of the system, clearinghouse or arrangement and each of the Borrower, Foster Grant and Fantasma acknowledges that the Agent's or such Affiliate bank's, as applicable, right to reverse, adjust, stop payment or delay posting of an executed payment order is subject to the laws, regulations, rules, circulars and arrangements described herein. 2.4.9 GUARANTY. (a) Each of the Obligors hereby unconditionally and irrevocably, guarantees to the Agent and the Lenders: (i) the due and punctual payment in full (and not merely the collectibility) by the other Obligors of the Obligations, including unpaid and accrued interest thereon, in each case when due and payable, all according to the terms of this Agreement, the Notes and the other Financing Documents; (ii) the due and punctual payment in full (and not merely the collectibility) by the other Obligors of all other sums and charges which may at any time be due and payable in accordance with this Agreement, the Notes or any of the other Financing Documents; (iii) the due and punctual performance by the other Obligors of all of the other terms, covenants and conditions contained in the Financing Documents; and (iv) all the other Obligations of the other Obligors. 47 55 (b) The obligations and liabilities of each Obligor as a guarantor under this Section 2.4.9 (Guaranty) shall be absolute and unconditional and joint and several, irrespective of the genuineness, validity, priority, regularity or enforceability of this Agreement, any of the Notes or any of the Financing Documents or any other circumstance which might otherwise constitute a legal or equitable discharge of a surety or guarantor. Each Obligor in its capacity as a guarantor expressly agrees that the Agent and the Lenders may, in their sole and absolute discretion, without notice to or further assent of such Obligor and without in any way releasing, affecting or in any way impairing the joint and several obligations and liabilities of such Obligor as a guarantor hereunder: (i) waive compliance with, or any defaults under, or grant any other indulgences under or with respect to any of the Financing Documents; (ii) modify, amend, change or terminate any provisions of any of the Financing Documents in accordance with the provisions of this Agreement including, without limitation, the agreements of necessary parties; (iii) grant extensions or renewals of or with respect to the Credit Facilities, the Notes or any of the other Financing Documents; (iv) effect any release, subordination, compromise or settlement in connection with this Agreement, any of the Notes or any of the other Financing Documents; (v) agree to the substitution, exchange, release or other disposition of the Collateral or any part thereof, or any other collateral for the Loan or to the subordination of any lien or security interest therein; (vi) make advances for the purpose of performing any term, provision or covenant contained in this Agreement, any of the Notes or any of the other Financing Documents with respect to which the Obligors shall then be in default; (vii) make future advances pursuant to the Financing Agreement or any of the other Financing Documents; (viii) assign, pledge, hypothecate or otherwise transfer the Commitments, the Obligations, the Notes, any of the other Financing Documents or any interest therein, all as and to the extent permitted by the provisions of this Agreement; (ix) deal in all respects with the other Obligors as if this Section 2.4.9 were not in effect; 48 56 (x) effect any release, compromise or settlement with any of the other Obligors, whether in their capacity as a Obligor or as a guarantor under this Section 2.4.9, or any other guarantor; and (xi) provide debtor-in-possession financing or allow use of cash collateral in proceedings under the Bankruptcy Code, it being expressly agreed by all Obligors that any such financing and/or use would be part of the Obligations. (c) The obligations and liabilities of each Obligor, as guarantor under this Section 2.4.9, shall be primary, direct and immediate, shall not be subject to any counterclaim, recoupment, set off, reduction or defense based upon any claim that a Obligor may have against any one or more of the other Obligors, the Agent, any one or more of the Lenders and/or any other guarantor and shall not be conditional or contingent upon pursuit or enforcement by the Agent or other Lenders of any remedies it may have against the Obligors with respect to this Agreement, the Notes or any of the other Financing Documents, whether pursuant to the terms thereof or by operation of law. Without limiting the generality of the foregoing, the Agent and the Lenders shall not be required to make any demand upon any of the Obligors, or to sell the Collateral or otherwise pursue, enforce or exhaust its or their remedies against the Obligors or the Collateral either before, concurrently with or after pursuing or enforcing its rights and remedies hereunder. Any one or more successive or concurrent actions or proceedings may be brought against each Obligor under this Section 2.4.9, either in the same action, if any, brought against any one or more of the Obligors or in separate actions or proceedings, as often as the Agent may deem expedient or advisable. Without limiting the foregoing, it is specifically understood that any modification, limitation or discharge of any of the liabilities or obligations of any one or more of the Obligors, any other guarantor or any Obligor under any of the Financing Documents, arising out of, or by virtue of, any bankruptcy, arrangement, reorganization or similar proceeding for relief of debtors under federal or state law initiated by or against any one or more of the Obligors, in their respective capacities as Obligors and guarantors under this Section 2.4.9, or under any of the Financing Documents shall not modify, limit, lessen, reduce, impair, discharge, or otherwise affect the liability of each Obligor under this Section 2.4.9 in any manner whatsoever, and this Section 2.4.9 shall remain and continue in full force and effect. It is the intent and purpose of this Section 2.4.9 that each Obligor shall and does hereby waive all rights and benefits which might accrue to any other guarantor by reason of any such proceeding, and the Obligors agree that they shall be liable for the full amount of the obligations and liabilities under this Section 2.4.9, regardless of, and irrespective to, any modification, limitation or discharge of the liability of any one or more of the Obligors, any other guarantor or any Obligor under any of the Financing Documents, that may result from any such proceedings. (d) Each Obligor, as guarantor under this Section 2.4.9, hereby unconditionally, jointly and severally, irrevocably and expressly waives: (i) presentment and demand for payment of the Obligations and protest of non-payment; 49 57 (ii) notice of acceptance of this Section 2.4.9 and of presentment, demand and protest thereof; (iii) notice of any default hereunder or under the Notes or any of the other Financing Documents and notice of all indulgences; (iv) notice of any increase in the amount of any portion of or all of the indebtedness guaranteed by this Section 2.4.9; (v) demand for observance, performance or enforcement of any of the terms or provisions of this Section 2.4.9, the Notes or any of the other Financing Documents; (vi) all errors and omissions in connection with the Lender's administration of all indebtedness guaranteed by this Section 2.4.9, except errors and omissions resulting from acts of bad faith; (vii) any right or claim of right to cause a marshalling of the assets of any one or more of the other Obligors; (viii) any act or omission of the Agent or the Lenders which changes the scope of the risk as guarantor hereunder; and (ix) all other notices and demands otherwise required by law which the Obligor may lawfully waive. (e) Within ten (10) days following any request of the Agent so to do, each Obligor will furnish the Agent and the Lenders and such other persons as the Agent may direct with a written certificate, duly acknowledged stating in detail whether or not any credits, offsets or defenses exist with respect to this Section 2.4.9. (f) Notwithstanding any provision contained herein to the contrary, the maximum amount payable hereunder by each Guarantor shall at no time exceed the Maximum Amount of such Guarantor. Each Guarantor understands, agrees and confirms that the Agent and the Lenders may enforce this Section up to the full amount of the Obligations against each Guarantor (subject to the proviso in the preceding sentence) without proceeding against any other Guarantor or any security for the Obligations, or under any other guaranty covering all or a portion of the Obligations. All payments by each Guarantor under this Section shall be made on the same basis as payments by the Borrower under this Agreement. 2.4.10 NO NOVATION. The Obligors acknowledge and agree that the Notes delivered on the date of this Agreement have been delivered in substitution for the Notes delivered under the terms of the Original Financing Agreement and that the execution and delivery of the Notes delivered on the date of this Agreement are not intended to and shall not cause a novation with respect to any or all of the Obligations. 50 58 Section 2.5 SETTLEMENT AMONG LENDERS. 2.5.1 REVOLVING LOAN. It is agreed that each Lender's Net Outstandings are intended by the Lenders to be equal at all times to such Lender's Revolving Credit Pro Rata Share of the aggregate outstanding principal amount of the Revolving Loan outstanding. Notwithstanding such agreement, the several and not joint obligation of each Lender to fund the Revolving Loan made in accordance with the terms of this Agreement ratably in accordance with such Lender's Revolving Credit Pro Rata Share and each Lender's right to receive its ratable share of principal payments on the Revolving Loan in accordance with its Revolving Credit Pro Rata Share, the Lenders agree that in order to facilitate the administration of this Agreement and the Financing Documents that settlement among them may take place on a periodic basis in accordance with the provisions of this Section 2.5. 2.5.2 SETTLEMENT PROCEDURES AS TO REVOLVING LOAN. (a) IN GENERAL. To the extent and in the manner hereinafter provided in this Section 2.5.2, settlement among the Lenders as to the Revolving Loan may occur periodically on Settlement Dates determined from time to time by the Agent, which may occur before or after the occurrence or during the continuance of a Default or Event of Default and whether or not all of the conditions set forth in 5.1.17 (Conditions to All Extensions of Credit) have been met. On each Settlement Date payments shall be made by or to NationsBank and the other Lenders in the manner provided in this Section 2.5.2 in accordance with the Settlement Report delivered by the Agent pursuant to the provisions of this Section 2.5.2 in respect of such Settlement Date so that as of each Settlement Date, and after giving effect to the transactions to take place on such Settlement Date, each Lender's Net Outstandings shall equal such Lender's Revolving Credit Pro Rata Share of the Revolving Loan outstanding. (b) SELECTION OF SETTLEMENT DATES. If the Agent elects, in its discretion, but subject to the consent of NationsBank, to settle accounts among the Lenders with respect to principal amounts of Revolving Loan less frequently than each Business Day, then the Agent shall designate periodic Settlement Dates which may occur on any Business Day after the Closing Date; provided, however, that the Agent shall designate as a Settlement Date any Business Day which is an Interest Payment Date; and provided further, that a Settlement Date shall occur at least once during each seven-day period. The Agent shall designate a Settlement Date by delivering to each Lender a Settlement Report not later than 12:00 noon (Baltimore City Time) on the proposed Settlement Date, which Settlement Report shall be with respect to the period beginning on the next preceding Settlement Date and ending on such designated Settlement Date. (c) NON-RATABLE LOANS AND PAYMENTS. Between Settlement Dates, the Agent shall request and NationsBank may (but shall not be obligated to) advance to the Borrower out of NationsBank's own funds, the entire principal amount of any advance under the Revolving Loan requested or deemed requested pursuant to Section 2.1.2 (Procedure for Making Advances) (any such advance under the Revolving Loan being referred to as a "Non-Ratable Loan"). The making of each Non-Ratable Loan by NationsBank shall be deemed to be a purchase 51 59 by NationsBank of a 100% participation in each other Lender's Revolving Credit Pro Rata Share of the amount of such Non-Ratable Loan. All payments of principal, interest and any other amount with respect to such Non-Ratable Loan shall be payable to and received by the Agent for the account of NationsBank. Upon demand by NationsBank, with notice to the Agent, each other Lender shall pay to NationsBank, as the repurchase of such participation, an amount equal to 100% of such Lender's Revolving Credit Pro Rata Share of the principal amount of such Non-Ratable Loan. Any payments received by the Agent between Settlement Dates which in accordance with the terms of this Agreement are to be applied to the reduction of the outstanding principal balance of Revolving Loan, shall be paid over to and retained by NationsBank for such application, and such payment to and retention by NationsBank shall be deemed, to the extent of each other Lender's Revolving Credit Pro Rata Share of such payment, to be a purchase by each such other Lender of a participation in the advance under the Revolving Loan (including the repurchase of participations in Non-Ratable Loans) made by NationsBank. Upon demand by another Lender, with notice thereof to the Agent, NationsBank shall pay to the Agent, for the account of such other Lender, as a repurchase of such participation, an amount equal to such other Lender's Revolving Credit Pro Rata Share of any such amounts (after application thereof to the repurchase of any participations of NationsBank in such other Lender's Revolving Credit Pro Rata Share of any Non-Ratable Loans) paid only to NationsBank by the Agent. (d) NET DECREASE IN OUTSTANDINGS. If on any Settlement Date the increase, if any, in the dollar amount of any Lender's Net Outstandings which is required to comply with the first sentence of Section 2.5.1 (Revolving Loan) is less than such Lender's Revolving Credit Pro Rata Share of amounts received by the Agent but paid only to NationsBank since the next preceding Settlement Date, such Lender and the Agent, in their respective records, shall apply such Lender's Revolving Credit Pro Rata Share of such amounts to the increase in such Lender's Net Outstandings, and NationsBank shall pay to the Agent, for the account of such Lender, the excess allocable to such Lender. (e) NET INCREASE IN OUTSTANDINGS. If on any Settlement Date the increase, if any, in the dollar amount of any Lender's Net Outstandings which is required to comply with the first sentence of Section 2.5.1 (Revolving Loan) exceeds such Lender's Revolving Credit Pro Rata Share of amounts received by the Agent but paid only to NationsBank since the next preceding Settlement Date, such Lender and the Agent, in their respective records, shall apply such Lender's Revolving Credit Pro Rata Share of such amounts to the increase in such Lender's Net Outstandings, and such Lender shall pay to the Agent, for the account of NationsBank, any excess. (f) NO CHANGE IN OUTSTANDINGS. If a Settlement Report indicates that no advance under the Revolving Loan has been made during the period since the next preceding Settlement Date, then such Lender's Revolving Credit Pro Rata Share of any amounts received by the Agent but paid only to NationsBank shall be paid by NationsBank to the Agent, for the account of such Lender. If a Settlement Report indicates that the increase in the dollar amount of a Lender's Net Outstandings which is required to comply with the first sentence of Section 2.5.1 (Revolving Loan) is exactly equal to such Lender's Revolving Credit Pro Rata Share of amounts received by the Agent but paid only to NationsBank since the next preceding Settlement Date, such Lender and the Agent, in their respective records, shall apply such Lender's 52 60 Revolving Credit Pro Rata Share of such amounts to the increase in such Lender's Net Outstandings. (g) RETURN OF PAYMENTS. If any amounts received by NationsBank in respect of the Obligations are later required to be returned or repaid by NationsBank to the Obligors or any other Obligor or their respective representatives or successors in interest, whether by court order, settlement or otherwise, in excess of the NationsBank's Revolving Credit Pro Rata Share of all such amounts required to be returned by all Lenders, each other Lender shall, upon demand by NationsBank with notice to the Agent, pay to the Agent for the account of NationsBank, an amount equal to the excess of such Lender's Revolving Credit Pro Rata Share of all such amounts required to be returned by all Lenders over the amount, if any, returned directly by such Lender. (h) PAYMENTS TO AGENT, LENDERS. (i) Payment by any Lender to the Agent shall be made not later than 2:00 p.m. (Baltimore City Time) on the Business Day such payment is due, provided that if such payment is due on demand by another Lender, such demand is made on the paying Lender not later than 10:00 a.m. (Baltimore City Time) on such Business Day. Payment by the Agent to any Lender shall be made by wire transfer, promptly following the Agent's receipt of funds for the account of such Lender and in the type of funds received by the Agent, provided that if the Agent receives such funds at or prior to 12:00 p.m. noon (Baltimore City Time), the Agent shall pay such funds to such Lender by 2:00 p.m. (Baltimore City Time) on such Business Day. If a demand for payment is made after the applicable time set forth above, the payment due shall be made by 2:00 p.m. (Baltimore City Time) on the first Business Day following the date of such demand. (ii) If a Lender shall, at any time, fail to make any payment to the Agent required hereunder, the Agent may, but shall not be required to, retain payments that would otherwise be made to such Lender hereunder and apply such payments to such Lender's defaulted obligations hereunder, at such time, and in such order, as the Agent may elect in its sole discretion. (iii) With respect to the payment of any funds under this Section 2.5.2, whether from the Agent to a Lender or from a Lender to the Agent, the party failing to make full payment when due pursuant to the terms hereof shall, upon demand by the other party, pay such amount together with interest on such amount at the Federal Funds Rate. 2.5.3 SETTLEMENT OF OTHER OBLIGATIONS. All other amounts received by the Agent on account of, or applied by the Agent to the payment of, any Obligation owed to the Lenders (including, without limitation, Fees 53 61 payable to the Lenders and proceeds from the sale of, or other realization upon, all or any part of the Collateral following an Event of Default) that are received by the Agent not later than 11:00 a.m. (Baltimore City Time) on a Business Day will be paid by the Agent to each Lender on the same Business Day, and any such amounts that are received by the Agent after 11:00 a.m. (Baltimore City Time) will be paid by the Agent to each Lender on the following Business Day. Unless otherwise stated herein, the Agent shall distribute Fees payable to the Lenders ratably to the Lenders based on each Lender's Revolving Credit Pro Rata Share and shall distribute proceeds from the sale of, or other realization upon, all or any part of the Collateral following an Event of Default ratably to the Lenders based on the amount of the Obligations then owing to each Lender. 2.5.4 PRESUMPTION OF PAYMENT. (a) Unless the Agent shall have received notice from a Lender prior to 2:30 p.m. (Baltimore City Time) on the date of the requested date for the making of advances under the Revolving Loan that such Lender will not make available to the Agent, such Lender's Revolving Credit Pro Rata Share of the advances to be made on such date, the Agent may assume that such Lender has made such amount available to the Agent on such date in accordance with this Section 2.5, and the Agent, in its sole discretion may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount on behalf of such Lender. (b) If and to the extent such Lender shall not have so made available to the Agent its Revolving Credit Pro Rata Share of the advances under the Revolving Loan made on such date, and the Agent shall have so made available to the Borrower a corresponding amount on behalf of such Lender, such Lender shall, on demand, pay to the Agent such corresponding amount, together with interest thereon, at the Federal Funds Rate, for each day from the date such corresponding amount shall have been so available by the Agent to the Borrower until the date such amount shall have been repaid to the Agent. Such Lender shall not be entitled to payment of any interest which accrues on the amount made available by the Agent to the Borrower for the account of such Lender until such time as such Lender reimburses the Agent for such amount, together with interest thereon, as provided in this Section 2.5.4. (c) A certificate of the Agent submitted to any Lender with respect to any amounts owing to the Agent by such Lender under this Section 2.5 shall be conclusive and binding on such Lender, absent manifest error. (d) Unless the Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Agent that the Borrower will not make such payment in full, the Agent may assume that the Borrower has made such payment in full to the Agent on such date and the Agent in its sole discretion may, in reliance upon such assumption, cause to be distributed to each Lender on such due date an amount equal to the amount then due such Lender. If and to the extent the Borrower shall not have so made such payment in full to the Agent and the Agent shall have distributed to any Lender all or any portion of such amount, such Lender shall repay to the Agent on demand the amount so distributed to such Lender, together with interest thereon at the Federal Funds Rate, for each day from the date 54 62 such amount is distributed to such Lender until the date such Lender repays such amount to the Agent. ARTICLE III THE COLLATERAL Section 3.1 DEBT AND OBLIGATIONS SECURED. All property and Liens assigned, pledged or otherwise granted under or in connection with this Agreement (including, without limitation, those under Section 3.2 (Grant of Liens)) or any of the Financing Documents shall secure (a) the payment of all of the Obligations, including, without limitation, any and all Agent's Obligations, and (b) the performance, compliance with and observance by the the Borrower, Foster Grant and Fantasma of the provisions of this Agreement and all of the other Financing Documents or otherwise under the Obligations. The security interest and Lien of each Lender in such property shall rank equally in priority with the interest of each other Lender, but the security interest and Lien of the Agent with respect to the Agent's Obligations shall be superior and paramount to the security interest and Lien of the Lenders. Section 3.2 GRANT OF LIENS. Each of the Borrower, Foster Grant and Fantasma hereby assigns, pledges and grants to the Agent, for the ratable benefit of the Lenders and for the benefit of the Agent with respect to the Agent's Obligations, and agrees that the Agent and the Lenders shall have a perfected and continuing security interest in, and Lien on, (a) all of the Borrower's, Foster Grant's and Fantasma's Accounts, Inventory, Chattel Paper and Instruments, whether now owned or existing or hereafter acquired or arising, (b) all returned, rejected or repossessed goods, the sale or lease of which shall have given or shall give rise to an Account, (c) all insurance policies relating to the foregoing, (d) all books and records in whatever media (paper, electronic or otherwise) recorded or stored, with respect to the foregoing and all rights of access to all equipment and general intangibles necessary or beneficial to retain, access and/or process the information contained in those books and records, and (e) all cash and non-cash proceeds and products of the foregoing. Each of the Borrower, Foster Grant and Fantasma further agrees that the Agent, for the ratable benefit of the Lenders and for the benefit of the Agent with respect to the Agent's Obligations, shall have in respect thereof all of the rights and remedies of a secured party under the Uniform Commercial Code as well as those provided in this Agreement, under each of the other Financing Documents and under applicable Laws. Section 3.3 COLLATERAL DISCLOSURE LIST. On or prior to the Closing Date, the Borrower, Foster Grant and Fantasma shall deliver to the Agent a list (the "Collateral Disclosure List") which shall contain such information with respect to each of the Borrower's, Foster Grant's and Fantasma's business and real and personal property as the Agent may reasonably require and shall be certified by a Responsible Officer of each of the Borrower, Foster Grant and Fantasma as applicable, all in the form provided to the Borrower by the Agent. Promptly after demand by the Agent, the Borrower, Foster Grant or 55 63 Fantasma, as appropriate, shall furnish to the Agent an update of the information contained in the Collateral Disclosure List at any time and from time to time as may be requested by the Agent. Section 3.4 INVENTORY AND RECEIVABLES. The Borrower, Foster Grant or Fantasma acknowledge and agree that it is the intention of the parties to this Agreement that the Agent, for the ratable benefit of the Lenders and for the benefit of the Agent with respect to the Agent's Obligations, shall have a first priority, perfected Lien, in form and substance satisfactory to the Agent and its counsel, on all of the Borrower's, Foster Grant's and Fantasma's Inventory and Receivables of any kind and nature whatsoever, whether now owned or hereafter acquired, subject only to the Permitted Liens, if any. In furtherance of the foregoing: 3.4.1 CHATTEL PAPER, PROMISSORY NOTES, ETC. (a) On the Closing Date and without implying any limitation on the scope of Section 3.2 (Grant of Liens), each of the Borrower, Foster Grant and Fantasma shall deliver to the Agent, for the ratable benefit of the Lenders and for the benefit of the Agent with respect to the Agent's Obligations, all originals of all of the Borrower's, Foster Grant's and Fantasma's Chattel Paper and Instruments and, if the Agent so requires, shall execute and deliver a separate pledge, assignment and security agreement in form and content acceptable to the Agent, which pledge, assignment and security agreement shall assign, pledge and grant a Lien to the Agent, for the ratable benefit of the Lenders and for the benefit of the Agent with respect to the Agent's Obligations on all of each of the Borrower's, Foster Grant's and Fantasma's Chattel Paper and Instruments. (b) In the event that any of the Borrower, Foster Grant or Fantasma shall acquire after the Closing Date any Chattel Paper or Instruments, the Borrower, Foster Grant and Fantasma, as applicable, shall promptly so notify the Agent and deliver the originals of all of the foregoing to the Agent promptly and in any event within ten (10) days of each acquisition. (c) All Chattel Paper and Instruments shall be delivered to the Agent endorsed and/or assigned as required by the pledge, assignment and security agreement and/or as the Agent may reasonably require and, if applicable, shall be accompanied by blank irrevocable and unconditional stock or bond powers and/or notices as the Agent may require. 3.4.2 TRADEMARKS. On the Closing Date, the Borrower, Foster Grant and Fantasma shall execute and deliver all Financing Documents and take all actions requested in good faith by the Agent in order to perfect a first priority assignment of Trademarks, including, without limitation, any Trademarks acquired by Foster Grant from BEC which assignment shall limit the Agent's rights thereunder to non-exclusive use of the Trademarks in the disposition of Inventory to which such Trademarks are attached. 56 64 Section 3.5 RECORD SEARCHES. As of the Closing Date and thereafter at the time any Financing Document is executed and delivered by the Borrower, Foster Grant and Fantasma pursuant to this Section, the Agent shall have received, in form and substance satisfactory in good faith to the Agent, such Lien or record searches with respect to all of the Borrower, Foster Grant and Fantasma and/or any other Person, as appropriate, and the property covered by such Financing Document showing that the Lien of such Financing Document will be a perfected first priority Lien on the property covered by such Financing Document subject only to Permitted Liens or to such other matters as the Agent may approve. Section 3.6 COSTS. The Borrower, Foster Grant and Fantasma agree to pay, as part of the Enforcement Costs and to the fullest extent permitted by applicable Laws, on demand all costs, fees and expenses incurred by the Agent and/or any of the Lenders in connection with the taking, perfection, preservation, protection and/or release of a Lien on the Collateral, including, without limitation: (a) customary fees and expenses incurred by the Agent and/or any of the Lenders in preparing the Financing Documents from time to time (including, without limitation, reasonable attorneys' fees incurred in connection with preparing any of the Financing Documents, including, any amendments and supplements thereto); (b) all filing and/or recording taxes or fees; (c) all costs of Lien and record searches; (d) reasonable attorneys' fees in connection with all legal opinions required; and (e) all related costs, fees and expenses. Section 3.7 RELEASE. Upon the payment and performance of all Obligations of the Borrower, Foster Grant and Fantasma and all obligations and liabilities of each other Person, other than the Agent and the Lenders, under this Agreement and all other Financing Documents, the termination and/or expiration of all of the Commitments, all Letters of Credit and all Outstanding Letter of Credit Obligations, upon the Borrower's request and at the Borrower's sole cost and expense, the Agent shall release and/or terminate any Financing Document but only if and provided that there is no commitment or obligation (whether or not conditional) of the Agent and/or any of the Lenders to re-advance amounts which would be secured thereby and/or no commitment or obligation of the Agent to issue any Letter of Credit or return or restore any payment of any Current Letter of Credit Obligations. 57 65 Section 3.8 INCONSISTENT PROVISIONS. In the event that the provisions of any Financing Document directly conflict with any provision of this Agreement, the provisions of this Agreement govern. ARTICLE IV REPRESENTATIONS AND WARRANTIES Section 4.1 REPRESENTATIONS AND WARRANTIES. Each of the Borrower, Foster Grant and Fantasma, for themselves and for each other, represent and warrant to the Agent and the Lenders, as follows: 4.1.1 OWNERSHIP INTERESTS. None of the Borrower, Foster Grant or Fantasma has any ownership interest, legal, beneficial or otherwise, in any other Person except as listed on the Collateral Disclosure List furnished to the Agent or before the Closing Date, which correctly indicates the nature and amount of all ownership interests held by any of them in any other Person. 4.1.2 GOOD STANDING. (a) The Borrower (i) is a corporation duly formed and existing under the laws of the state in which it is formed, (ii) has the corporate power to own its property and to carry on its business as now being conducted, and (iii) is duly qualified to do business and is in good standing in each jurisdiction in which the character of the properties owned by it therein or in which the transaction of its business makes such qualification necessary, except where failure to do so would not have a Material Adverse Effect. (b) Foster Grant (i) is a limited partnership duly formed, and existing under the laws of the state in which it is formed, (ii) has the limited partnership power to own its property and to carry on its business as now being conducted, and (iii) is duly qualified to do business and is in good standing in each jurisdiction in which the character of the properties owned or leased by it therein or in which the transaction of its business makes such qualification necessary, except where failure to do so would not have a Material Adverse Effect. (c) Fantasma (i) is a limited liability company duly formed and existing and the laws of the state in which it is formed, (ii) has the power and authority to own its property and to carry on its business as not being conducted and (iii) is duly qualified to do business and is in good standing in each jurisdiction in which the character of the properties owned or leased by it therein or in which the transaction of its business makes such qualification necessary, except where failure to do so would not have a Material Adverse Effect. 4.1.3 POWER AND AUTHORITY. Each of the Borrower, Foster Grant and Fantasma has full the requisite corporate power or partnership authority, as appropriate, and authority to execute and deliver this Agreement and the other Financing Documents, to make the borrowings and request Letters of 58 66 Credit under this Agreement, and to incur and perform the Obligations under this Agreement and the other Financing Documents, all of which have been duly authorized by all proper and necessary corporate or partnership action, as appropriate. No consent or approval of shareholders, partners, members or any creditors of any of the Borrower, Foster Grant and Fantasma, and no consent, approval, filing or registration with or notice to any Governmental Authority on the part of any of the Borrower, Foster Grant and Fantasma, is required as a condition to the execution, delivery, validity or enforceability of this Agreement and the other Financing Documents, the performance by any of the Borrower, Foster Grant and Fantasma of the Obligations, or if required the same has been duly obtained. 4.1.4 BINDING AGREEMENTS. This Agreement and the other Financing Documents executed and delivered by the Borrower, Foster Grant or Fantasma have been properly executed and delivered and constitute the valid and legally binding obligations of the Borrower, Foster Grant or Fantasma and are fully enforceable against each of the Borrower, Foster Grant or Fantasma in accordance with their respective terms, subject to bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting the rights and remedies of creditors and secured parties, and general principles of equity regardless of whether applied in a proceeding in equity or at law. 4.1.5 NO CONFLICTS. Except as set forth in SCHEDULE 4.1.5, neither the execution, delivery and performance of the terms of this Agreement or of any of the other Financing Documents, the consummation of the transactions contemplated by this Agreement will conflict with, violate or be prevented by (a) any of the Borrower's, Foster Grant's or Fantasma's charter, bylaws, operating agreements or partnership agreement, (b) any existing material mortgage, indenture, contract or agreement binding on any of the Borrower, Foster Grant or Fantasma or affecting its property, or (c) any Laws. 4.1.6 NO DEFAULTS, VIOLATIONS. (a) No Default or Event of Default has occurred and is continuing. (b) None of the Borrower, Foster Grant or Fantasma is in default under or with respect to any obligation under any existing mortgage, indenture, contract or agreement binding on it or affecting its property in any respect which could be materially adverse to the business, operations, property or financial condition of any of the Borrower, Foster Grant or Fantasma, or which could materially adversely affect the ability of any of the Borrower, Foster Grant or Fantasma to perform its obligations under this Agreement or the other Financing Documents, to which any of the Borrower, Foster Grant or Fantasma is a party. 4.1.7 COMPLIANCE WITH LAWS. None of the Borrower, Foster Grant or Fantasma is in violation of any applicable Laws (including, without limitation, any Laws relating to employment practices, to 59 67 environmental, occupational and health standards and controls) or order, writ, injunction, decree or demand of any court, arbitrator, or any Governmental Authority affecting any of the Borrower, Foster Grant or Fantasma or any of its properties, the violation of which, considered in the aggregate, could materially adversely affect the business, operations or properties of any of the Borrower, Foster Grant or Fantasma. 4.1.8 MARGIN STOCK. None of the proceeds of the Loan will be used, directly or indirectly, by any of the Borrower, Foster Grant or Fantasma or any other Affiliate of any of the Borrower, Foster Grant or Fantasma for the purpose of purchasing or carrying, or for the purpose of reducing or retiring any indebtedness which was originally incurred to purchase or carry, any "margin security" within the meaning of Regulation G (12 CFR Part 207), or "margin stock" within the meaning of Regulation U (12 CFR Part 221), of the Board of Governors of the Federal Reserve System or for any other purpose which might make the transactions contemplated in this Agreement a "purpose credit" within the meaning of said Regulation G or Regulation U, or cause this Agreement to violate any other regulation of the Board of Governors of the Federal Reserve System or the Securities Exchange Act of 1934 or the Small Business Investment Act of 1958, as amended, or any rules or regulations promulgated under any of such statutes. 4.1.9 INVESTMENT COMPANY ACT; MARGIN SECURITIES. None of the Borrower, Foster Grant or Fantasma is an investment company within the meaning of the Investment Company Act of 1940, as amended, nor is it, directly or indirectly, controlled by or acting on behalf of any Person which is an investment company within the meaning of said Act. None of the Borrower, Foster Grant or Fantasma is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying "margin security" within the meaning of Regulation G (12 CFR Part 207), or "margin stock" within the meaning of Regulation U (12 CFR Part 221), of the Board of Governors of the Federal Reserve System. 4.1.10 LITIGATION. Except as otherwise disclosed on Schedule 4.1.10 attached to and made a part of this Agreement, there are no proceedings, actions or investigations pending or, so far as any of the Borrower, Foster Grant or Fantasma knows, threatened before or by any court, arbitrator or any Governmental Authority which, in any one case or in the aggregate, if determined adversely to the interests of any of the Borrower, Foster Grant or Fantasma, would have a Material Adverse Effect. 4.1.11 FINANCIAL CONDITION. The audited consolidated and consolidating financial statements of the Borrower dated December 31, 1997, are complete and correct in all material respects and fairly present the financial position of the Borrower on a consolidated basis as of the date and for the period referred to and have been prepared in accordance with GAAP applied on a consistent basis throughout the period involved. There are no liabilities, direct or indirect, fixed or contingent, of any of the Borrower, Foster Grant or Fantasma as of the date of such financial statements 60 68 required by GAAP to be reflected therein that are not reflected therein or in the notes thereto. There has been no material adverse change in the financial condition or operations of any of the Borrower, Foster Grant or Fantasma since the date of such financial statements and to the Borrower's, Foster Grant's and Fantasma's knowledge no such material adverse change is pending or threatened. None of the Borrower, Foster Grant or Fantasma has guaranteed the obligations of, or made any investment in or advances to, any Person, except as disclosed in such financial statements and except for the guaranty of the Senior Notes by Foster Grant and Fantasma. 4.1.12 FULL DISCLOSURE. The financial statements referred to in Section 4.1.11 (Financial Condition), the Financing Documents (including, without limitation, this Agreement), and the statements, reports or certificates furnished by any of the Borrower, Foster Grant or Fantasma in connection with the Financing Documents (a) do not contain any untrue statement of a material fact and (b) when taken in their entirety, do not omit any material fact necessary to make the statements contained therein not misleading. There is no fact known to any of the Borrower, Foster Grant or Fantasma which it has not disclosed to the Agent and the Lenders in writing prior to the date of this Agreement with respect to the transactions contemplated by the Financing Documents which materially and adversely affects or which the Borrower, Foster Grant or Fantasma believe will materially adversely affect the condition, financial or otherwise, results of operations, business, or assets of any of the Borrower, Foster Grant or Fantasma. 4.1.13 INDEBTEDNESS FOR BORROWED MONEY. Except for the Obligations and the Senior Notes and except as set forth in SCHEDULE 4.1.13 attached to and made a part of this Agreement, none of the Borrower, Foster Grant or Fantasma have any Indebtedness for Borrowed Money. The Agent has received photocopies of all promissory notes evidencing any Indebtedness for Borrowed Money set forth in SCHEDULE 4.1.13, together with any and all subordination agreements, other agreements, documents, or instruments securing, evidencing, guarantying or otherwise executed and delivered in connection therewith. 4.1.14 TAXES. Except for Taxes for which the failure to pay has not resulted in an Event of Default under this Agreement or for which the failure to pay would otherwise not have a Material Adverse Effect, each of the Borrower, Foster Grant and Fantasma has filed all returns, reports and forms for Taxes which, to the knowledge of the Borrower, Foster Grant and Fantasma, are required to be filed, and has paid all Taxes as shown on such returns or on any assessment received by it, to the extent that such Taxes have become due, unless and to the extent only that such Taxes, assessments and governmental charges are currently contested in good faith and by appropriate proceedings by the Borrower, Foster Grant or Fantasma, such Taxes are not the subject of any Liens other than Permitted Liens, and adequate reserves therefor have been established as required under GAAP. All tax liabilities of the Borrower, Foster Grant and Fantasma were as of the date of unaudited financial statements referred to in Section 4.1.11 (Financial Condition), and are now, adequately provided for on the books of the Borrower and its 61 69 Subsidiaries. No tax liability has been asserted by the Internal Revenue Service or any state or local authority against any of the Borrower, Foster Grant or Fantasma for Taxes in excess of those already paid which would have a Material Adverse Effect or otherwise constitute an Event of Default. 4.1.15 ERISA. With respect to any "pension plan" as defined in SECTION 3(2) of ERISA, which plan is now or previously has been maintained or contributed to by any Obligor and/or by any commonly controlled entity: (a) no "accumulated funding deficiency" as defined in Code ss.412 or ERISA ss.302 has occurred, whether or not that accumulated funding deficiency has been waived; (b) no Reportable Event has occurred; (c) no termination of any plan subject to Title IV of ERISA has occurred; (d) no Obligor nor any commonly controlled entity (as defined under ERISA) has incurred a "complete withdrawal" within the meaning of ERISA ss.4203 from any Multi-employer Plan; (e) no Obligor nor any commonly controlled entity has incurred a "partial withdrawal" within the meaning of ERISA ss.4205 with respect to any Multi-employer Plan; (f) no Multi-employer Plan to which an Obligor or any commonly controlled entity has an obligation to contribute is in "reorganization" within the meaning of ERISA ss.4241 nor has notice been received by any Obligor or any commonly controlled entity that such a Multi-employer Plan will be placed in "reorganization". 4.1.16 TITLE TO PROPERTIES. The Borrower, Foster Grant or Fantasma have good and marketable title (fee, leasehold or otherwise) to all of their respective properties, including, without limitation, the Collateral and the properties and assets reflected in the balance sheets described in Section 4.1.11 (Financial Condition). The Borrower, Foster Grant or Fantasma have legal, enforceable and uncontested rights to use freely such property and assets, including, without limitation, rights to use Trademarks owned by BEC and licensed to the Borrower in accordance with the terms of such license. All of such properties, including, without limitation, the Collateral which were purchased, were purchased for fair consideration and reasonably equivalent value in the ordinary course of business of both the seller and the Borrower, Foster Grant or Fantasma and not, by way of example only, as part of a bulk sale. 4.1.17 PATENTS, TRADEMARKS, ETC. Each of the Borrower, Foster Grant or Fantasma owns, possesses, or has the right to use all necessary Patents, licenses, Trademarks, Copyrights, permits and franchises to own its properties and to conduct its business as now conducted, without known conflict with the rights of any other Person. Any and all obligations to pay royalties or other charges with respect to such properties and assets are properly reflected on the financial statements described in Section 4.1.11 (Financial Condition). 4.1.18 EMPLOYEE RELATIONS. Except as disclosed on SCHEDULE 4.1.18 attached hereto and made a part hereof, (a) no Obligor nor any of the Obligor's employees is subject to any collective bargaining agreement, (b) no petition for certification or union election is pending with respect to the 62 70 employees of any Obligor and no union or collective bargaining unit has sought such certification or recognition with respect to the employees of a Obligor, (c) there are no strikes, slowdowns, work stoppages or controversies pending or, to the best knowledge of the Borrower, Foster Grant and Fantasma after due inquiry, threatened between any of them and its employees, and (d) none of Borrower, Foster Grant or Fantasma is subject to any material employment contract, severance agreement, commission contract, consulting agreement or bonus agreement. Hours worked and payments made to the employees of any one or more of the Borrower, Foster Grant or Fantasma have not been in violation of the Fair Labor Standards Act or any other applicable law dealing with such matters. All payments due from any one or more of the Borrower, Foster Grant or Fantasma or for which any claim may be made against an Obligor, on account of wages and employee and retiree health and welfare insurance and other benefits have been paid or accrued in accordance with GAAP as a liability on its books. The consummation of the transactions contemplated by this Agreement or any of the other Financing Documents will not, give rise to a right of termination or right of renegotiation on the part of any union under any collective bargaining agreement to which any Obligor is a party or by which it is bound. 4.1.19 PRESENCE OF HAZARDOUS MATERIALS OR HAZARDOUS MATERIALS CONTAMINATION. To the best of each of the Borrower's, Foster Grant's or Fantasma's knowledge, except as disclosed on SCHEDULE 4.1.19 attached hereto and made a part hereof, (a) no Hazardous Materials are located on any real property owned, controlled or operated by of any of the Borrower, Foster Grant or Fantasma or for which any of the Borrower, Foster Grant or Fantasma is, or is claimed to be, responsible, except for reasonable quantities of necessary supplies for use by of the Borrower, Foster Grant or Fantasma in the ordinary course of its current line of business and stored, used and disposed in accordance with applicable Laws; and (b) no property owned, controlled or operated by any of the Borrower, Foster Grant or Fantasma or for which any of the Borrower, Foster Grant or Fantasma has, or is claimed to have, responsibility has ever been used as a manufacturing, storage, or dump site for Hazardous Materials nor is affected by Hazardous Materials Contamination at any other property. 4.1.20 PERFECTION AND PRIORITY OF COLLATERAL. The Agent and the Lenders have, or upon execution and recording of this Agreement and the Security Documents will have, and will continue to have as security for the Obligations, a valid and perfected Lien on and security interest in all Collateral, free of all other Liens, claims and rights of third parties whatsoever except Permitted Liens, including, without limitation, those described on SCHEDULE 4.1.20. 4.1.21 PLACES OF BUSINESS AND LOCATION OF COLLATERAL. The information contained in the Collateral Disclosure List is complete and correct. The Collateral Disclosure List completely and accurately identifies the address of (a) the chief executive office of each of the Borrower, Foster Grant or Fantasma, (b) any and each other place of business of each of the Borrower, Foster Grant or Fantasma, (c) the location of all books and records pertaining to the Collateral, and (d) each location, other than the foregoing, where any of the Collateral is located. 63 71 4.1.22 BUSINESS NAMES AND ADDRESSES. Except as disclosed in SCHEDULE 4.1.22 attached hereto and made a part hereof, in the five (5) years preceding the date hereof, none of the Borrower, Foster Grant or Fantasma has changed its name, identity or corporate structure, has conducted business under any name other than its current name, and has conducted its business in any jurisdiction, other than those disclosed on the Collateral Disclosure List. 4.1.23 INVENTORY. The Inventory of the Borrower, Foster Grant and Fantasma is (a) of good and merchantable quality, (b) not stored with a bailee, warehouseman, carrier, or similar party, (c) not on consignment, sale on approval, or sale or return, and (d) located at the places of business set forth on the Collateral Disclosure List. No goods offered for sale by any of the Borrower, Foster Grant or Fantasma are consigned to or held on sale or return terms by that Person. 4.1.24 ACCOUNTS. With respect to all Accounts and to the best of the Borrower's, Foster Grant's and Fantasma's knowledge (a) they are genuine, and in all respects what they purport to be, and are not evidenced by a judgment, an Instrument, or Chattel Paper (unless such judgment has been assigned and such Instrument or Chattel Paper has been endorsed and delivered to the Agent for the benefit of itself and the Lenders); (b) they represent bona fide transactions completed in accordance with the terms and provisions contained in the invoices, purchase orders and other contracts relating thereto, and the underlying transaction therefor is in accordance with all applicable Laws; (c) the amounts shown on the respective books and records of the Borrower, Foster Grant or Fantasma, with respect thereto are actually and absolutely owing to that entity and are not contingent or subject to reduction for any reason other than regular discounts, credits or adjustments allowed by that entity in the ordinary course of its business; (d) no payments have been or shall be made thereon except payments turned over to the Agent by the Borrower, Foster Grant or Fantasma; (e) all Account Debtors thereon have the capacity to contract; and (f) the goods sold, leased or transferred or the services furnished giving rise thereto are not subject to any Liens except the security interest granted to the Agent and the Lenders by this Agreement and Permitted Liens. 4.1.25 COMPLIANCE WITH ELIGIBILITY STANDARDS. Each Account and all Inventory included in the calculation of the Borrowing Base does and will at all times meet and comply with all of the standards for Eligible Receivables and Eligible Inventory. With respect to those Accounts which the Agent has deemed Eligible Receivables (a) there are no facts, events or occurrences which in any way impair the validity, collectibility or enforceability thereof or tend to reduce the amount payable thereunder; and (b) there are no proceedings or actions known to any of the Borrower, Foster Grant or Fantasma which are threatened or pending against any Account Debtor which might result in any material adverse change in the Borrowing Base. 64 72 4.1.26 ORIGINAL FINANCING AGREEMENT. No Default or Event of Default (including, without limitation, those with respect to representations and warranties) existed under the Original Financing Agreement or under any of the other Financing Documents immediately before the execution and delivery of this Agreement. 4.1.27 YEAR 2000. The Borrower has (a) initiated a review and assessment of all areas within its and each of its Subsidiaries' businesses and operations (including those affected by suppliers, vendors and customers) that could be adversely affected by the "Year 2000 Problem" (that is, the risk that computer applications used by such of the Borrower, Foster Grant or Fantasma or any of its Subsidiaries (or suppliers, vendors and customers) may be unable to recognize and perform properly date-sensitive functions involving certain dates prior to and any date after December 31, 1999), (b) developed a plan and timeline for addressing the Year 2000 Problem on a timely basis, and (c) to date, implemented that plan in accordance with that timetable. Based on the foregoing, the Borrower believes that all computer applications (including those of its suppliers, vendors and customers) that are material to its or any of its Subsidiaries' business and operations are reasonably expected on a timely basis to be able to perform properly date-sensitive functions for all dates before and after January 1, 2000 (that is, be "Year 2000 compliant"), except to the extent that a failure to do so could not reasonably expected to have a Material Adverse Effect. Section 4.2 SURVIVAL; UPDATES OF REPRESENTATIONS AND WARRANTIES. All representations and warranties contained in or made under or in connection with this Agreement and the other Financing Documents shall survive the Closing Date, the making of any advance under the Loan, the issuance of any Letter of Credit, and extension of credit made hereunder, and the incurring of any other Obligations and shall be deemed to have been made at the time of each request for, and again at the time the making of, each advance under the Loan or the issuance of each Letter of Credit, except that the representations and warranties which relate to financial statements which are referred to in Section 4.1.11 (Financial Condition), shall also be deemed to cover financial statements furnished from time to time to the Agent and the Lenders pursuant to Section 6.1.1 (Financial Statements). ARTICLE V CONDITIONS PRECEDENT Section 5.1 CONDITIONS TO THE INITIAL ADVANCE AND INITIAL LETTER OF CREDIT. The making of the initial advance under the Loan and the issuance of the initial Letter of Credit is subject to the fulfillment on or before the Closing Date of the following conditions precedent in a manner satisfactory in form and substance to the Agent and its counsel: 65 73 5.1.1 ORGANIZATIONAL DOCUMENTS - BORROWER, FOSTER GRANT AND FANTASMA. The Agent shall have received for each of Borrower, Foster Grant and Fantasma, as applicable: (a) a certificate of good standing certified by the Secretary of State, or other appropriate Governmental Authority, of the state of incorporation or formation of the Borrower, Foster Grant and Fantasma, as appropriate; (b) a certified copy from the appropriate Governmental Authority under which Foster Grant is organized, of Foster Grant's recorded limited partnership certificate and all recorded amendments thereto; (c) a certificate of qualification to do business for the Borrower, Foster Grant and Fantasma certified by the Secretary of State or other Governmental Authority of each state in which each such entity conducts business; (d) a certificate dated as of the Closing Date by the Secretary or an Assistant Secretary of the Borrower covering: (i) true and complete copies of the Borrower's corporate charter, bylaws, and all amendments thereto; (ii) true and complete copies of the resolutions of its Board of Directors authorizing (i) the execution, delivery and performance of the Financing Documents to which it is a party, (ii) the borrowings hereunder, and (iii) the granting of the Liens contemplated by this Agreement and the Financing Documents to which the Borrower is a party; (iii) the incumbency, authority and signatures of the officers of the Borrower authorized to sign this Agreement and the other Financing Documents to which the Borrower is a party; and (iv) the identity of the Borrower's current directors, common stock holders and other equity holders, as well as their respective percentage ownership interests. (e) a certificate of the partners (both general and limited) of Foster Grant, dated as of the Closing Date: (i) stating that attached to the certificate is a true and complete copy of Foster Grant's Partnership Agreement, with all amendments, modifications, restatements, substitutions, extensions and renewals thereto; 66 74 (ii) authorizing (A) the execution, delivery and performance of the Financing Documents to which Foster Grant, is a party, (B) any and all Obligations, (C) the granting of the Liens contemplated by this Agreement and the Security Documents to which Foster Grant is a party, and (D) any and all other actions or agreements taken with respect to the Obligations or the Collateral by any general partner of Foster Grant at any time; (iii) setting forth the identity and signatures of the general partners of Foster Grant and of other Responsible Officers then authorized to sign this Agreement and the other Financing Documents and the Security Documents to which Foster Grant is a party; and (iv) identifying Foster Grant's current partners and other equity holders, as well as their respective percentage ownership interests. (f) a certificate of the Secretary of Fantasma, dated as of the Closing Date: (i) stating that attached to the certificate is a true and complete copy of Fantasma's Operating Agreement, with all amendments, modifications, restatements, substitutions, extensions and renewals thereto; (ii) authorizing (A) the execution, delivery and performance of the Financing Documents to which Fantasma, is a party, (B) any and all Obligations, (C) the granting of the Liens contemplated by this Agreement and the Security Documents to which Fantasma is a party, and (D) any and all other actions or agreements taken with respect to the Obligations or the Collateral by the members of Fantasma at any time; (iii) setting forth the identity and signatures of the members of Fantasma and of other Responsible Officers then authorized to sign this Agreement and the other Financing Documents and the Security Documents to which Fantasma is a party; and (iv) identifying Fantasma's current members, as well as their respective percentage ownership interests. 5.1.2 OPINION OF OBLIGORS' COUNSEL. The Agent shall have received the favorable opinion of counsel for the Obligors addressed to the Agent and the Lenders in form satisfactory to the Agent. 5.1.3 ORGANIZATIONAL DOCUMENTS - CORPORATE GUARANTORS. The Agent shall have received for each Corporate Guarantor: 67 75 (a) a certificate of good standing certified by the Secretary of State, or other appropriate Governmental Authority, of the state of incorporation for such Corporate Guarantor; (b) a certificate of qualification to do business certified by the Secretary of State or other Governmental Authority of each state in which such Corporate Guarantor conducts business; and (c) a certificate dated as of the Closing Date by the Secretary or an Assistant Secretary of such Corporate Guarantor covering: (i) true and complete copies of such Corporate Guarantor's corporate charter, bylaws, and all amendments thereto; (ii) true and complete copies of the resolutions of the Board of Directors of such Corporate Guarantor authorizing the execution, delivery and performance of the Financing Documents to which such Corporate Guarantor is a party and the granting of the Liens contemplated by any of the Financing Documents to which such Corporate Guarantor is a party; (iii) the incumbency, authority and signatures of the officers of such Corporate Guarantor authorized to sign the Corporate Guaranty and all other Financing Documents to which such Corporate Guarantor is a party; and (iv) the identity of such Corporate Guarantor's current directors, common stock holders and other equity holders, as well as their respective percentage ownership interests. 5.1.4 CONSENTS, LICENSES, APPROVALS, ETC. Except as set forth in SCHEDULE 5.1.4, the Agent shall have received copies of all material consents, licenses and approvals, required in connection with the execution, delivery, performance, validity and enforceability of the Financing Documents, and such consents, licenses and approvals shall be in full force and effect. 5.1.5 NOTES. The Agent shall have received for delivery to each of the Lenders the Revolving Credit Notes, each conforming to the requirements hereof and executed by a Responsible Officer of the Borrower and attested by a duly authorized representative of the Borrower. 5.1.6 FINANCING DOCUMENTS AND COLLATERAL. 68 76 Each Obligor shall have executed and delivered the Financing Documents to be executed by it, and shall have delivered original Chattel Paper, Instruments and related Collateral and all opinions, and other documents contemplated by ARTICLE III (The Collateral). 5.1.7 OTHER FINANCING DOCUMENTS. In addition to the Financing Documents to be delivered by the Obligors, the Agent shall have received the Financing Documents duly executed and delivered by Persons other than the Obligors. 5.1.8 OTHER DOCUMENTS, ETC. The Agent shall have received such other certificates, opinions, documents and instruments confirmatory of or otherwise relating to the transactions contemplated hereby as may have been reasonably requested by the Agent. 5.1.9 PAYMENT OF FEES. The Agent and the Lenders shall have received payment of any Fees due on or before the Closing Date. 5.1.10 COLLATERAL DISCLOSURE LIST. Each of the Borrower, Foster Grant and Fantasma shall have delivered the Collateral Disclosure List required under the provisions of Section 3.3 (Collateral Disclosure List) duly executed by a Responsible Officer of the Borrower, Foster Grant or Fantasma, as appropriate. 5.1.11 RECORDINGS AND FILINGS. The Borrower, Foster Grant and Fantasma and such other Persons, as appropriate, shall have: (a) executed and delivered all Financing Documents (including, without limitation, UCC-1 and UCC-3 statements) required to be filed, registered or recorded in order to create, in favor of the Agent and the Lenders, a perfected Lien in the Collateral (subject only to the Permitted Liens) in form and in sufficient number for filing, registration, and recording in each office in each jurisdiction in which such filings, registrations and recordations are required, and (b) delivered such evidence as the Agent may reasonably require that all necessary filing fees and all recording and other similar fees, and all Taxes and other expenses related to such filings, registrations and recordings will be or have been paid in full. 5.1.12 INSURANCE CERTIFICATE. The Agent shall have received an insurance certificate in accordance with the provisions of Section 6.1.7 (Insurance) and Section 6.1.18 (Insurance With Respect to Equipment and Inventory). 5.1.13 LANDLORD'S WAIVERS. Except as otherwise agreed by the Agent, the Agent shall have received a landlord's waiver from each landlord of each and every business premise leased by each of the 69 77 Borrower, Foster Grant and Fantasma and on which any of the Collateral is or may hereafter be located, which landlords' waivers must be reasonably acceptable to the Agent and its counsel in their sole and absolute discretion. 5.1.14 BAILEE ACKNOWLEDGEMENTS. The Agent shall have received an agreement acknowledging the Liens of the Agent and the Lenders from each bailee, warehouseman, consignee or similar third party which has possession of any of the Collateral, which agreements must be reasonably acceptable to the Agent and its counsel in their sole and absolute discretion. 5.1.15 FIELD EXAMINATION. The Agent shall have completed a field examination and audit of each of the Borrower's, Foster Grant's and Fantasma's business, operations and income, the results of which field examination and audit shall be in all respects acceptable to the Agent in its sole and absolute discretion and shall include reference discussions with key customers and vendors. 5.1.16 CREDIT INSURANCE. The Agent shall have received a copy of all agreements related to the credit insurance covered by the Assignment of Credit Insurance, all of which shall be in form and content satisfactory to the Agent, together with the fully executed duplicate originals of the Assignment of Credit Insurance. 5.1.17 SENIOR NOTES. The Agent shall have received a certificate signed by a Responsible Officer, certifying to the Agent and the Lenders that the Borrower (a) has received the proceeds of sale of the Senior Notes, in accordance with, and pursuant to, the terms and conditions of the Senior Note Documents, and has applied the same to such purposes as has been previously disclosed to the Agent and the Lenders, and (b) has delivered to the Agent and the Lenders a true and correct photocopy of all Senior Note Documents. Section 5.2 CONDITIONS TO ALL EXTENSIONS OF CREDIT. The making of all advances under the Loan and the issuance of all Letters of Credit is subject to the fulfillment of the following conditions precedent in a manner satisfactory in form and substance to the Agent and its counsel: 5.2.1 COMPLIANCE. Each of the Borrower, Foster Grant or Fantasma shall have complied and shall then be in compliance with all terms, covenants, conditions and provisions of this Agreement and the other Financing Documents that are binding upon it. 5.2.2 BORROWING BASE. The Borrower, Foster Grant and Fantasma shall have furnished all Borrowing Base Reports required by Section 2.1.4 (Borrowing Base Report), there shall exist no 70 78 Borrowing Base Deficiency, and as evidence thereof, the Borrower, Foster Grant and Fantasma shall have furnished to the Agent such reports, schedules, certificates, records and other papers as may be requested by the Agent, and the Borrower, Foster Grant and Fantasma shall be in compliance with the provisions this Agreement both immediately before and immediately after the making of the advance requested. 5.2.3 DEFAULT. There shall exist no Event of Default or Default hereunder. 5.2.4 REPRESENTATIONS AND WARRANTIES. The representations and warranties of each of the Borrower, Foster Grant and Fantasma contained among the provisions of this Agreement shall be true in all material respects and with the same effect as though such representations and warranties had been made at the time of the making of, and of the request for, each advance under the Loan or the issuance of each Letter of Credit, except that the representations and warranties which relate to financial statements which are referred to in Section 4.1.11 (Financial Condition), shall also be deemed to cover financial statements furnished from time to time to the Agent pursuant to Section 6.1.1 (Financial Statements). 5.2.5 MATERIAL ADVERSE CHANGE. No material adverse change shall have occurred in the condition (financial or otherwise), operations or business of any of the Borrower, Foster Grant and Fantasma that would, in the good faith judgment of the Agent, materially impair the ability of that entity to pay or perform any of the Obligations. 5.2.6 LEGAL MATTERS. All legal documents incident to each advance under the Loan and each of the Letters of Credit shall be reasonably satisfactory to counsel for the Agent.** ARTICLE VI COVENANTS OF THE BORROWER Section 6.1 AFFIRMATIVE COVENANTS. So long as any of the Obligations (or any the Commitments therefor) shall be outstanding hereunder, the Borrower agrees with the Agent and the Lenders as follows: 6.1.1 FINANCIAL STATEMENTS. The Borrower shall furnish to the Agent and the Lenders: (a) ANNUAL STATEMENTS AND CERTIFICATES. The Borrower shall furnish to the Agent and the Lenders as soon as available, but in no event no later one hundred twenty (120) days after the close of each fiscal year of the Borrower thereafter, (i) a copy of the annual consolidated and consolidating financial statement in reasonable detail satisfactory to the 71 79 Agent relating to the Borrower and its Subsidiaries on a consolidated basis, prepared in accordance with GAAP and examined and certified by independent certified public accountants satisfactory to the Agent, which financial statement shall include a balance sheet as of the end of such fiscal year and statements of income, cash flows and changes in equity for such fiscal year and (ii) a Compliance Certificate, in substantially the form attached to this Agreement as EXHIBIT "C", as may be amended by the Agent from time to time, containing a detailed computation of each financial covenant which is applicable for the period reported, a certification that no material change has occurred to the information contained in the Collateral Disclosure List (except as set forth in a schedule attached to the certification), each prepared by a Responsible Officer of the Borrower in a format acceptable to the Agent. The Borrower shall furnish to the Agent and the Lenders as soon as available, but in no event later than June 30 of each calendar year, a management letter for the then preceding fiscal year in the form prepared by the Borrower's independent certified public accountants. (b) ANNUAL OPINION OF ACCOUNTANT. The Borrower shall furnish to the Agent and the Lenders as soon as available, but in no event more than one hundred twenty (120) days after the close of the Borrower's fiscal year, a letter or opinion of the accountant who examined and certified the annual financial statement relating to the Borrower stating whether anything in such accountant's examination has revealed the occurrence of a Default or an Event of Default hereunder, and, if so, stating the facts with respect thereto. (c) MONTHLY STATEMENTS AND CERTIFICATES. The Borrower shall furnish to the Agent and the Lenders as soon as available, but in no event more than thirty (30) days after the close of each fiscal month of the Borrower consolidated and consolidating balance sheets of the Borrower as of the close of such period, income, cash flows and changes in equity statements for such period (which statements shall be preliminary for the month of December and shall be followed by final statements no later than (60) days after the close of such month), and a detailed computation of each financial covenant in this Agreement which is applicable for the period reported, all as prepared and certified by a Responsible Officer of the Borrower and accompanied by a certificate of that officer stating whether any event has occurred which constitutes a Default or an Event of Default hereunder, and, if so, stating the facts with respect thereto. (d) MONTHLY REPORTS. The Borrower shall furnish, or cause to be furnished, to the Agent and the Lenders within fifteen (15) Business Days after the end of each fiscal month, a report containing the following information for each of the Borrower, Foster Grant and Fantasma: (i) a detailed aging schedule of all Receivables by Account Debtor, in such detail, and accompanied by such supporting information, as the Agent may from time to time reasonably request; (ii) a detailed aging of all accounts payable by supplier, in such detail, and accompanied by such supporting information, as the Agent may from time to time reasonably request; 72 80 (iii) a listing of all Inventory by component, category and location, in such detail, and accompanied by such supporting information as the Agent may from time to time reasonably request; and (iv) such other information as the Agent may reasonably request. (e) ANNUAL BUDGET AND PROJECTIONS. The Borrower shall furnish to the Agent and the Lenders (i) as soon as available, but in no event later than the 10th day before the end of each fiscal year a budget and pro forma financial statements on a month-to-month basis for the following fiscal year, and (ii) as soon as available, but in no event later than March 31 of each year, three year projections. (f) CONSOLIDATING SCHEDULES. The Borrower shall furnish or cause to be furnished to the Agent and the Lenders as soon as available, but in no event later than September 15 of each calendar year, copies of all tax returns filed by the Borrower on a consolidated basis. (g) ADDITIONAL REPORTS AND INFORMATION. The Borrower shall furnish to the Agent and the Lenders promptly, such additional information, reports or statements as the Agent may from time to time reasonably request with respect to the Borrower and its Subsidiaries. (h) CERTAIN INFORMATION FURNISHED TO TRUSTEE. The Borrower will furnish to the Agent and the Lenders, at the same time sent to the Trustee, at least one (l) copy of all financial statements, reports, and other information sent by the Borrower to the holders of the Senior Notes and the Trustee pursuant to Section 4.03 (a) of the Indenture as in effect on the Closing Date. 6.1.2 RECORDKEEPING, RIGHTS OF INSPECTION, FIELD EXAMINATION, ETC. (a) Each of the Borrower, Foster Grant and Fantasma shall maintain (i) a standard system of accounting in accordance with GAAP, and (ii) proper books of record and account in which full, true and correct entries are made of all dealings and transactions in relation to its properties, business and activities. (b) Each of the Borrower, Foster Grant and Fantasma shall permit authorized representatives of the Agent, who may be accompanied by the Lenders at their own expense, to visit and inspect the properties of any of the Borrower, Foster Grant or Fantasma, to review, audit, check and inspect the Collateral at any time with reasonable notice prior to the occurrence of a Default or Event of Default or without notice following and during the continuance of a Default or an Event of Default, to review, audit, check and inspect any of the Borrower's, Foster Grant's and Fantasma's other books of record at any time with reasonable notice prior to the occurrence of a Default or Event of Default or without notice following and during the continuance of a Default or an Event of Default and to make abstracts and photocopies thereof, and to discuss the affairs, finances and accounts of any of Borrower, Foster Grant and Fantasma, with the officers, directors, employees and other representatives of any or all of the 73 81 Borrower, Foster Grant and Fantasma and its or their accountants, all at such times during normal business hours and other reasonable times and as often as the Agent may reasonably request. (c) Without implying any limitation on subsection (b) above, through and including the period ending December 31, 1997, the Borrower, Foster Grant and Fantasma shall permit authorized representatives of the Agent to conduct a quarterly appraisal of each such entity's Inventory, all at such times during normal business hours as may be reasonably requested by the Agent. (d) Each of the Borrower, Foster Grant and Fantasma hereby irrevocably authorizes and directs all accountants and auditors employed by any of the Borrower, Foster Grant or Fantasma at any time prior to the repayment in full of the Obligations to exhibit and deliver to the Agent copies of any and all of the financial statements, trial balances, management letters, or other accounting records of any nature of any of Borrower, Foster Grant or Fantasma in the accountant's or auditor's possession, and to disclose to the Agent any information they may have concerning the financial status and business operations of any of the Borrower, Foster Grant or Fantasma; provided, however, that the Agent agrees that any and all such accountants and/or auditors shall first be given a reasonable opportunity to consult with the Borrower, Foster Grant and Fantasma prior to responding to any request from the Agent, and provided further that the accountants may decline to provide information which accountants generally may not provide to third parties even if so directed by their clients. Further, each of the Borrower, Foster Grant and Fantasma hereby authorizes all Governmental Authorities to furnish to the Agent copies of reports or examinations relating to any of the Borrower, Foster Grant and Fantasma, whether made by the Borrower, Foster Grant or Fantasma or otherwise. (e) Any and all costs and expenses reasonably incurred by, or on behalf of, the Agent in connection with the conduct of any of the foregoing shall be part of the Enforcement Costs and shall be payable to the Agent upon demand. The Borrower, Foster Grant and Fantasma acknowledge and agree that such reasonable expenses may include, but shall not be limited to, any and all out-of-pocket costs and expenses of the Agent's employees and agents reasonably incurred in, and when, travelling to any of the Borrower's, Foster Grant's or Fantasma's facilities. 6.1.3 EXISTENCE. Each of the Borrower, Foster Grant and Fantasma shall maintain its corporate, partnership or limited liability existence, as appropriate, in good standing in the jurisdiction in which it is organized or incorporated, as appropriate, and in each other jurisdiction where it is required to register or qualify to do business if the failure to do so in such other jurisdiction might have a Material Adverse Effect. 6.1.4 COMPLIANCE WITH LAWS. Each of the Borrower, Foster Grant and Fantasma shall comply with all applicable Laws and observe the valid requirements of Governmental Authorities, the noncompliance with or the nonobservance of which might have a Material Adverse Effect. 74 82 6.1.5 PRESERVATION OF PROPERTIES. Each of the Borrower, Foster Grant and Fantasma will at all times (a) maintain, preserve, protect and keep its properties, whether owned or leased, in reasonably satisfactory operating condition, working order and repair (ordinary wear and tear excepted), and from time to time will make all proper repairs, maintenance, replacements, additions and improvements thereto needed to maintain such properties in reasonably satisfactory operating condition, working order and repair, except to the extent the same is the subject of a Permitted Asset Disposition, and (b) do or cause to be done all things necessary to preserve and to keep in full force and effect its material franchises, leases of real and personal property, trade names, patents, trademarks and permits which are necessary for the orderly continuance of its business. 6.1.6 LINE OF BUSINESS. The Borrower will continue to engage substantially only in the business of distributing and selling personal and fashion accessories including, but not limited to, jewelry, sunglasses, reading glasses, key chains, small leather goods, handbags and watches and clocks. Foster Grant will continue to engage substantially only in the business of distributing and selling sunglasses, reading glasses, watches, clocks, accessories and related consumer goods. 6.1.7 INSURANCE. (a) Each of the Borrower, Foster Grant and Fantasma will at all times maintain with "A" or better rated insurance companies such insurance as is required by applicable Laws and such other insurance, in such amounts, of such types and against such risks, hazards, liabilities, casualties and contingencies as are usually insured against in the same geographic areas by business entities engaged in the same or similar business. Without limiting the generality of the foregoing, each of the Borrower, Foster Grant and Fantasma will keep adequately insured all of its property against loss or damage resulting from fire or other risks insured against by extended coverage and maintain public liability insurance against claims for personal injury, death or property damage occurring upon, in or about any properties occupied or controlled by it, or arising in any manner out of the businesses carried on by it, all in such amounts not less than the Agent shall reasonably determine from time to time. (b) Each of the Borrower, Foster Grant and Fantasma shall deliver to the Agent on the Closing Date (and thereafter on each date there is a material change in the insurance coverage) a certificate of a Responsible Officer of the Borrower, Foster Grant and Fantasma, as applicable, containing a detailed list of the insurance then in effect and stating the names of the insurance companies, the types, the amounts and rates of the insurance, dates of the expiration thereof and the properties and risks covered thereby. Within thirty (30) days after notice in writing from the Agent, the Borrower, Foster Grant and Fantasma will obtain such additional insurance as the Agent may reasonably request. 6.1.8 TAXES. Except to the extent that the validity or amount thereof is being contested in good faith and by appropriate proceedings, each of the Borrower, Foster Grant and Fantasma will pay and discharge all Taxes prior to the date when any interest or penalty would accrue for 75 83 the nonpayment thereof. The Agent agrees that the failure of any of Borrower, Foster Grant or Fantasma to pay and discharge Taxes in an amount not greater than Fifty Thousand Dollars ($50,000), individually or in the aggregate, shall not constitute a violation of this Section 6.1.8. Each of the Borrower, Foster Grant and Fantasma shall furnish to the Agent at such times as the Agent may require proof reasonably satisfactory to the Agent of the making of payments or deposits required by applicable Laws including, without limitation, payments or deposits with respect to amounts withheld by any of the Borrower, Foster Grant and Fantasma from wages and salaries of employees and amounts contributed by any of the Borrower, Foster Grant and Fantasma on account of federal and other income or wage taxes and amounts due under the Federal Insurance Contributions Act, as amended. 6.1.9 ERISA. Each of the Borrower, Foster Grant and Fantasma will, and will cause each of its Affiliates which is a Corporate Guarantor to, comply with the funding requirements of ERISA with respect to employee pension benefit plans for its respective employees. Upon the Agent's request, the Borrower, Foster Grant and Fantasma will deliver to the Agent a copy of the most recent actuarial report, financial statements and annual report completed with respect to any "defined benefit plan", as defined in ERISA. 6.1.10 NOTIFICATION OF EVENTS OF DEFAULT AND ADVERSE DEVELOPMENTS. Each of the Borrower, Foster Grant and Fantasma shall promptly notify the Agent upon obtaining knowledge of the occurrence of: (a) any Event of Default; (b) any Default; (c) any litigation instituted or threatened against any of the Borrower, Foster Grant or Fantasma and of the entry of any judgment or Lien (other than any Permitted Liens) against any of the assets or properties of any of the Borrower, Foster Grant or Fantasma where the claims against any of the Borrower, Foster Grant or Fantasma exceed One Million Dollars ($1,000,000) and are not covered by insurance; (d) any event, development or circumstance whereby the financial statements furnished hereunder fail in any material respect to present fairly, in accordance with GAAP, the financial condition and operational results of the Borrower and its Subsidiaries; (e) any judicial, administrative or arbitral proceeding pending against any of the Borrower, Foster Grant and Fantasma and any judicial or administrative proceeding known by any of the Borrower, Foster Grant and Fantasma to be threatened against any of the Borrower, Foster Grant and Fantasma which, if adversely decided, could have a Material Adverse Effect; (f) the receipt by any of the Borrower, Foster Grant and Fantasma of any notice, claim or demand from any Governmental Authority which alleges that 76 84 any of the Borrower, Foster Grant and Fantasma is in violation of any of the terms of, or has failed to comply with any applicable Laws regulating its operation and business, including, but not limited to, the Occupational Safety and Health Act and the Environmental Protection Act; provided that any such violation would constitute a Material Adverse Effect; and (g) any other development in the business or affairs of any of the Borrower, Foster Grant and Fantasma which may have a Material Adverse Effect; in each case describing in detail reasonably satisfactory to the Agent the nature thereof and the action the Borrower, Foster Grant and Fantasma propose to take with respect thereto. 6.1.11 HAZARDOUS MATERIALS; CONTAMINATION. Each of the Borrower, Foster Grant and Fantasma agree to: (a) give notice to the Agent immediately upon acquiring knowledge of the presence of any Hazardous Materials or any Hazardous Materials Contamination on any property owned, operated or controlled by any of the Borrower, Foster Grant and Fantasma or for which any of the Borrower, Foster Grant and Fantasma is, or is claimed to be, responsible (provided that such notice shall not be required for Hazardous Materials placed or stored on such property in accordance with applicable Laws in the ordinary course (including, without limitation, quantity) of Borrower's, Foster Grant's and Fantasma's line of business expressly described in this Agreement), with a full description thereof; (b) promptly comply with any Laws requiring the removal, treatment or disposal of Hazardous Materials or Hazardous Materials Contamination and provide the Agent with satisfactory evidence of such compliance; (c) provide the Agent, within thirty (30) days after a demand by the Agent, with a bond, letter of credit or similar financial assurance evidencing to the Agent's reasonable satisfaction that the necessary funds are available to pay the cost of removing, treating, and disposing of such Hazardous Materials or Hazardous Materials Contamination and discharging any Lien which may be established as a result thereof on any property owned, operated or controlled by any of the Borrower, Foster Grant and Fantasma or for which any of the Borrower, Foster Grant and Fantasma is, or is claimed to be, responsible; and (d) as part of the Obligations, defend, indemnify and hold harmless the Agent, each of the Lenders and each of their respective agents, employees, trustees, successors and assigns from any and all claims which may now or in the future (whether before or after the termination of this Agreement) be asserted as a result of the presence of any Hazardous Materials or any Hazardous Materials Contamination on any property owned, operated or controlled by any of the Borrower, Foster Grant and Fantasma for which any of the Borrower, Foster Grant and Fantasma is, or is claimed to be, responsible. Each of the Borrower, Foster Grant and Fantasma acknowledges and agrees that this indemnification shall survive the termination of this Agreement and the Commitments and the payment and performance of all of the other Obligations. 77 85 6.1.12 DISCLOSURE OF SIGNIFICANT TRANSACTIONS. Each of the Borrower, Foster Grant and Fantasma shall deliver to the Agent a written notice describing in detail each transaction by it involving the purchase, sale, lease, or other acquisition or loss or casualty to or disposition of an interest in Fixed or Capital Assets (other than displays sold in the ordinary course of business), which exceeds Five Hundred Thousand Dollars ($500,000.00), said notices to be delivered to the Agent within thirty (30) days of the occurrence of each such transaction. 6.1.13 FINANCIAL COVENANTS. (a) FIXED CHARGE COVERAGE RATIO. The Borrower and its Subsidiaries on a consolidated basis will maintain, tested on the last Business Day of each of the Borrower's fiscal quarters beginning on the last Business Day of the fiscal quarter ending closest to December 31, 1998, for the four (4) quarter period ending on such date, a Fixed Charge Coverage Ratio of not less than the following: -------------------------------------------------------- FISCAL QUARTER ENDING CLOSEST TO: RATIO -------------------------------------------------------- December 31, 1998 through and 1.00 to 1.0 including September 30, 1999 -------------------------------------------------------- December 31, 1999 through and 1.20 to 1.0 including September 30, 2000 -------------------------------------------------------- December 31, 2000 through and 1.25 to 1.0 including September 30, 2001 -------------------------------------------------------- December 31, 2001 through and 1.30 to 1.0 including September 30, 2002 -------------------------------------------------------- December 31, 2002 through and 1.35 to 1.0 including September 30, 2003 -------------------------------------------------------- December 31, 2003 and thereafter 1.40 to 1.0 -------------------------------------------------------- (b) LEVERAGE RATIO. The Borrower and its Subsidiaries on a consolidated basis will at all times maintain, tested as of the last Business Day of each of Borrower's fiscal quarters beginning with the fiscal quarter ending closest to December 31, 1998, as of the last day of each of the Borrower's fiscal quarters for the four (4) quarter period ending on such date, a ratio of Funded Debt to EBITDA so that it is not more than the following: 78 86 --------------------------------------------------------- FISCAL QUARTER ENDING CLOSEST TO: RATIO --------------------------------------------------------- December 31, 1998 through and 6.20 to 1.0 including September 30, 1999 --------------------------------------------------------- December 31, 1999 through and 3.50 to 1.0 including September 30, 2000 --------------------------------------------------------- December 31, 2000 through and 3.25 to 1.0 including September 30, 2001 --------------------------------------------------------- December 31, 2001 through and 3.00 to 1.0 including September 30, 2002 --------------------------------------------------------- December 31, 2002 through and 2.75 to 1.0 including September 30, 2003 --------------------------------------------------------- December 31, 2003 and thereafter 2.50 to 1.0 (applicable if the Revolving Credit Termination Date has not sooner occurred) --------------------------------------------------------- (c) EBITDA. The Borrower and its Subsidiaries on a consolidated basis will maintain, tested on the last Business Day of each of the Borrower's fiscal quarters beginning on the last Business Day of the fiscal quarter ending closest to December 31, 1998 for the four (4) quarter period ending on such date, EBITDA of not less than the following: ========================================================= FISCAL QUARTER ENDING CLOSEST TO: AMOUNT --------------------------------------------------------- December 31, 1998 $13,250,000 --------------------------------------------------------- March 31, 1999 $24,750,000 --------------------------------------------------------- June 30, 1999 $27,000,000 --------------------------------------------------------- September 30, 1999 $29,250,000 --------------------------------------------------------- December 31, 1999 $31,500,000 --------------------------------------------------------- Thereafter $34,000,000 --------------------------------------------------------- 6.1.14 COLLECTION OF RECEIVABLES. Until such time that the Agent shall notify the Borrower, Foster Grant and Fantasma of the revocation of such privilege, the Borrower, Foster Grant and Fantasma shall at their own expense have the privilege for the account of, and in trust for, the Agent and the Lenders of collecting their Receivables and receiving in respect thereto all Items of Payment and 79 87 shall otherwise completely service all of the Receivables including (a) the billing, posting and maintaining of complete records applicable thereto, (b) the taking of such action with respect to the Receivables as the Agent may request or in the absence of such request, as each of the Borrower, Foster Grant and Fantasma may deem advisable; and (c) the granting, in the ordinary course of business, to any Account Debtor, any rebate, refund or adjustment to which the Account Debtor may be lawfully entitled, and may accept, in connection therewith, the return of goods, the sale or lease of which shall have given rise to a Receivable and may take such other actions relating to the settling of any Account Debtor's claim as may be commercially reasonable. The Agent may, at its option, at any time or from time to time after and during the continuance of a Default hereunder, revoke the collection privilege given in this Agreement to any one or more of the Borrower, Foster Grant and Fantasma by either giving notice of its assignment of, and Lien on the Collateral to the Account Debtors or giving notice of such revocation to the Borrower, Foster Grant and Fantasma. The Agent shall not have any duty to, and the Borrower, Foster Grant and Fantasma hereby release the Agent and the Lenders from all claims of loss or damage caused by the delay or failure to collect or enforce any of the Receivables or to preserve any rights against any other party with an interest in the Collateral. The Agent shall be entitled at any time and from time to time to confirm and verify Receivables. 6.1.15 ASSIGNMENTS OF RECEIVABLES. Each of the Borrower, Foster Grant and Fantasma will promptly, upon request, execute and deliver to the Agent written assignments, in form and content acceptable to the Agent, of specific Receivables or groups of Receivables; provided, however, the Lien and/or security interest granted to the Agent, for the ratable benefit of the Lenders and for the benefit of the Agent with respect to the Agent's Obligations, under this Agreement shall not be limited in any way to or by the inclusion or exclusion of Receivables within such assignments. Receivables so assigned shall secure payment of the Obligations and are not sold to the Agent and/or the Lenders whether or not any assignment thereof, which is separate from this Agreement, is in form absolute. The Borrower, Foster Grant and Fantasma agree that neither any assignment to the Lender nor any other provision contained in this Agreement or any of the other Financing Documents shall impose on the Agent or the Lenders any obligation or liability of any of the Borrower, Foster Grant and Fantasma with respect to that which is assigned and the Borrower, Foster Grant and Fantasma hereby agree jointly and severally to indemnify the Agent and the Lenders and hold the Agent and the Lenders harmless from any and all claims, actions, suits, losses, damages, costs, expenses, fees, obligations and liabilities which may be incurred by or imposed upon the Agent and/or any of the Lenders by virtue of the assignment of and Lien on any of the Borrower's, Foster Grant's or Fantasma's rights, title and interest in, to, and under the Collateral. 6.1.16 GOVERNMENT ACCOUNTS. The Borrower, Foster Grant and Fantasma will immediately notify the Agent if any of the Receivables arise out of contracts with the United States or with any other Governmental Authority, and, as appropriate, execute any Instruments and take any steps required by the Agent in order that all moneys due and to become due under such contracts shall be assigned to the Agent, for the ratable benefit of the Lenders and for the benefit of the Agent 80 88 with respect to the Agent's Obligations, and notice thereof given to the Governmental Authority under the Federal Assignment of Claims Act or any other applicable Laws. 6.1.17 INVENTORY. With respect to the Inventory, the Borrower, Foster Grant and Fantasma will: (a) as soon as possible upon demand by the Agent from time to time, prepare and deliver to the Agent designations of Inventory specifying the Borrower's, Foster Grant's or Fantasma's standard cost, which generally represents average cost, of Inventory, and such other matters and information relating to the Inventory as the Agent may reasonably request; (b) keep correct and accurate records itemizing and describing the kind, type, quality and quantity of Inventory, consistent with past practices, the Borrower's, Foster Grant's or Fantasma's cost therefor and the selling price thereof, all of which records shall be available to the officers, employees or agents of the Agent upon demand for inspection and copying thereof; (c) except for Inventory located with freight forwarders in the ordinary course of shipment, not store any Inventory with a bailee, warehouseman or similar Person without the Agent's prior written consent, which consent may be conditioned on, among other things, delivery by the bailee, warehouseman or similar Person to the Agent of warehouse receipts, in form acceptable to the Agent, in the name of the Agent evidencing the storage of Inventory and the interests of the Agent and the Lenders therein; and (d) permit the Agent and its agents or representatives to inspect and examine the Inventory and to check and test the same as to quality, quantity, value and condition at any time or times hereafter during the Borrower's, Foster Grant's or Fantasma's usual business hours or at other reasonable times, provided that, absent an Event of Default, the Agent shall take reasonable steps not to interfere with the conduct of the Borrower's, Foster Grant's or Fantasma's business except to the extent reasonably necessary to complete the Agent's activities. The Borrower, Foster Grant and Fantasma shall be permitted to sell their Inventory in the ordinary course of business until the occurrence of a Default or an Event of Default. 6.1.18 INSURANCE WITH RESPECT TO AND INVENTORY. The Borrower, Foster Grant and Fantasma will (a) maintain hazard insurance with fire and extended coverage and naming the Agent as an additional insured with loss payable to the Agent as its respective interest may appear on the Inventory in an amount at least equal to the lesser amount of the outstanding principal amount of the Obligations or the fair market value of the Inventory (but in any event sufficient to avoid any co-insurance obligations) and with a specific endorsement to each such insurance policy pursuant to which the insurer agrees to give the Agent at least thirty (30) days written notice before any alteration or cancellation of such insurance policy and that no act or default of any of the Borrower, Foster Grant and Fantasma shall affect the right of the Agent to recover under such policy in the event of loss or damage; (b) file with the Agent, upon its request, a detailed list of the insurance then in effect and stating the names of the insurance companies, the amounts and rates of the insurance, dates of the expiration thereof and the properties and risks covered thereby; and (c) within thirty (30) days after notice in writing from the Agent, obtain such additional insurance as the Agent may reasonably request. 81 89 6.1.19 CREDIT INSURANCE. The Borrower and Foster Grant shall at all times maintain, subject to the Lien of the Assignment of Credit Insurance, credit insurance with a responsible insurer on insurance terms and other terms substantially no less favorable than that credit insurance covered by the Assignment of Credit Insurance on the date of this Agreement. No later than thirty (30) days after the date of this Agreement, Fantasma shall obtain for its accounts, and thereafter shall at all times maintain, subject to the Lien of the Assignment of Credit Insurance, credit insurance with a responsible insurer on insurance terms and other terms substantially no less favorable than the Borrower's and Foster Grant's credit insurance covered by the Assignment of Credit Insurance on the date of this Agreement. 6.1.20 MAINTENANCE OF THE COLLATERAL. (a) The Borrower, Foster Grant and Fantasma will maintain the Collateral in satisfactory order, saving and excepting ordinary wear and tear, and will not permit anything to be done to the Collateral that may materially impair the value thereof. (b) The Agent, or an agent designated by the Agent, shall be permitted to enter the premises of each of the Borrower, Foster Grant and Fantasma and examine, audit and inspect the Collateral at any reasonable time and from time to time without notice. Absent an Event of Default, the Agent shall take reasonable steps not to interfere with the conduct of the Borrower's, Foster Grant's or Fantasma's business except to the extent reasonably necessary to complete the Agent's activities. (c) The Agent shall not have any duty to, and the Borrower, Foster Grant and Fantasma hereby release the Agent and the Lenders from all claims of loss or damage caused by the delay or failure to collect or enforce any of the Receivables or to, preserve any rights against any other party with an interest in the Collateral. 6.1.21 DEFENSE OF TITLE AND FURTHER ASSURANCES. At their expense, the Borrower, Foster Grant and Fantasma will defend the title to the Collateral (and any part thereof), and will immediately execute, acknowledge and deliver any financing statement, renewal, affidavit, deed, assignment, continuation statement, security agreement, certificate or other document which the Agent may require in order to perfect, preserve, maintain, continue, protect and/or extend the Lien or security interest granted to the Agent, for the ratable benefit of the Lenders and for the benefit of the Agent with respect to the Agent's Obligations, under this Agreement, under any of the other Financing Documents and the first priority of that Lien, subject only to the Permitted Liens. The Borrower, Foster Grant and Fantasma will from time to time do whatever the Agent may require by way of obtaining, executing, delivering, and/or filing financing statements, landlords' or mortgagees' waivers, notices of assignment and other notices and amendments and renewals thereof and the Borrower, Foster Grant and Fantasma will take any and all steps and observe such formalities as the Agent may require, in order to create and maintain a valid Lien upon, pledge of, or security interest in, the Collateral, subject to the Permitted Liens. The Borrower, Foster Grant and Fantasma shall pay to the Agent on demand all taxes, costs and expenses incurred by the Agent in connection with the preparation, execution, recording and filing of any such document or instrument. To the 82 90 extent that the proceeds of any of the Accounts or Receivables of the Borrower, Foster Grant or Fantasma are expected to become subject to the control of, or in the possession of, a party other than the Borrower, Foster Grant or Fantasma or the Agent, the Borrower, Foster Grant and Fantasma shall cause all such parties to execute and deliver on the Closing Date security documents, financing statements or other documents as requested by the Agent and as may be necessary to evidence and/or perfect the security interest of the Agent, for the ratable benefit of the Lenders and for the benefit of the Agent with respect to the Agent's Obligations, in those proceeds. The Borrower, Foster Grant and Fantasma agree that a copy of a fully executed security agreement and/or financing statement shall be sufficient to satisfy for all purposes the requirements of a financing statement as set forth in Article 9 of the applicable Uniform Commercial Code. Each of the Borrower, Foster Grant and Fantasma hereby irrevocably appoints the Agent as the Borrower's, Foster Grant's and Fantasma's attorney-in-fact, with power of substitution, in the name of the Agent or in the name of the Borrower, Foster Grant and Fantasma or otherwise, for the use and benefit of the Agent for itself and the Lenders, but at the cost and expense of the Borrower, Foster Grant and Fantasma and without notice to the Borrower, Foster Grant and Fantasma, to execute and deliver any and all of the instruments and other documents and take any action which the Lender may require pursuant to the foregoing provisions of this Section 6.1.21. 6.1.22 BUSINESS NAMES; LOCATIONS. Each of the Borrower, Foster Grant and Fantasma will notify the Agent not less than thirty (30) days prior to (a) any change in the name under which the Borrower, Foster Grant or Fantasma conducts its business, (b) any change of the location of the chief executive office of the applicable party, and (c) the opening of any new place of business or the closing of any existing place of business, and any change in the location of the places where the Collateral, or any part thereof, or the books and records, or any part thereof, are kept. 6.1.23 SUBSEQUENT OPINION OF COUNSEL AS TO RECORDING REQUIREMENTS. In the event that any of the Borrower, Foster Grant and Fantasma shall transfer its principal place of business or the office where it keeps its records pertaining to the Collateral, upon the Agent's request the Borrower, Foster Grant or Fantasma, as applicable, will provide to the Agent a subsequent opinion of counsel as to the filing, recording and other requirements with which the Borrower, Foster Grant or Fantasma, as applicable, have complied to maintain the Lien and security interest in favor of the Agent, for the ratable benefit of the Lenders and for the benefit of the Agent with respect to the Agent's Obligations, in the Collateral. 6.1.24 USE OF PREMISES AND EQUIPMENT. The Borrower, Foster Grant and Fantasma agree that until the Obligations are fully paid and all of the Commitments and the Letters of Credit have been terminated or have expired, the Agent (a) after and during the continuance of a Default or an Event of Default, may use any of the Borrower's, Foster Grant's and Fantasma's owned or leased lifts, hoists, trucks and other facilities or equipment for handling or removing the Collateral; and (b) shall have, and is hereby granted, a right of ingress and egress to the places where the Collateral is located, and may 83 91 proceed over and through any of the Borrower's, Foster Grant's and Fantasma's owned or leased property. 6.1.25 PROTECTION OF COLLATERAL. The Borrower, Foster Grant and Fantasma agree that the Agent may at any time following an Event of Default take such steps as the Agent deems reasonably necessary to protect the interest of the Agent and the Lenders in, and to preserve the Collateral, including, the hiring of such security guards or the placing of other security protection measures as the Agent deems appropriate, may employ and maintain at any of the Borrower's, Foster Grant's and Fantasma's premises a custodian who shall have full authority to do all acts necessary to protect the interests of the Agent and the Lenders in the Collateral and may lease warehouse facilities to which the Agent may move all or any part of the Collateral to the extent commercially reasonable. The Borrower, Foster Grant and Fantasma agree to cooperate fully with the Agent's efforts to preserve the Collateral and will take such actions to preserve the Collateral as the Agent may reasonably direct. All of the Agent's expenses of preserving the Collateral, including any reasonable expenses relating to the compensation and bonding of a custodian, shall part of the Enforcement Costs. Section 6.2 NEGATIVE COVENANTS. So long as any of the Obligations or the Commitments or Letters of Credit therefor shall be outstanding hereunder, the Borrower, Foster Grant and Fantasma agree with the Agent and the Lenders that without the prior written consent of the Agent: 6.2.1 CAPITAL STRUCTURE, MERGER, ACQUISITION OR SALE OF ASSETS. (a) None of the Borrower, Foster Grant and Fantasma will enter into any merger or consolidation or amalgamation (other than with another Obligor or Subsidiary), or windup or dissolve themselves (or suffer any liquidation or dissolution) or enter into an Asset Disposition (except for Permitted Asset Dispositions) or acquire all or substantially all the assets of any Person (except for Permitted Acquisitions). Any consent of the Agent to an Asset Disposition (other than a Permitted Asset Disposition) may be conditioned on a specified use of the proceeds of disposition. (b) Notwithstanding the provisions of subsection (a) above, the Lenders agree that the Borrower may acquire all or a portion of the member interest of Fantasma, or other ownership interests of a Subsidiary, not owned by the Borrower. (c) Notwithstanding the provisions of subsection (a) above, the Lenders agreement to mergers, consolidations, reorganizations and restructurings, and other circumstances permitted by Section 6.2.1(a), by and among the Borrower, the other Obligors and/or Subsidiaries, shall be conditioned upon the following: (i) the Lenders are given at least fifteen (15) days prior written notice of any such proposed merger, consolidation, reorganization and restructuring and such information with respect to such transaction as may be reasonably requested by any of the Lenders, (ii) the merger, consolidation, reorganization and/or restructuring would not otherwise constitute or give rise to a Default or an Event of Default, (iii) 84 92 the Borrower shall furnish such information as any of the Lenders may request to reconcile any actual changes to the then most current financial statements of the Borrower available to the Lenders and any actual and projected changes to financial covenants under this Agreement and to the financial condition and operations of the Borrower, Foster Grant and Fantasma and each other member of the AAi Group affected by any such merger, consolidation, reorganization or restructuring, (iv) that the Lien of the Agent and the Lenders in the Collateral shall continue without impairment, (v) each Obligor, and each successor to any Obligor shall execute and deliver to the Agent any and all such confirmations, ratifications, affirmations and such other agreements as the Agent may reasonably request to confirm, reaffirm, preserve, ratify or validate the Obligations and/or to preserve, maintain, protect or perfect any and all Liens of the Agent and the Lenders, and (vi) the Agent shall be satisfied that the closing and consummation of the proposed transaction will not have a Material Adverse Effect. 6.2.2 SUBSIDIARIES. None of the Borrower, Foster Grant and Fantasma will create or acquire any Subsidiaries other than the Subsidiaries identified on the Collateral Disclosure List, except (a) to the extent necessary to close and consummate any merger, consolidation, reorganization, restructuring or other circumstances permitted under the provisions of Section 6.2.1 (Capital Structure, etc.) or (b) where upon such creation or acquisition all Accounts, Inventory, Chattel Paper, Instruments, rights to non-exclusive use of Trademarks in the disposition of the Inventory to which such Trademarks are attached and any real property and fixtures acquired are pledged to the Lenders. 6.2.3 ISSUANCE OF STOCK. None of the Obligors other than the Borrower, as appropriate, will issue, or grant any option or right to purchase, any of its capital stock, limited liability membership interest or partnership interests, except to the extent necessary to close and consummate any merger, consolidation, reorganization, restructuring, or other circumstances permitted under the provisions of Section 6.2.1 (Capital Structure, etc.) and except for the issuance or transfer of stock or interests such that the Borrower owns (directly or indirectly) no less than fifty one percent (51%) of all such stock or interests. The Borrower will not issue or grant any option or right to purchase, any Disqualified Stock (as defined in the Indenture). 6.2.4 PURCHASE OR REDEMPTION OF SECURITIES, DISTRIBUTION RESTRICTIONS; PAYMENT OF INDEBTEDNESS FOR BORROWED MONEY. Except as permitted in Section 6.2.1 (Capital Structure, etc.), Foster Grant will neither make any distribution by reduction of capital or otherwise in respect of, any partnership or other equity interests in Foster Grant nor set aside any funds for any such purpose, except for Permitted Affiliate Distributions made at a time when there is no Event of Default. Except for Permitted Affiliate Distributions made at a time when there is no Event of Default, the Borrower, will not purchase, redeem or otherwise acquire any shares of its capital stock or warrants now or hereafter outstanding, declare or pay any dividends thereon (other than stock dividends), apply any of its property or assets to the purchase, redemption or other retirement of, set apart any sum for the payment of any dividends on, or for the purchase, redemption, or other 85 93 retirement of, make any distribution by reduction of capital or otherwise in respect of, any shares of any class of capital stock, or any warrants, make any distribution to stockholders or set aside any funds for any such purpose, except to the extent necessary to close and consummate a merger, consolidation, reorganization, restructuring or other circumstances permitted by the provisions of Section 6.2.1 (Capital Structure, etc.). In addition, the Borrower shall not prepay, purchase or redeem any Indebtedness for Borrowed Money other than the Obligations (except through the issuance of Exchange Notes for its Senior Notes and except for Permitted Senior Note Purchases). Notwithstanding the foregoing, and provided there shall exist no Default or Event of Default, the Borrower may distribute to certain of its shareholders an amount sufficient to cover that shareholder's actual tax liability due and payable as a result of income of the Borrower that is attributed to such shareholder as a result of the Borrower having been an S corporation under the Internal Revenue Code. 6.2.5 INDEBTEDNESS. None of the Borrower, Foster Grant and Fantasma will create, incur, assume or suffer to exist any Indebtedness for Borrowed Money, except: (a) the Obligations; (b) accounts payable arising in the ordinary course; (c) Indebtedness secured by Permitted Liens; (d) intercompany debt among the Borrower and its Subsidiaries incurred in the ordinary course of business and not otherwise prohibited by this Agreement and intercompany loans among the Borrower and its Subsidiaries; (e) the Senior Notes and any Subordinated Indebtedness; (f) Indebtedness of the Obligors existing on the date hereof and reflected on the financial statements furnished pursuant to Section 4.1.11 (Financial Condition); (g) endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business; (h) other Indebtedness in the aggregate not to exceed $5,000,000; and (i) Indebtedness incurred in connection with Permitted Acquisitions. 6.2.6 INVESTMENTS, LOANS AND OTHER TRANSACTIONS. Except for the Permitted Uses and except for Permitted Senior Note Purchases, investments of one Obligor in another Obligor, and as otherwise provided in this Agreement, none of the Borrower, Foster Grant and Fantasma will (a) make, assume, acquire or continue to hold any investment in any real property (unless used in connection with their business 86 94 and treated as a Fixed or Capital Asset of any Obligor) or any Person, whether by stock purchase, capital contribution, acquisition of Indebtedness of such Person or otherwise (including, without limitation, investments in any joint venture or partnership), (b) guaranty or otherwise become contingently liable for the Indebtedness or obligations of any Person (other than another Obligor), or (c) make any loans or advances, or otherwise extend credit to any Person, except: (i) loans existing on the date of this Agreement and reflected on the consolidated balance sheet of the Borrower and its Subsidiaries furnished to the Agent; (ii) loans made to officers or employees under 401(k) and other qualified pension plans; (iii) any advance to an officer or employee of any of the Borrower, Foster Grant and Fantasma for travel or other business expenses in the ordinary course of business, provided that the aggregate amount of all such advances by all of the Borrower, Foster Grant and Fantasma (taken as a whole) outstanding at any time shall not exceed One Hundred Thousand Dollars ($100,000); (iv) the endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business; (v) any investment in Cash Equivalents, which are pledged to the Agent, for the ratable benefit of the Lenders and for the benefit of the Agent with respect to the Agent's Obligations, as collateral and security for the Obligations; (vi) trade credit extended to customers in the ordinary course of business; (vii) indebtedness permitted under Section 6.2.5 (Indebtedness); (viii) loans to shareholders partners and limited liability company members evidencing Permitted Affiliate Distributions; (ix) Permitted Acquisitions; and (x) acquisitions of investments in connection with the bankruptcy or reorganization of customers and suppliers. 6.2.7 CAPITAL EXPENDITURES. The Borrower, Foster Grant and Fantasma will not, directly or indirectly (by way of the acquisition of the securities of a Person or otherwise), make any Capital Expenditures (excluding, however, any Buybacks otherwise included as a Capital Expenditure) in 87 95 the aggregate for the Borrower, Foster Grant and Fantasma (taken as a whole) in any fiscal year exceeding $10,000,000, except the purchase and sale/leaseback of the Headquarter's Property. 6.2.8 SUBORDINATED INDEBTEDNESS. None of the Borrower, Foster Grant and Fantasma will make: (a) any payment of principal of, or interest on, any of the Subordinated Indebtedness, if a Default or an Event of Default then exists hereunder or would result from such payment; (b) any payment of the principal or interest due on the Subordinated Indebtedness as a result of acceleration thereunder or a mandatory prepayment thereunder; (c) any amendment or modification of or supplement to the documents evidencing or securing the Subordinated Indebtedness that would accelerate payments, increase the principal amount or increase the interest rate or other amounts payable thereunder; and (d) payment of principal or interest on the Subordinated Indebtedness other than when due (without giving effect to any acceleration of maturity or mandatory prepayment) except that the Borrower may offset the amount of any sums payable under the Subordinated Indebtedness against amounts owed by the holders of the Subordinated Indebtedness. 6.2.9 LIENS. Each of the Borrower, Foster Grant and Fantasma agrees that it (a) will not create, incur, assume or suffer to exist any Lien upon any of its properties or assets, whether now owned or hereafter acquired, except for Liens securing the Obligations and Permitted Liens, (b) will not agree to, assume or suffer to exist any provision in any instrument or other document for confession of judgment, cognovit or other similar right or remedy, (c) will not allow or suffer to exist any Permitted Liens to be superior to Liens securing the Obligations, (d) will not enter into any contracts for the consignment of goods, will not execute or suffer the filing of any financing statements or the posting of any signs giving notice of consignments, and will not, as a material part of its business, engage in the sale of goods belonging to others, and (e) will not allow or suffer to exist the failure of any Lien described in the Security Documents to attach to, and/or remain at all times perfected on, any of the property described in the Security Documents. 6.2.10 TRANSACTIONS WITH AFFILIATES. None of the Borrower, Foster Grant and Fantasma will enter into or participate in any transaction including, without limitation, leases of real property (a) with any Affiliate (other than another Obligor), except as permitted in Section 6.2.6 (Investments, etc.) and except in the ordinary course on reasonable and arm's length basis and which does not otherwise violate the provisions of this Agreement or the other Financing Documents, or (b) except in the ordinary course of business, with the officers, directors, employees and other representatives of 88 96 any of the Borrower, Foster Grant and Fantasma, (c) except Permitted Uses, or (d) existing real estate leases. 6.2.11 OTHER BUSINESSES. None of the Borrower, Foster Grant and Fantasma will engage directly or indirectly in any substantial respect in any business other than the Line of Business. 6.2.12 ERISA COMPLIANCE. None of the Borrower, Foster Grant and Fantasma nor any Commonly Controlled Entity shall: (a) engage in or permit any "prohibited transaction" (as defined in ERISA); (b) cause any "accumulated funding deficiency" as defined in ERISA and/or the Internal Revenue Code; (c) terminate any pension plan in a manner which could result in the imposition of a Lien on the property of any of the Borrower, Foster Grant and Fantasma pursuant to ERISA; (d) terminate or consent to the termination of any Multi-employer Plan; or (e) incur a complete or partial withdrawal with respect to any Multi-employer Plan. The Borrower, Foster Grant and Fantasma will not permit with respect to any employee benefit plan or plans covered by Title IV of ERISA (a) any prohibited transaction or transactions under ERISA or the Internal Revenue Code, which results, or may result, in any material liability of any of the Borrower, Foster Grant and Fantasma and/or any of their Affiliates which is a Guarantor, or (b) any Reportable Event if, upon termination of the plan or plans with respect to which one or more such Reportable Events shall have occurred, there is or would be any material liability of any of the Borrower, Foster Grant and Fantasma and/or any of their Affiliates which is a guarantor to the PBGC. 6.2.13 PROHIBITION ON HAZARDOUS MATERIALS. None of the Borrower, Foster Grant and Fantasma shall place, manufacture or store or permit to be placed, manufactured or stored any Hazardous Materials on any property owned, operated or controlled by any of the Borrower, Foster Grant and Fantasma or for which any of the Borrower, Foster Grant and Fantasma is responsible other than Hazardous Materials placed or stored on such property in accordance with applicable Laws in the ordinary course of the Borrower's, Foster Grant's and Fantasma's business expressly described in this Agreement. 6.2.14 METHOD OF ACCOUNTING; FISCAL YEAR. (a) The Borrower shall not change the method of accounting employed in the preparation of any financial statements furnished to the Agent under the provisions of Section 6.1.1 (Financial Statements), unless required to conform to GAAP or unless prior thereto the Borrower has given the Agent no less than sixty (60) days prior written notice thereof and the Borrower's, certified public accountants shall confirm the changes are in accordance with GAAP, shall furnish such information as the Agent may request to reconcile to the good faith satisfaction of the Agent the changes with the Borrower's, prior financial statements, with the Borrowing Base, and with the financial and other covenants under this Agreement, and the Agent and the Borrower shall have entered into an agreement acknowledging the same. 89 97 (b) The Borrower, Foster Grant and Fantasma will not change their fiscal year from a year ending on the last Saturday of the calendar year closest to December 31st. 6.2.15 COMPENSATION. None of the Borrower, Foster Grant and Fantasma will pay any bonuses, fees, compensation, commissions, salaries, drawing accounts, or other payments (cash and non-cash), whether direct or indirect, to any stockholders, partners or members of any of the Borrower, Foster Grant and Fantasma or any Affiliate of any of them, other than Permitted Affiliate Distributions and reasonable compensation for actual services rendered by partners, stockholders or Affiliates in their capacity as officers or employees, except for reasonable compensation in transactions not prohibited by Section 6.2.10 (Transactions with Affiliates) and obligations under existing agreements that have been previously disclosed to the Agent and the Lenders.. 6.2.16 TRANSFER OF COLLATERAL. None of the Borrower, Foster Grant and Fantasma will transfer, or permit the transfer, to another location of any of the Collateral or the books and records related to any of the Collateral, except to a place where the Agent has previously perfected the security interest of the Agent and the Lenders in the Collateral by filing of financing statements. 6.2.17 SALE AND LEASEBACK. None of the Borrower, Foster Grant and Fantasma will directly or indirectly enter into any arrangement to sell or transfer all or any substantial part of its fixed assets and thereupon or within one year thereafter rent or lease the assets so sold or transferred; provided, however, the sale/leaseback of the Headquarter's Property is specifically permitted. 6.2.18 DISPOSITION OF COLLATERAL. None of the Borrower, Foster Grant and Fantasma will sell, discount, allow credits or allowances, transfer, assign, extend the time for payment on, convey, lease, assign, transfer or otherwise dispose of the Collateral, except, prior to an Event of Default, Permitted Asset Dispositions, other dispositions expressly permitted elsewhere in this Agreement, the sale of Inventory (including, without limitation, the liquidation of slow moving and obsolete Inventory) in the ordinary course of business. ARTICLE VII DEFAULT AND RIGHTS AND REMEDIES Section 7.1 EVENTS OF DEFAULT. The occurrence of any one or more of the following events shall constitute an "Event of Default" under the provisions of this Agreement: 90 98 7.1.1 FAILURE TO PAY. The failure of the Borrower to pay any of the Obligations as and when due and payable in accordance with the provisions of this Agreement, the Notes and/or any of the other Financing Documents, and, except in the case of the failure make any payment of principal and in the case of the failure to pay any Obligation at its maturity (whether by acceleration or otherwise), such failure continues uncured for a period of five (5) days; 7.1.2 BREACH OF REPRESENTATIONS AND WARRANTIES. Any representation or warranty made in this Agreement or in any report, statement, schedule, certificate, opinion (including any opinion of counsel for the Borrower, Foster Grant and Fantasma), financial statement or other document furnished in connection with this Agreement, any of the other Financing Documents, or the Obligations, shall prove to have been false or misleading when made (or, if applicable, when reaffirmed) in any material respect. 7.1.3 FAILURE TO COMPLY WITH COVENANTS. The failure of the Borrower, Foster Grant and Fantasma to perform, observe or comply with any covenant, condition or agreement contained in this Agreement and, only with respect to a failure under Sections 6.1.1(a) (Recordkeeping), 6.1.3 (Existence), Section 6.1.4 (Compliance with Laws), Section 6.1.5 (Preservation of Properties), Section 6.1.7(a) (Insurance), Section 6.1.8 (Taxes) which does not relate to Taxes due or claimed to be due in excess of $50,000 in the aggregate, Section 6.1.9 (ERISA), Section 6.1.7(a) (Inventory), Section 6.1.18(a) (Insurance with Respect to Equipment and Inventory) or Section 6.1.20(a) (Maintenance of the Collateral), if the Borrower, Foster Grant and Fantasma after discovering such failure, fail to diligently and continuously pursue the cure of such failure or such failure continues uncured thirty (30) days after discovery. 7.1.4 DEFAULT UNDER OTHER FINANCING DOCUMENTS OR OBLIGATIONS. A default shall occur under any of the other Financing Documents or under any other Obligations, and such default is not cured within any applicable grace period provided therein. 7.1.5 RECEIVER; BANKRUPTCY. Any of the Obligors or any general partner of any of the Obligors shall (a) apply for or consent to the appointment of a receiver, trustee or liquidator of itself or any of its property, (b) admit in writing its inability to pay its debts as they mature, (c) make a general assignment for the benefit of creditors, (d) be adjudicated a bankrupt or insolvent, (e) file a voluntary petition in bankruptcy or a petition or an answer seeking or consenting to reorganization or an arrangement with creditors or to take advantage of any bankruptcy, reorganization, insolvency, readjustment of debt, dissolution or liquidation law or statute, or an answer admitting the material allegations of a petition filed against it in any proceeding under any such law, or take corporate action for the purposes of effecting any of the foregoing, or (f) by any act indicate its consent to, approval of or acquiescence in any such proceeding or the appointment of any receiver of or trustee for any of its property, or suffer any such receivership, trusteeship or proceeding to continue undischarged for a period of ninety (90) days, or (g) by any act indicate its 91 99 consent to, approval of or acquiescence in any order, judgment or decree by any court of competent jurisdiction or any Governmental Authority enjoining or otherwise prohibiting the operation of a material portion of any Obligor's, or any general partner's business or the use or disposition of a material portion of any Obligor's, or any general partner's assets. 7.1.6 INVOLUNTARY BANKRUPTCY, ETC. (a) An order for relief shall be entered in any involuntary case brought against any Obligor or any general partner of any Obligor under the Bankruptcy Code, or (b) any such case shall be commenced against any Obligor or any general partner of any Obligor and shall not be dismissed within ninety (90) days after the filing of the petition, or (c) an order, judgment or decree under any other Law is entered by any court of competent jurisdiction or by any other Governmental Authority on the application of a Governmental Authority or of a Person other than any Obligor or any general partner of any Obligor (i) adjudicating any Obligor or any general partner of any Obligor bankrupt or insolvent, or (ii) appointing a receiver, trustee or liquidator of any Obligor or any general partners of any Obligor, or of a material portion of any Obligor's or any general partner's of any Obligor's assets, or (iii) enjoining, prohibiting or otherwise limiting the operation of a material portion of any Obligor's or any general partner of any Obligor's business or the use or disposition of a material portion of any Obligor's or any general partner of any Obligor's assets, and such order, judgment or decree continues unstayed and in effect for a period of thirty (30) days from the date entered. 7.1.7 JUDGMENT. Unless adequately insured in the opinion of the Agent, the entry of a final judgment for the payment of money involving more than One Million Dollars ($1,000,000) against any Obligor or any general partner of any Obligor, and the failure by such Obligor or general partner to discharge the same, or cause it to be discharged, within thirty (30) days from the date of the order, decree or process under which or pursuant to which such judgment was entered, or to secure a stay of execution pending appeal of such judgment. 7.1.8 EXECUTION; ATTACHMENT. Any execution or attachment shall be levied against the Collateral, or any part thereof, and such execution or attachment shall not be set aside, discharged or stayed within forty-five (45) days after the same shall have been levied. 7.1.9 DEFAULT UNDER OTHER BORROWINGS. Default shall be made with respect to any Indebtedness for Borrowed Money of any of the Obligors (other than the Loan) in excess of $1,000,000 in the aggregate, if the effect of such default is to accelerate the maturity of such Indebtedness for Borrowed Money or to permit the holder or obligee thereof or other party thereto to cause such Indebtedness for Borrowed Money to become due prior to its stated maturity. 7.1.10 CHALLENGE TO AGREEMENTS. Any Obligor or any general partner of any Obligor shall challenge the validity and binding effect of any provision of any of the Financing Documents or shall state its 92 100 intention to make such a challenge of any of the Financing Documents or any of the Financing Documents shall for any reason (except to the extent permitted by its express terms) cease to be effective or to create a valid and perfected first priority Lien (except for Permitted Liens) on, or security interest in, any of the Collateral purported to be covered thereby. 7.1.11 CHANGE IN OWNERSHIP. Any change shall occur in the ownership of any of Foster Grant or Fantasma, except as otherwise permitted by the provisions of Section 6.2.1 (Capital Structure, etc.), and except the acquisition of stock or other ownership interests of Subsidiaries by the Borrower, Foster Grant or Fantasma. 7.1.12 LIQUIDATION, TERMINATION, DISSOLUTION, CHANGE IN MANAGEMENT, ETC. Any of the Borrower, Foster Grant or Fantasma shall liquidate, dissolve or terminate its existence except as permitted by 6.2.1 (Capital Structure, etc.) or as a result of the acquisition of stock or other ownership interests of Subsidiaries by the Borrower, Foster Grant or Fantasma. Section 7.2 REMEDIES. Upon the occurrence of any Default or Event of Default, and in the event such Default or Event of Default is not cured or otherwise remedied to the satisfaction of the Requisite Lenders on or before such date the Agent exercises any rights or remedies, the Agent may, in the exercise of its sole and absolute discretion from time to time, and shall, at the direction of the Requisite Lenders of the Lenders, at any time thereafter exercise any one or more of the following rights, powers or remedies: 7.2.1 ACCELERATION. The Agent may, and shall, at the direction of the Requisite Lenders, declare any or all of the Obligations to be immediately due and payable, notwithstanding anything contained in this Agreement or in any of the other Financing Documents to the contrary, without presentment, demand, protest, notice of protest or of dishonor, or other notice of any kind, all of which the Obligors hereby waive. 7.2.2 FURTHER ADVANCES. The Agent may, and shall, at the direction of the Requisite Lenders, from time to time without notice to the Obligors suspend, terminate or limit any further advances, loans or other extensions of credit under the Commitment, under this Agreement and/or under any of the other Financing Documents. Further, upon the occurrence of an Event of Default or Default specified in Sections 7.1.5 (Receiver; Bankruptcy) or 7.1.6 (Involuntary Bankruptcy, etc.) above, the Revolving Credit Commitments, the Letter of Credit Commitments and any agreement in any of the Financing Documents to provide additional credit and/or to issue Letters of Credit shall immediately and automatically terminate and the unpaid principal amount of the Notes (with accrued interest thereon) and all other Obligations then outstanding, shall immediately become 93 101 due and payable without further action of any kind and without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived by the Obligors. 7.2.3 UNIFORM COMMERCIAL CODE. The Agent shall have all of the rights and remedies of a secured party under the applicable Uniform Commercial Code and other applicable Laws. Upon demand by the Agent, the Borrower, Foster Grant and Fantasma shall assemble the Collateral and make it available to the Agent, at a place designated by the Agent. The Agent or its agents may without notice from time to time enter upon any of the Borrower's, Foster Grant's or Fantasma's premises to take possession of the Collateral, to remove it, to render it unusable, to process it or otherwise prepare it for sale, or to sell or otherwise dispose of it. Any written notice of the sale, disposition or other intended action by the Agent with respect to the Collateral which is sent in the manner set forth in 0 (Notices), or such other address of the Obligors which may from time to time be shown on the Agent's records, at least ten (10) days prior to such sale, disposition or other action, shall constitute commercially reasonable notice to the Obligors. The Agent may alternatively or additionally give such notice in any other commercially reasonable manner. Nothing in this Agreement shall require the Agent to give any notice not required by applicable Laws. If any consent, approval, or authorization of any state, municipal or other Governmental Authority or of any other Person or of any Person having any interest therein, should be necessary to effectuate any sale or other disposition of the Collateral, the Borrower, Foster Grant and Fantasma agree to execute all such applications and other instruments, and to take all other action, as may be required in connection with securing any such consent, approval or authorization. 7.2.4 SPECIFIC RIGHTS WITH REGARD TO COLLATERAL. In addition to all other rights and remedies provided hereunder or as shall exist at law or in equity from time to time, the Agent may (but shall be under no obligation to), without notice to any of the Borrower, Foster Grant and Fantasma, and each of the Borrower, Foster Grant and Fantasma hereby irrevocably appoints the Agent as its attorney-in-fact, with power of substitution, in the name of the Agent and/or any or all of the Lenders and/or in the name of any or all of the Borrower, Foster Grant and Fantasma or otherwise, for the use and benefit of the Agent and the Lenders, but at the cost and expense of the Borrower, Foster Grant and Fantasma and without notice to the Borrower, Foster Grant and Fantasma: (a) request any Account Debtor obligated on any of the Accounts to make payments thereon directly to the Agent, with the Agent taking control of the cash and non-cash proceeds thereof; (b) compromise, extend or renew any of the Collateral or deal with the same as it may deem advisable; 94 102 (c) make exchanges, substitutions or surrenders of all or any part of the Collateral; (d) copy, transcribe, or remove from any place of business of any of the Borrower, Foster Grant and Fantasma all books, records, ledger sheets, correspondence, invoices and documents, relating to or evidencing any of the Collateral or without cost or expense to the Agent or the Lenders, make such use of any of the Borrower's, Foster Grant's or Fantasma's place(s) of business as may be reasonably necessary to administer, control and collect the Collateral; (e) repair, alter or supply goods if necessary to fulfill in whole or in part the purchase order of any Account Debtor; (f) demand, collect, receipt for and give renewals, extensions, discharges and releases of any of the Collateral; (g) institute and prosecute legal and equitable proceedings to enforce collection of, or realize upon, any of the Collateral; (h) settle, renew, extend, compromise, compound, exchange or adjust claims in respect of any of the Collateral or any legal proceedings brought in respect thereof; (i) endorse or sign the name of any of the Borrower, Foster Grant and Fantasma upon any Items of Payment, certificates of title, Instruments, Securities, stock powers, documents, documents of title, financing statements, assignments, notices or other writing relating to or part of the Collateral and on any proof of claim in Bankruptcy against an Account Debtor; (j) notify the Post Office authorities to change the address for the delivery of mail to the Borrower, Foster Grant and Fantasma to such address or Post Office Box as the Agent may designate and receive and open all mail addressed to any of the Borrower, Foster Grant and Fantasma; and (k) take any other action necessary or beneficial to realize upon or dispose of the Collateral or to carry out the terms of this Agreement. 7.2.5 APPLICATION OF PROCEEDS. Any proceeds of sale or other disposition of the Collateral will be applied by the Agent to the payment first of any and all Agent's Obligations, then to any and all Enforcement Costs, and any balance of such proceeds will be remitted to the Lenders in like currency and funds received ratably in accordance with their respective Pro Rata Shares of such balance. Each Lender shall apply any such proceeds received from the Agent to its Obligations in such order and manner as such Lender shall determine. If the sale or other disposition of the Collateral fails to fully satisfy the Obligations, the Borrower, Foster Grant and Fantasma shall remain liable to the Agent and the Lenders for any deficiency. 95 103 7.2.6 PERFORMANCE BY AGENT. If the Borrower, Foster Grant and Fantasma shall fail to pay the Obligations or otherwise fail to perform, observe or comply with any of the conditions, covenants, terms, stipulations or agreements contained in this Agreement or any of the other Financing Documents, the Agent without notice to or demand upon the Borrower, Foster Grant and Fantasma and without waiving or releasing any of the Obligations or any Default or Event of Default, may (but shall be under no obligation to) at any time thereafter make such payment or perform such act for the account and at the expense of the Borrower, Foster Grant and Fantasma, and may enter upon the premises of the Borrower, Foster Grant and Fantasma for that purpose and take all such action thereon as the Agent may consider necessary or appropriate for such purpose and each of the Borrower, Foster Grant and Fantasma hereby irrevocably appoints the Agent as its attorney-in-fact to do so, with power of substitution, in the name of the Agent, in the name of any or all of the Lenders, or in the name of any or all of the Borrower, Foster Grant and Fantasma or otherwise, for the use and benefit of the Agent, but at the cost and expense of the Borrower, Foster Grant and Fantasma and without notice to the Borrower, Foster Grant and Fantasma. All sums so paid or advanced by the Agent together with interest thereon from the date of payment, advance or incurring until paid in full at the Post-Default Rate and all costs and expenses, shall be deemed part of the Enforcement Costs, shall be paid by the Borrower, Foster Grant and Fantasma to the Agent on demand, and shall constitute and become a part of the Agent's Obligations. 7.2.7 OTHER REMEDIES. The Agent may from time to time proceed to protect or enforce the rights of the Agent and/or any of the Lenders by an action or actions at law or in equity or by any other appropriate proceeding, whether for the specific performance of any of the covenants contained in this Agreement or in any of the other Financing Documents, or for an injunction against the violation of any of the terms of this Agreement or any of the other Financing Documents, or in aid of the exercise or execution of any right, remedy or power granted in this Agreement, the Financing Documents, and/or applicable Laws. The Agent and each of the Lenders is authorized to offset and apply to all or any part of the Obligations all moneys, credits and other property of any nature whatsoever of any or all of the Borrower, Foster Grant and Fantasma now or at any time hereafter in the possession of, in transit to or from, under the control or custody of, or on deposit with, the Agent, any of the Lenders or any Affiliate of the Agent or any of the Lenders. Section 7.3 CONSENT. For purposes of the affirmative and negative covenants set forth in ARTICLE VI (Covenants of the Borrower), except for compliance with Section 6.1.13 (Financial Covenants), the Agent and the Lenders, by their execution of this Agreement, consent to the events, circumstances and transactions expressly set forth in the Preliminary Offering Memorandum dated June 24, 1998 by the Borrower. 96 104 ARTICLE VIII THE AGENT Section 8.1 APPOINTMENT. Each Lender hereby designates and appoints NationsBank as its agent under this Agreement and the Financing Documents, and each Lender hereby irrevocably authorizes the Agent to take such action or to refrain from taking such action on its behalf under the provisions of this Agreement and the Financing Documents and to exercise such powers as are set forth herein or therein, together with such other powers as are reasonably incidental thereto. The Agent agrees to act as such on the express conditions contained in this ARTICLE VIII. The provisions of this ARTICLE VIII are solely for the benefit of the Agent and the Lenders and neither the Borrower, Foster Grant and Fantasma nor any Person shall have any rights as a third party beneficiary of any of the provisions hereof. In performing its functions and duties under this Agreement, the Agent shall act solely as an administrative representative of the Lenders and does not assume and shall not be deemed to have assumed any obligation toward or relationship of agency or trust with or for the Lenders, the Borrower, Foster Grant and Fantasma or any Person. The Agent may perform any of its duties hereunder, or under the Financing Documents, by or through its agents or employees. Section 8.2 NATURE OF DUTIES. 8.2.1 IN GENERAL. The Agent shall have no duties, obligations or responsibilities except those expressly set forth in this Agreement or in the Financing Documents. The duties of the Agent shall be mechanical and administrative in nature. The Agent shall not have by reason of this Agreement a fiduciary relationship in respect of any Lender. Each Lender shall make its own independent investigation of the financial condition and affairs of the Borrower, Foster Grant and Fantasma in connection with the extension of credit hereunder and shall make its own appraisal of the credit worthiness of the Borrower, Foster Grant and Fantasma, and the Agent shall have no duty or responsibility, either initially or on a continuing basis, to provide any Lender with any credit or other information with respect thereto, whether coming into its possession before the Closing Date or at any time or times thereafter, except as expressly set forth in Section 8.13 (Dissemination of Information). If the Agent seeks the consent or approval of any of the Lenders to the taking or refraining from taking of any action hereunder, then the Agent shall send notice thereof to each Lender. The Agent shall promptly notify each Lender any time that the applicable percentage of the Lenders have instructed the Agent to act or refrain from acting pursuant hereto. 8.2.2 EXPRESS AUTHORIZATION. The Agent is hereby expressly and irrevocably authorized by each of the Lenders, as agent on behalf of itself and the other Lenders: (a) To receive on behalf of each of the Lenders any payment or collection on account of the Obligations and to distribute to each Lender its Pro Rata Share of all such payments and collections so received as provided in this Agreement; 97 105 (b) To receive all documents and items to be furnished to the Lenders under the Financing Documents (nothing contained herein shall relieve the Borrower, Foster Grant and Fantasma of any obligation to deliver any item directly to the Lenders to the extent expressly required by the provisions of this Agreement); (c) To act or refrain from acting in this Agreement and in the other Financing Documents with respect to those matters so designated for the Agent; (d) To act as nominee for and on behalf of the Lenders in and under this Agreement and the other Financing Documents; (e) To arrange for the means whereby the funds of the Lenders are to be made available to the Borrower, Foster Grant and Fantasma; (f) To distribute promptly to the Lenders, if required by the terms of this Agreement, all written information, requests, notices, Loan Notices, payments, Prepayments, documents and other items received from the Borrower, Foster Grant and Fantasma or other Person; (g) To amend, modify, or waive any provisions of this Agreement or the other Financing Documents on behalf of the Lenders subject to the requirement that certain of the Lenders' consent be obtained in certain instances as provided in 0 (Circumstances Where Consent Required); (h) To deliver to the Borrower, Foster Grant and Fantasma and other Persons, all requests, demands, approvals, notices, and consents received from any of the Lenders; (i) To exercise on behalf of each Lender all rights and remedies of the Lenders upon the occurrence of any Event of Default and/or Default specified in this Agreement and/or in any of the other Financing Documents or applicable Laws; (j) To execute any of the Security Documents and any other documents on behalf of the Lenders as the secured party for the benefit of the Agent and the Lenders; and (k) To take such other actions as may be requested by the Requisite Lenders. Section 8.3 RIGHTS, EXCULPATION, ETC. Neither the Agent nor any of its officers, directors, employees or agents shall be liable to any Lender for any action taken or omitted by them hereunder or under any of the Financing Documents, or in connection herewith or therewith, except that the Agent shall be obligated on the terms set forth herein for performance of its express obligations hereunder, and except that the Agent shall be liable with respect to its own gross negligence or willful misconduct. The Agent shall not be liable for any apportionment or distribution of payments made by it in good faith and 98 106 if any such apportionment or distribution is subsequently determined to have been made in error the sole recourse of any Lender to whom payment was due but not made, shall be to recover from other the Lenders any payment in excess of the amount to which they are determined to be entitled (and such other Lenders hereby agree to return to such Lender any such erroneous payments received by them). The Agent shall not be responsible to any Lender for any recitals, statements, representations or warranties herein or for the execution, effectiveness, genuineness, validity, enforceability, collectible, or sufficiency of this Agreement or any of the Financing Documents or the transactions contemplated thereby, or for the financial condition of any Person. The Agent shall not be required to make any inquiry concerning either the performance or observance of any of the terms, provisions or conditions of this Agreement or any of the Financing Documents or the financial condition of any Person, or the existence or possible existence of any Default or Event of Default. The Agent may at any time request instructions from the Lenders with respect to any actions or approvals which by the terms of this Agreement or of any of the Financing Documents the Agent is permitted or required to take or to grant, and the Agent shall be absolutely entitled to refrain from taking any action or to withhold any approval and shall not be under any liability whatsoever to any Person for refraining from any action or withholding any approval under any of the Financing Documents until it shall have received such instructions from the applicable percentage of the Lenders. Without limiting the foregoing, no Lender shall have any right of action whatsoever against the Agent as a result of the Agent acting or refraining from acting under this Agreement or any of the other Financing Documents in accordance with the instructions of the applicable percentage of the Lenders and notwithstanding the instructions of the Lenders, the Agent shall have no obligation to take any action if it, in good faith believes that such action exposes the Agent to any liability. Section 8.4 RELIANCE. The Agent shall be entitled to rely upon any written notices, statements, certificates, orders or other documents or any telephone message or other communication (including any writing, telex, telecopy or telegram) believed by it in good faith to be genuine and correct and to have been signed, sent or made by the proper Person, and with respect to all matters pertaining to this Agreement or any of the Financing Documents and its duties hereunder or thereunder, upon advice of counsel selected by it. The Agent may deem and treat the original Lenders as the owners of the respective Notes for all purposes until receipt by the Agent of a written notice of assignment, negotiation or transfer of any interest therein by the Lenders in accordance with the terms of this Agreement. Any interest, authority or consent of any holder of any of the Notes shall be conclusive and binding on any subsequent holder, transferee, or assignee of such Notes. The Agent shall be entitled to rely upon the advice of legal counsel, independent accountants, and other experts selected by the Agent in its sole discretion. Section 8.5 INDEMNIFICATION. Each Lender, severally, agrees to reimburse and indemnify the Agent for and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses, advances or disbursements including, without limitation, Enforcement Costs, of any kind or nature whatsoever which may be imposed on, incurred by, or asserted against the Agent in any way relating to or arising out of this Agreement or any of the Financing Documents or any 99 107 action taken or omitted by the Agent under this Agreement for any of the Financing Documents, in proportion to each Lender's Pro Rata Share, all of the foregoing as they may arise, be asserted or be imposed from time to time; provided, however, that no Lender shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses, advances or disbursements resulting from the Agent's gross negligence or willful misconduct. The obligations of the Lenders under this Section 8.5 shall survive the payment in full of the Obligations and the termination of this Agreement. Section 8.6 NATIONSBANK INDIVIDUALLY. With respect to its Commitments and the Loan made by it, and the Notes issued to it, NationsBank shall have and may exercise the same rights and powers hereunder and is subject to the same obligations and liabilities as and to the extent set forth herein for any other Lender. The terms "the Lenders" or "Requisite Lenders" or any similar terms shall, unless the context clearly otherwise indicates, include NationsBank in its individual capacity as a Lender or one of the Requisite Lenders. NationsBank and its Affiliates may lend money to, accept deposits from and generally engage in any kind of banking, trust or other business with the Borrower, Foster Grant and Fantasma, any Affiliate of any of them, or any other Person or any of their officers, directors and employees as if NationsBank were not acting as the Agent pursuant hereto and the Agent may accept fees and other consideration from the Borrower, Foster Grant and Fantasma, any Affiliate of the Borrower, Foster Grant and Fantasma or any of their officers, directors and employees (in addition to the Agency Fees or other arrangements fees heretofore agreed to between the Borrower, Foster Grant and Fantasma and the Agent) for services in connection with this Agreement or otherwise without having to account for or share the same with the Lenders. Section 8.7 SUCCESSOR AGENT. 8.7.1 RESIGNATION. The Agent may resign from the performance of all its functions and duties hereunder at any time by giving at least thirty (30) Business Days' prior written notice to the Borrower, Foster Grant and Fantasma and the Lenders. Such resignation shall take effect upon the acceptance by a successor Agent of appointment pursuant to Section 8.7.2 (Appointment of Successor) or as otherwise provided below. 8.7.2 APPOINTMENT OF SUCCESSOR. Upon any such notice of resignation pursuant to Section 8.7.1 (Resignation), the Requisite Lenders shall appoint a successor to the Agent. If a successor to the Agent shall not have been so appointed within said thirty (30) Business Day period, the Agent retiring, upon notice to the Borrower, Foster Grant and Fantasma, shall then appoint a successor Agent who shall serve as the Agent until such time, as the Requisite Lenders appoint a successor the Agent as provided above. 8.7.3 SUCCESSOR AGENT. Upon the acceptance of any appointment as the Agent under the Financing Documents by a successor Agent, such successor to the Agent shall thereupon succeed to and 100 108 become vested with all the rights, powers, privileges and duties of the Agent retiring, and the Agent retiring shall be discharged from its duties and obligations under the Financing Documents. After any Agent's resignation as the Agent under the Financing Documents, the provisions of this ARTICLE VIII shall inure to its benefit as to any actions taken or omitted to be taken by it while it was the Agent under the Financing Documents. Section 8.8 COLLATERAL MATTERS. 8.8.1 RELEASE OF COLLATERAL. The Lenders hereby irrevocably authorize the Agent, at its option and in its discretion, to release any Lien granted to or held by the Agent upon any property covered by this Agreement or the Financing Documents: (a) upon termination of the Commitments and payment and satisfaction of all Obligations; (b) constituting property being sold or disposed of if the Borrower certifies to the Agent that the sale or disposition is made in compliance with the provisions of this Agreement (and the Agent may rely in good faith conclusively on any such certificate, without further inquiry); (c) constituting property leased to the Borrower, Foster Grant and Fantasma under a lease which has expired or been terminated in a transaction permitted under this Agreement or is about to expire and which has not been, and is not intended by the Borrower, Foster Grant and Fantasma to be, renewed or extended; or (d) constituting property covered by Permitted Liens with lien priority superior to those Liens in favor or for the benefit of the Lenders. In addition during any fiscal year of the Borrower (x) the Agent may release Collateral having a book value of not more than 5% of the book value of all Collateral, (y) the Agent, with the consent of Requisite Lenders, may release Collateral having a book value of not more than 25% of the book value of all Collateral and (z) the Agent, with the consent of the Lenders having 90% of (i) the Commitments and (ii) the Loan, may release all the Collateral. 8.8.2 CONFIRMATION OF AUTHORITY, EXECUTION OF RELEASES. Without in any manner limiting the Agent's authority to act without any specific or further authorization or consent by the Lenders as set forth in Section 8.8.1 (Release of Collateral), each Lender agrees to confirm in writing, upon request by the Borrower, Foster Grant and Fantasma, the authority to release any property covered by this Agreement or the Financing Documents conferred upon the Agent under Section 8.8.1 (Release of Collateral). So long as no Event of Default is then continuing, upon receipt by the Agent of confirmation from the requisite percentage of the Lenders, of its authority to release any particular item or types of property covered by this Agreement or the Financing Documents, and upon at least five (5) Business Days prior written request by the Borrower, Foster Grant and Fantasma, the Agent shall (and is hereby irrevocably authorized by the Lenders to) execute such documents as may be necessary to 101 109 evidence the release of the Liens granted to the Agent for the benefit of the Lenders herein or pursuant hereto upon such Collateral; PROVIDED, HOWEVER, that (i) the Agent shall not be required to execute any such document on terms which, in the Agent's opinion, would expose the Agent to liability or create any obligation or entail any consequence other than the release of such Liens without recourse or warranty, and (ii) such release shall not in any manner discharge, affect or impair the Obligations or any Liens upon (or obligations of any Person, in respect of), all interests retained by any Person, including, without limitation, the proceeds of any sale, all of which shall continue to constitute part of the property covered by this Agreement or the Financing Documents. 8.8.3 ABSENCE OF DUTY. The Agent shall have no obligation whatsoever to any Lender, the Borrower, Foster Grant and Fantasma or any other Person to assure that the property covered by this Agreement or the Financing Documents exists or is owned by the Borrower, Foster Grant and Fantasma or is cared for, protected or insured or has been encumbered or that the Liens granted to the Agent on behalf of the Lenders herein or pursuant hereto have been properly or sufficiently or lawfully created, perfected, protected or enforced or are entitled to any particular priority, or to exercise at all or in any particular manner or under any duty of care, disclosure or fidelity, or to continue exercising, any of the rights, authorities and powers granted or available to the Agent in this Section 8.8.3 (Absence of Duty) or in any of the Financing Documents, it being understood and agreed that in respect of the property covered by this Agreement or the Financing Documents or any act, omission or event related thereto, the Agent may act in any manner it may deem appropriate, in its discretion, given the Agent's own interest in property covered by this Agreement or the Financing Documents as one of the Lenders and that the Agent shall have no duty or liability whatsoever to any of the other the Lenders. Section 8.9 AGENCY FOR PERFECTION. Each Lender hereby appoints the Agent and each other Lender as agent for the purpose of perfecting the Lenders' Liens in Collateral which, in accordance with Article 9 of the Uniform Commercial Code in any applicable jurisdiction or otherwise, can be perfected only by possession. Should any Lender (other than the Agent) obtain possession of any such Collateral, such Lender shall notify the Agent thereof, and, promptly upon the Agent's request therefor, shall deliver such Collateral to the Agent or in accordance with the Agent's instructions. Section 8.10 EXERCISE OF REMEDIES. Each Lender agrees that it will not have any right individually to enforce or seek to enforce this Agreement or any Financing Document or to realize upon any collateral security for the Loan, it being understood and agreed that such rights and remedies may be exercised only by the Agent. Section 8.11 CONSENTS. (a) In the event the Agent requests the consent of a Lender and does not receive a written denial thereof, or a written notice from a Lender that due cause 102 110 consideration of the request requires additional time, in each case, within ten (10) Business Days after such Lender's receipt of such request, then such Lender will be deemed to have given such consent. (b) In the event the Agent requests the consent of a Lender and such consent is denied, then NationsBank may, at its option, require such Lender to assign its interest in the Loan to NationsBank for a price equal to the then outstanding principal amount thereof PLUS accrued and unpaid interest, fees and costs and expenses due such Lender under the Financing Documents, which principal, interest, fees and costs and expenses will be paid on the date of such assignment. In the event that NationsBank elects to require any Lender to assign its interest to NationsBank, NationsBank will so notify such Lender in writing within thirty (30) days following such Lender's denial, and such Lender will assign its interest to NationsBank no later than five (5) days following receipt of such notice. Section 8.12 CIRCUMSTANCES WHERE CONSENT OF ALL OF THE LENDERS IS REQUIRED. Notwithstanding anything to the contrary contained herein, no amendment, modification, change or waiver shall be effective without the consent of all of the Lenders to: (a) extend the maturity of the principal of, or interest on, any Note or of any of the other Obligations; (b) reduce the principal amount of any Note or of any of the other Obligations or the rate of interest thereon, except as expressly permitted therein; (c) change the date of payment of principal of, or interest on, any Note or of any of the other Obligations; (d) change the method of calculation utilized in connection with the computation of interest and Fees; (e) change the manner of pro rata application by the Agent of payments made by the Borrower, Foster Grant and Fantasma, or any other payments required hereunder or under the other Financing Documents; (f) modify this Section, Section 8.8.1 (Release of Collateral), Section 8.14 (Discretionary Advances) or the definition of "Requisite Lenders"; (g) release or subordinate any material portion of any Collateral or Financing Document (except to the extent provided herein or therein); or (h) change the definition of "Borrowing Base." Additionally, no change may be made to the amount of a Lender's Commitment or to the Lender's percentage of all Commitments without the prior written consent of that Lender. Nothing in this Section 8.12 (Circumstances Where Consent Required) is, however, intended to or shall imply any limitation on the right of the Agent alone to exercise that discretion and 103 111 otherwise to make those determinations provided for the Agent in the definitions of "Eligible Inventory" and "Eligible Receivables" and provided for the Agent elsewhere in this Agreement. Section 8.13 DISSEMINATION OF INFORMATION. The Agent will provide the Lenders with any information received by the Agent from the Borrower, Foster Grant and Fantasma which is required to be provided to the Agent or to the Lenders hereunder; PROVIDED, HOWEVER, that the Agent shall not be liable to any one or more the Lenders for any failure to do so, except to the extent that such failure is attributable to the Agent's gross negligence or willful misconduct. Section 8.14 DISCRETIONARY ADVANCES. The Agent may, in its sole discretion, make, for the account of the Lenders on a pro rata basis, advances under the Revolving Loan of up to ten percent (10%) in excess of the Borrowing Base but not in excess of the limitation set forth in aggregate Revolving Credit Commitments for a period of not more than thirty (30) consecutive days. ARTICLE IX MISCELLANEOUS Section 9.1 NOTICES. All notices, requests and demands to or upon the parties to this Agreement shall be in writing and shall be deemed to have been given or made when delivered by hand on a Business Day, or two (2) days after the date when deposited in the mail, postage prepaid by registered or certified mail, return receipt requested, or when sent by overnight courier, on the Business Day next following the day on which the notice is delivered to such overnight courier, addressed as follows: Obligors: c/o AAi.FosterGrant, Inc. 500 George Washington Highway Smithfield, Rhode Island 02917 Attention: Mr. Gerald F. Cerce with a copy to: AAi.FosterGrant, Inc. 500 George Washington Highway Smithfield, Rhode Island 02917 Attention: Mr. Duane M. DeSisto Hinckley, Allen & Snyder 1500 Fleet Center Providence, Rhode Island 02903 Attention: Stephen J. Carlotti, Esquire 104 112 Agent: NATIONSBANK, N. A. NationsBank Business Credit 100 S. Charles Street Baltimore, Maryland 21201 Attn: Mr. Stephen V. Rieger with a copy to: Frederick W. Runge, Jr., Esquire Miles & Stockbridge P. C. 10 Light Street Baltimore, Maryland 21202 Lenders: NATIONSBANK, N. A. NationsBank Business Credit 100 S. Charles Street Baltimore, Maryland 21201 Attn: Mr. Stephen V. Rieger By written notice, each party to this Agreement may change the address to which notice is given to that party, provided that such changed notice shall include a street address to which notices may be delivered by overnight courier in the ordinary course on any Business Day. Section 9.2 AMENDMENTS; WAIVERS. This Agreement and the other Financing Documents may not be amended, modified, or changed in any respect except by an agreement in writing signed by the Agent, the Requisite Lenders and the Borrower, Foster Grant and Fantasma, and to the extent provided in Section 8.12 (Circumstances Where Consent Required) by an agreement in writing signed by all of the Lenders and the Borrower, Foster Grant and Fantasma. No waiver of any provision of this Agreement or of any of the other Financing Documents, nor consent to any departure by the Borrower, Foster Grant and Fantasma therefrom, shall in any event be effective unless the same shall be in writing. No course of dealing between the Borrower, Foster Grant and Fantasma and the Agent and/or any of the Lenders and no act or failure to act from time to time on the part of the Agent and/or any of the Lenders shall constitute a waiver, amendment or modification of any provision of this Agreement or any of the other Financing Documents or any right or remedy under this Agreement, under any of the other Financing Documents or under applicable Laws. Without implying any limitation on the foregoing, and subject to the provisions of Section 8.12 (Circumstances Where Consent Required): (a) Any waiver or consent shall be effective only in the specific instance, for the terms and purpose for which given, subject to such conditions as the Agent may specify in any such instrument. (b) No waiver of any Default or Event of Default shall extend to any subsequent or other Default or Event of Default, or impair any right consequent thereto. 105 113 (c) No notice to or demand on the Borrower, Foster Grant and Fantasma in any case shall entitle the Borrower, Foster Grant and Fantasma to any other or further notice or demand in the same, similar or other circumstance. (d) No failure or delay by the Lender to insist upon the strict performance of any term, condition, covenant or agreement of this Agreement or of any of the other Financing Documents, or to exercise any right, power or remedy consequent upon a breach thereof, shall constitute a waiver, amendment or modification of any such term, condition, covenant or agreement or of any such breach or preclude the Agent from exercising any such right, power or remedy at any time or times. (e) By accepting payment after the due date of any amount payable under this Agreement or under any of the other Financing Documents, the Agent shall not be deemed to waive the right either to require prompt payment when due of all other amounts payable under this Agreement or under any of the other Financing Documents, or to declare a default for failure to effect such prompt payment of any such other amount. Section 9.3 CUMULATIVE REMEDIES. The rights, powers and remedies provided in this Agreement and in the other Financing Documents are cumulative, may be exercised concurrently or separately, may be exercised from time to time and in such order as the Agent shall determine, subject to the provisions of this Agreement, and are in addition to, and not exclusive of, rights, powers and remedies provided by existing or future applicable Laws. In order to entitle the Agent to exercise any remedy reserved to it in this Agreement, it shall not be necessary to give any notice, other than such notice as may be expressly required in this Agreement. Without limiting the generality of the foregoing and subject to the terms of this Agreement, the Agent may: (a) proceed against any one or more of the Borrower, Foster Grant and Fantasma with or without proceeding against any other Person (including, without limitation, any one or more of the Corporate Guarantors) who may be liable (by endorsement, guaranty, indemnity or otherwise) for all or any part of the Obligations; (b) proceed against any one or more of the Borrower, Foster Grant and Fantasma with or without proceeding under any of the other Financing Documents or against any Collateral or other collateral and security for all or any part of the Obligations; (c) without reducing or impairing the obligation of the Borrower, Foster Grant and Fantasma and without notice, release or compromise with any guarantor or other Person liable for all or any part of the Obligations under the Financing Documents or otherwise; (d) without reducing or impairing the obligations of the Borrower, Foster Grant and Fantasma and without notice thereof: (i) fail to perfect the Lien in any or all Collateral or to release any or all the Collateral or to accept substitute Collateral, (ii) approve the making of advances under the Revolving Loan under this Agreement, (iii) waive any 106 114 provision of this Agreement or the other Financing Documents, (iv) exercise or fail to exercise rights of set-off or other rights, or (v) accept partial payments or extend from time to time the maturity of all or any part of the Obligations. Section 9.4 SEVERABILITY. In case one or more provisions, or part thereof, contained in this Agreement or in the other Financing Documents shall be invalid, illegal or unenforceable in any respect under any Law, then without need for any further agreement, notice or action: (a) the validity, legality and enforceability of the remaining provisions shall remain effective and binding on the parties thereto and shall not be affected or impaired thereby; (b) the obligation to be fulfilled shall be reduced to the limit of such validity; (c) if such provision or part thereof pertains to repayment of the Obligations, then, at the sole and absolute discretion of the Agent, all of the Obligations of the Borrower, Foster Grant and Fantasma to the Agent and the Lenders shall become immediately due and payable; and (d) if the affected provision or part thereof does not pertain to repayment of the Obligations, but operates or would prospectively operate to invalidate this Agreement in whole or in part, then such provision or part thereof only shall be void, and the remainder of this Agreement shall remain operative and in full force and effect. Section 9.5 ASSIGNMENTS BY LENDERS. Any Lender may, with the consent of the Agent (which consent shall not be unreasonably withheld or denied), but without the consent of the Borrower, Foster Grant and Fantasma, assign to (x) if there shall exist no Event of Default, any Financial Institution, other than those Financial Institutions listed on SCHEDULE 9.5 attached hereto, or (y) if there shall exist an Event of Default, any Financial Institution or other Person, other than those Financial Institutions and Persons listed on SCHEDULE 9.5 attached hereto (each an "Assignee" and collectively, the "Assignees") all or a portion of such Lender's Pro Rata Share of the Commitments; provided that, (i) except as provided in item (ii) below, after giving effect to such assignment, NationsBank or an Affiliate, or a successor of either, shall be the collateral agent with respect to this Agreement, NationsBank and each assignee must continue to hold a proportionate share of the commitments at least equal to Five Million Dollars ($5,000,000), and (ii) the Borrower, Foster Grant and Fantasma may, for a period of ninety (90) days after notice to the Borrower, Foster Grant and Fantasma of an assignment which does not meet the requirements of item (i), prepay all of the Obligations without payment of the Early Termination Fee, but only if the Borrower, Foster Grant and Fantasma have within thirty (30) days following receipt of such notice, notified the Agent and the assigning Lender of the Borrower's, Foster Grant's and Fantasma's intention to do so. Upon request following an assignment made in accordance with this Section, the Borrower, Foster 107 115 Grant and Fantasma shall issue new Notes to the assigning Lender and its Assignee reflecting such assignment, in exchange for the existing Note held by the assigning Lender. Any Lender (other than NationsBank) which elects to make such an assignment shall pay to the Agent, for the exclusive benefit of the Agent, an administrative fee for processing each such assignment in the amount of Three Thousand Five Hundred Dollars ($3,500.00). Such Lender and its Assignee shall notify the Agent and the Borrower, Foster Grant and Fantasma in writing of the date on which the assignment is to be effective (the "Adjustment Date"). On or before the Adjustment Date, the assigning Lender, the Agent, the Borrower, Foster Grant and Fantasma and the respective Assignee shall execute and deliver a written assignment agreement in a form acceptable to the Agent, which shall constitute an amendment to this Agreement to the extent necessary to reflect such assignment. In addition, notwithstanding the foregoing, any Lender may at any time pledge all or any portion of such Lender's rights under this Agreement, any of the Commitments or any of the Obligations to a Federal Reserve Bank. Section 9.6 PARTICIPATIONS BY LENDERS. Any Lender may at any time sell to one or more financial institutions participating interests in any of such Lender's Obligations or Commitments; provided, however, that (a) no such participation shall relieve such Lender from its obligations under this Agreement or under any of the other Financing Documents to which it is a party, (b) such Lender shall remain solely responsible for the performance of its obligations under this Agreement and under all of the other Financing Documents to which it is a party, and (c) the Borrower, Foster Grant and Fantasma, the Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement and the other Financing Documents. Section 9.7 DISCLOSURE OF INFORMATION BY LENDERS. In connection with any sale, transfer, assignment or participation by any Lender in accordance with Section 9.6 (Participations by Lenders) or Section 9.7 (Disclosure of Information), each Lender shall have the right to disclose to any actual or potential purchaser, assignee, transferee or participant all financial records, information, reports, financial statements and documents obtained in connection with this Agreement and/or any of the other Financing Documents or otherwise. Section 9.8 SUCCESSORS AND ASSIGNS. This Agreement and all other Financing Documents shall be binding upon and inure to the benefit of the Borrower, Foster Grant and Fantasma, the Agent and the Lenders and their respective heirs, personal representatives, successors and assigns, except that the Borrower, Foster Grant and Fantasma shall not have the right to assign its rights hereunder or any interest herein without the prior written consent of the Agent and the Requisite Lenders of the Lenders. 108 116 Section 9.9 CONTINUING AGREEMENTS. All covenants, agreements, representations and warranties made by the Obligors in this Agreement, in any of the other Financing Documents, and in any certificate delivered pursuant hereto or thereto shall survive the making by the Lenders of the Loan, the issuance of Letters of Credit by the Agent and the execution and delivery of the Notes, shall be binding upon the Obligors regardless of how long before or after the date hereof any of the Obligations were or are incurred, and shall continue in full force and effect so long as any of the Obligations are outstanding and unpaid. From time to time upon the Agent's request, and as a condition of the release of any one or more of the Security Documents, the Obligors and other Persons obligated with respect to the Obligations shall provide the Agent with such acknowledgments and agreements as the Agent may require to the effect that there exists no defenses, rights of setoff or recoupment, claims, counterclaims, actions or causes of action of any kind or nature whatsoever against the Agent, any or all of the Lenders, and/or any of its or their agents and others, or to the extent there are, the same are waived and released. Section 9.10 ENFORCEMENT COSTS. The Borrower, Foster Grant and Fantasma agree to pay to the Agent on demand all reasonable Enforcement Costs. Enforcement Costs shall be immediately due and payable at the time advanced or incurred, whichever is earlier. Without implying any limitation on the foregoing, the Borrower, Foster Grant and Fantasma agree, as part of the Enforcement Costs, to pay upon demand any and all stamp and other Taxes and fees payable or determined to be payable in connection with the execution and delivery of this Agreement and the other Financing Documents and to save the Agent and the Lenders harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay any Taxes or fees referred to in this Section. The provisions of this Section shall survive the execution and delivery of this Agreement, the repayment of the other Obligations and shall survive the termination of this Agreement. Section 9.11 APPLICABLE LAW; JURISDICTION. 9.11.1 APPLICABLE LAW. As a material inducement to the Agent and the Lenders to enter into this Agreement, the Obligors acknowledge and agree that the Financing Documents, including, this Agreement, shall be governed by the Laws of the State, as if each of the Financing Documents and this Agreement had each been executed, delivered, administered and performed solely within the State even though for the convenience and at the request of the Obligors, one or more of the Financing Documents may be executed elsewhere. The Agent and the Lenders acknowledge, however, that remedies under certain of the Financing Documents that relate to property outside the State may be subject to the laws of the state in which the property is located. 9.11.2 SUBMISSION TO JURISDICTION. The Obligors irrevocably submit to the jurisdiction of any state or federal court sitting in the State over any suit, action or proceeding arising out of or relating to this 109 117 Agreement or any of the other Financing Documents. The Obligors irrevocably waive, to the fullest extent permitted by law, any objection that it may now or hereafter have to the laying of the venue of any such suit, action or proceeding brought in any such court and any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum. Final judgment in any such suit, action or proceeding brought in any such court shall be conclusive and binding upon the Obligors and may be enforced in any court in which the Obligors are subject to jurisdiction, by a suit upon such judgment, provided that service of process is effected upon the Obligors in one of the manners specified in this Section or as otherwise permitted by applicable Laws. 9.11.3 APPOINTMENT OF AGENT FOR SERVICE OF PROCESS. The Obligors hereby irrevocably designate and appoint Prentice Hall Corporation as the Obligors' authorized agent to receive on the Obligors' behalf service of any and all process that may be served in any suit, action or proceeding of the nature referred to in this Section in any state or federal court sitting in the State. If such agent shall cease so to act, the Obligors shall irrevocably designate and appoint without delay another such agent in the State satisfactory to the Agent and shall promptly deliver to the Agent evidence in writing of such other agent's acceptance of such appointment and its agreement that such appointment shall be irrevocable. 9.11.4 CONSENT TO SERVICE OF PROCESS. The Obligors hereby consent to process being served in any suit, action or proceeding of the nature referred to in this Section by (a) the mailing of a copy thereof by registered or certified mail, postage prepaid, return receipt requested, to the Obligors at the Obligors' address designated in or pursuant to Section 9.1 (Notices), and (b) serving a copy thereof upon the agent, if any, designated and appointed by the Obligors as the Obligor's agent for service of process by or pursuant to this Section. The Obligors irrevocably agree that such service (y) shall be deemed in every respect effective service of process upon the Obligors in any such suit, action or proceeding, and (z) shall, to the fullest extent permitted by law, be taken and held to be valid personal service upon the Obligors. Nothing in this Section shall affect the right of the Agent to serve process in any manner otherwise permitted by law or limit the right of the Agent otherwise to bring proceedings against the Obligors in the courts of any jurisdiction or jurisdictions. Section 9.12 DUPLICATE ORIGINALS AND COUNTERPARTS. This Agreement may be executed in any number of duplicate originals or counterparts, each of such duplicate originals or counterparts shall be deemed to be an original and all taken together shall constitute but one and the same instrument. Section 9.13 HEADINGS. The headings in this Agreement are included herein for convenience only, shall not constitute a part of this Agreement for any other purpose, and shall not be deemed to affect the meaning or construction of any of the provisions hereof. 110 118 Section 9.14 NO AGENCY. Nothing herein contained shall be construed to constitute the Obligors as the agent of the Agent or any of the Lenders for any purpose whatsoever or to permit the Obligors to pledge any of the credit of the Agent or any of the Lenders. Neither the Agent nor any of the Lenders shall be responsible or liable for any shortage, discrepancy, damage, loss or destruction of any part of the Collateral wherever the same may be located and regardless of the cause thereof. Neither the Agent nor any of the Lenders shall, by anything herein or in any of the Financing Documents or otherwise, assume any of the Obligors' obligations under any contract or agreement assigned to the Agent and/or the Lenders, and neither the Agent nor any of the Lenders shall be responsible in any way for the performance by the Obligors of any of the terms and conditions thereof. Section 9.15 DATE OF PAYMENT. Should the principal of or interest on the Notes become due and payable on other than a Business Day, the maturity thereof shall be extended to the next succeeding Business Day and in the case of principal, interest shall be payable thereon at the rate per annum specified in the Notes during such extension. Section 9.16 ENTIRE AGREEMENT. This Agreement is intended by the Agent, the Lenders and the Obligors to be a complete, exclusive and final expression of the agreements contained herein. Neither the Agent, the Lenders nor the Obligors shall hereafter have any rights under any prior agreements pertaining to the matters addressed by this Agreement but shall look solely to this Agreement for definition and determination of all of their respective rights, liabilities and responsibilities under this Agreement. Section 9.17 WAIVER OF TRIAL BY JURY. THE OBLIGORS, THE AGENT AND THE LENDERS HEREBY JOINTLY AND SEVERALLY WAIVE TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO WHICH THE OBLIGOR AND THE AGENT AND/OR ANY OR ALL OF THE LENDERS MAY BE PARTIES, ARISING OUT OF OR IN ANY WAY PERTAINING TO (A) THIS AGREEMENT, (B) ANY OF THE FINANCING DOCUMENTS, OR (C) THE COLLATERAL. THIS WAIVER CONSTITUTES A WAIVER OF TRIAL BY JURY OF ALL CLAIMS AGAINST ALL PARTIES TO SUCH ACTIONS OR PROCEEDINGS, INCLUDING CLAIMS AGAINST PARTIES WHO ARE NOT PARTIES TO THIS AGREEMENT. This waiver is knowingly, willingly and voluntarily made by the Obligors, the Agent and the Lenders, and the Obligors, the Agent and the Lenders hereby represent that no representations of fact or opinion have been made by any individual to induce this waiver of trial by jury or to in any way modify or nullify its effect. The Obligors, the Agent and the Lenders further represent that they have been represented in the signing of this Agreement and in the making of this waiver by independent legal counsel, selected of their own free will, and that they have had the opportunity to discuss this waiver with counsel. Section 9.18 LIABILITY OF THE AGENT AND THE LENDERS. 111 119 The Borrower, Foster Grant and Fantasma hereby agree that neither the Agent nor any of the Lenders shall be chargeable for any negligence, mistake, act or omission of any accountant, examiner, agency or attorney employed by the Agent and/or any of the Lenders in making examinations, investigations or collections, or otherwise in perfecting, maintaining, protecting or realizing upon any lien or security interest or any other interest in the Collateral or other security for the Obligations, except for acts of willful misconduct or gross negligence. By inspecting the Collateral or any other properties of the Borrower, Foster Grant and Fantasma or by accepting or approving anything required to be observed, performed or fulfilled by the Borrower, Foster Grant and Fantasma or to be given to the Agent and/or any of the Lenders pursuant to this Agreement or any of the other Financing Documents, neither the Agent nor any of the Lenders shall be deemed to have warranted or represented the condition, sufficiency, legality, effectiveness or legal effect of the same, and such acceptance or approval shall not constitute any warranty or representation with respect thereto by the Agent and/or the Lenders. IN WITNESS WHEREOF, each of the parties hereto have executed and delivered this Agreement under their respective seals as of the day and year first written above. WITNESS: AAI.FOSTERGRANT, INC. (formerly known as Accessories Associates, Inc.) /s/ Paula Zampini By: /s/ Duane M. DeSisto (Seal) - ------------------------- ------------------------------ Duane M. DeSisto Chief Financial Officer WITNESS: FOSTER GRANT GROUP, L.P. By: Bonneau General, Inc. General Partner /s/ Paula Zampini By: /s/ Duane M. DeSisto (Seal) - ------------------------- ------------------------- Duane M. DeSisto Chief Financial Officer WITNESS: FANTASMA LLC /s/ Paula Zampini By: /s/ Duane M. DeSisto (Seal) - ------------------------- ------------------------------ Duane M. DeSisto Treasurer 112 120 WITNESS OR ATTEST: F.G.G. INVESTMENTS, INC. /s/ Paula Zampini By: /s/ Duane M. DeSisto (Seal) - ------------------------- ------------------------------ Duane DeSisto Chief Financial Officer WITNESS OR ATTEST: THE BONNEAU COMPANY /s/ Paula Zampini By: /s/ Duane M. DeSisto (Seal) - ------------------------- ------------------------------ Duane DeSisto Chief Financial Officer WITNESS OR ATTEST: BONNEAU GENERAL, INC. /s/ Paula Zampini By: /s/ Duane M. DeSisto (Seal) - ------------------------- ------------------------------ Duane DeSisto Chief Financial Officer WITNESS OR ATTEST: BONNEAU HOLDINGS, INC. /s/ Paula Zampini By: /s/ Duane M. DeSisto (Seal) - ------------------------- ------------------------------ Duane DeSisto Chief Financial Officer WITNESS OR ATTEST: FOSTER GRANT HOLDINGS, INC. /s/ Paula Zampini By: /s/ Duane M. DeSisto (Seal) - ------------------------- ------------------------------ Duane DeSisto Chief Financial Officer WITNESS OR ATTEST: O-RAY HOLDINGS, INC. /s/ Paula Zampini By: /s/ Duane M. DeSisto (Seal) - ------------------------- ------------------------------ Duane DeSisto Chief Financial Officer 113 121 WITNESS: NATIONSBANK, N.A. in its capacity as Agent /s/ Mary J. Kliensmith By: /s/ Stephen V. Rieger (Seal) - ------------------------- ------------------------------ Stephen V. Rieger Vice President WITNESS: NATIONSBANK, N.A. in its capacity as a Lender /s/ Mary J. Kliensmith By: /s/ Stephen V. Rieger (Seal) - ------------------------- ------------------------------ Stephen V. Rieger Vice President WITNESS OF ATTEST: LASALLE BUSINESS CREDIT, INC. /s/ John C. Bain By: /s/ J. David Kommalan (Seal) - ------------------------- --------------------------- Name: J. David Kommalan Title: First Vice President WITNESS: PNC BUSINESS CREDIT /s/ By: /s/ Wallace G. Clements (Seal) - ------------------------- --------------------------- Name: Wallace G. Clements Title: Vice President 114 122 AGREED AND ACCEPTED AAi COMPANY OF CANADA By: /s/ Duane M. DeSisto ----------------------- Duane M. DeSisto Chief Financial Officer AGREED AND ACCEPTED AAi FOSTER GRANT LIMITED By: /s/ Duane M. DeSisto ----------------------- Duane M. DeSisto Chief Financial Officer 115 123 LIST OF EXHIBITS A. Revolving Credit Note B. Wire Transfer Procedures C. Form of Compliance Certificate D. Additional Obligor Joinder Supplement 116 124 LIST OF SCHEDULES Schedule 4.1.5 - No Conflicts Schedule 4.1.10 - Litigation Schedule 4.1.13 - Indebtedness for Borrowed Money Schedule 4.1.18 - Employee Relations Schedule 4.1.19 - Hazardous Materials Schedule 4.1.20 - Permitted Liens Schedule 4.1.22 - Business Names and Addresses Schedule 5.1.4 - Consents, Licenses, Approvals, Etc. Schedule 9.5 - Financial Institutions 117 EX-10.2 27 AGREEMENT OF AMENDMENT, TERMINATION & MODIFICATION 1 EXHIBIT 10.2 AGREEMENT OF AMENDMENT, TERMINATION AND MODIFICATION This AGREEMENT OF AMENDMENT, TERMINATION AND MODIFICATION, dated as of June ___, 1998, is by and among BOLLE INC. (as assignee of BEC GROUP, INC.), a Delaware corporation with offices at 555 Theodore Fremd Avenue, Rye, New York 10580 ("Bolle"), FOSTER GRANT GROUP, L.P., a Delaware limited partnership with offices at 1601 Valley View Lane, Dallas, Texas 75234 ("FGG"), FOSTER GRANT HOLDINGS, INC., a Delaware corporation with offices at 1601 Valley View Lane, Dallas, Texas 75234 ("FGH") and AAi.FOSTERGRANT, INC. (fka ACCESSORIES ASSOCIATES, INC.), a Rhode Island corporation with offices at 500 George Washington Highway, Smithfield, Rhode Island 02917 ("AAi"). WHEREAS, Bolle, FGG, FGH, and AAi entered into that certain Stock Purchase Agreement dated as of November 13, 1996 (the "Agreement"); WHEREAS, in conjunction with the Agreement, FGH issued 100 shares of FGH Series A Preferred Stock to Bolle; WHEREAS, in conjunction with Bolle's purchase of FGH Series A Preferred Stock, AAi and Bolle entered into that certain Exchange and Registration Rights Agreement dated as of December 11, 1996 (the "Rights Agreement"); WHEREAS, the parties now desire to amend the Agreement, terminate the Rights Agreement, and modify certain rights, preferences and privileges concerning the AAi Series A Redeemable Convertible Preferred Stock. NOW THEREFORE, the parties hereto, intending to be legally bound hereby, in consideration of the mutual promises and agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, agree as follows: 1. THE AGREEMENT. Bolle, FGG, FGH, and AAi hereby agree that effective as of the date hereof the Agreement is amended as set forth below. All terms used herein and defined in the Agreement have the same meaning herein as provided in the Agreement except as otherwise specified. (a) Section 1 of the Agreement is hereby amended to add a new definition as follows: "Effective Date" means June 24, 1998. 2 (b) Section 2.4 of the Agreement is hereby amended and restated in its entirety as follows: "2.4 LITIGATION LIABILITIES. (a) In connection with the Purchaser's purchase of the Shares, the Purchaser will, subject to Section 2.4(b) below, assume any and all liabilities of the Foster Grant Group and/or the Partnership other than the Excluded Liabilities, including (without limitation) liabilities arising out of any litigation pending, threatened or commenced against any member of the Foster Grant Group or the Partnership or pending, threatened or commenced against the Seller and relating to the Foster Grant Group or its business and not referred to in Section 2.3 hereinabove, including any litigation or administrative or governmental proceeding (i) pending prior to the Closing Date or (ii) arising out of or relating to any events occurring prior to the Closing Date, including, without limitation, liabilities resulting from any past or present violation of any environmental laws (the liabilities described in this Section 2.4(a) are referred to as the "Litigation Liabilities"). No such assumption of liability shall release Seller from any breach of any representations or warranties made by Seller herein. Without limiting the generality of the foregoing, Purchaser, and after the Closing, the members of the Foster Grant Group and the Partnership, shall, subject to Section 2.4(c) below, be solely responsible for defending against any such Litigation Liabilities and shall have sole direction of any defense thereof; provided, that Purchaser shall consult periodically with Seller and its counsel regarding the status of individual claims or cases and the Purchaser shall not enter into any settlement agreement or otherwise compromise or settle any Litigation Liability, claim or case without the prior written consent of Seller, which approval shall not be withheld or delayed unreasonably. (b) Notwithstanding the provisions of Section 2.4(a) above, from and after the last to occur of (x) the Effective Date, or (y) the payment by Purchaser of $100,000 to Seller, Seller will undertake and defend AAi, Purchaser, the members of the Foster Grant Group and/or the Partnership against any Litigation Liabilities, and will pay directly any costs or expenses relating to or arising from Litigation Liabilities (including, without limitation, defense costs, attorneys' fees, amounts assessed as damages and settlement costs) ("Litigation Costs"), except to the extent Litigation Costs were, in fact, paid by Foster Grant, AAi or Purchaser prior to the Effective Date; provided, however, that Purchaser and AAi will, at its expense, cooperate fully with Seller in the defense of any such Litigation Liabilities, shall make available any books or records useful for the defense of any such Litigation Liabilities and shall be solely responsible for accounts payable together with interest thereon for goods sold and delivered to the Partnership and its affiliates by Dioptics, Inc. From and after the date, Seller shall be responsible for all Litigation Liabilities and Litigation Costs pursuant to this Section 2.4(b). 2 3 Seller shall have the right to compromise and settle any Litigation Liability without the consent of Purchaser; provided, however, that no such settlement or compromise shall include an injunction or any court order affecting the conduct of Purchaser's business unless Purchaser shall have given its prior written consent which consent may be withheld in Purchaser's sole discretion. To the extent such Litigation Liabilities are indemnified against by applicable insurance policies, Seller shall be released of liability to the extent any such Litigation Liability is paid by the insurance company issuing any such policy. (c) Any other provision of this Section 2.4 notwithstanding, AAi and Purchaser will have sole responsibility for defending against litigation claims arising out of or relating to the Al-Site/Magnivision litigation, Civil Action No. 97-8351, brought in the United States District Court for the Central District of California (the "Magnivision Litigation"), and AAi, Purchaser and Seller will use their best efforts to cooperatively share any direct out-of-pocket costs and expenses incurred by the law firm of Lyon & Lyon LLP relating to the Magnivision Litigation and related litigation described in Section 2.3(b) hereof." (c) A new sentence is hereby added at the end of Section 8.1 to read as follows: "Provided, however, that on and after the Effective Date, Purchaser and AAi waive any claim for indemnification pursuant to this Section 8.1 whenever arising, other than indemnification claims based upon Litigation Liabilities and Litigation Costs defined in Section 2.4 hereof, and indemnification claims based upon Income Tax liabilities of the Foster Grant Group, with respect to which the Seller's obligation to indemnify shall extend until the applicable statutes of limitations on enforcement thereof has expired, but in no event more than seven (7) years after the Closing Date, or until the conclusion of any proceeding commenced within such period." (d) The first sentence of sub-section (a) of Section 8.3 of the Agreement is hereby amended and restated in its entirety as follows: "No indemnification shall be payable by either party with respect to claims asserted by an Indemnified Party on or after the Effective Date, and AAi and Purchaser hereby waive any claims asserted on or before the Effective Date, other than Litigation Liabilities and Litigation Costs defined in Section 2.4 hereof, and indemnification claims based upon Income Tax liabilities of the Foster Grant Group, with respect to which the Seller's obligation to indemnify shall extend until the applicable statutes of limitations on enforcement thereof has expired, but in no event more than seven (7) years after the Closing Date, or until the conclusion of any proceeding commenced within such period." (e) Except as modified herein, the Agreement is hereby ratified and affirmed. 3 4 2. PAYMENT PURSUANT TO SECTION 2.4 OF THE AGREEMENT. On the execution hereof, AAi has paid to Bolle, and Bolle acknowledges the receipt of $100,000, said payment thereby satisfying the obligation of AAi pursuant to Section 2.4(b) of the Agreement, as amended hereby. 3. FGH SERIES A PREFERRED STOCK. AAi and Bolle hereby agree as follows: (a) That effective as of the date hereof, that certain Exchange and Registration Rights Agreement dated December 11, 1996 by and between AAi and Bolle granting to Bolle certain registration and exchange rights with regard to shares of FGH Series A Preferred Stock issued by FGH to Bolle pursuant to the Agreement is null and void and of no further force and effect. (b) That Article Fourth of the Certificate of Incorporation of Foster Grant Holdings, Inc. shall be amended (the "FGH Amendment"), by deleting Section 5 in its entirety and substituting the following therefor: 5. REDEMPTION RIGHTS 5.1 MANDATORY REDEMPTION. Except as otherwise provided in this Certificate of Amendment, the Series A Preferred Shares shall be redeemed by the Corporation in immediately available funds on February 28, 2000 (the "Redemption Date") by payment of an amount determined by reference to the combined net sales of sun glasses, reading glasses, and accessories by FGG and AAi for the year ending January 1, 2000, determined in accordance with generally accepted accounting principals consistently applied, and excluding an amount equal to the net sales of AAi of sunglasses, reading glasses, and accessories for the year ending December 31, 1996 (the "Redemption Amount"). On or before February 28, 2000, the Holder shall deliver to AAi at its principal offices, all Series A Preferred Shares owned by such Holder endorsed in blank for transfer or with blank stock powers attached. The Redemption Amount per share shall be calculated pursuant to the formula set forth below. The amounts payable to the Holder upon redemption shall be pro-rated for net sales between the amounts specified below.
NET SALES REDEMPTION AMOUNT PER SHARE --------- --------------------------- Less than $90,000,000 $10,000 $90,000,000 but less than $110,000,000 $20,000 $110,000,000 or more $40,000
5.2 EARLY REDEMPTION. Subsection 5.1 notwithstanding, in the event that at any time on or prior to the Redemption Date (i) AAi completes an initial public offering of its 4 5 common stock (an "IPO") where the Pre-Money Valuation (as hereinafter defined) equals or exceeds $75,000,000 or (ii) a Transaction (as hereinafter defined) is consummated where the Transaction Amount (as hereinafter defined) equals or exceeds $75,000,000 (or $37,500,000 in the event of an Equity Transaction (as hereinafter defined)) (both an IPO and a Transaction are sometimes referenced herein as a "Redemption Event"), Subsection 5.1 shall not be operative, and the Redemption Amount will be calculated as specified in this Subsection 5.2 (the "Redemption Event Amount"). For purposes of this Section 5, "Transaction" shall mean (x) AAi effects a capital reorganization or reclassification of its stock (other than a change in par value or as a result of a stock dividend or subdivision, split-up or combination of shares), or the consolidation or merger of AAi with or into another person (other than a consolidation or merger in which AAi is the continuing corporation and which does not result in any change in the AAi common stock, or in change in ownership of the AAi common stock which constitutes an Equity Transaction, or sells or otherwise disposes of all or substantially all its properties and assets as an entirety to any other person or persons or (y) at least 50% of the shares of AAi common stock is acquired by any person or group (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) (the "Exchange Act") who was not an officer, director or shareholder of AAi on the effective date of the Certificate of Amendment (a "New Investor") or (z) AAi issues additional equity securities, or securities convertible into equity securities, other than in an IPO, which results in any New Investor being the "beneficial owner" (as such term is defined in Section 13(d)(3) of the Exchange Act) of more than 50% of the shares of AAi common stock (an "Equity Transaction"). If the Redemption Event is an IPO, the per share Redemption Event Amount will be based upon the Pre-Money Valuation (as hereinafter defined) of AAi immediately prior to the IPO according to the formula set forth below. For this purpose, "Pre-Money Valuation" shall be calculated by dividing the gross IPO proceeds by the percentage of the total issued and outstanding AAi common stock owned by the public immediately after and as a result of such IPO, excluding, however, from such calculation any common stock sold by persons who were holders of AAi common stock immediately prior to the IPO. The amounts payable to the Holder upon redemption shall be pro-rated for Pre-Money Valuations between the amounts specified below provided, however, that in no event shall the Redemption Event Amount exceed $40,000 per share.
PRE-MONEY VALUATION REDEMPTION EVENT AMOUNT PER SHARE ------------------- --------------------------------- $75,000,000 $35,000 More than $75,000,000 $35,000, plus an additional $0.025 for each dollar that the Pre-Money Valuation is in excess of $75,000,000
If the Redemption Event is a Transaction, the Redemption Event Amount will be based on the gross dollar value of the consideration (the "Transaction Consideration") (i) received in the Transaction (other than an Equity Transaction) by holders of the common 5 6 and convertible preferred stock of AAi or (ii) by AAi in the event the Transaction involves an Equity Transaction . In the event of a Transaction, the per share Redemption Event Amount will be calculated according to the formula set forth below. The amounts payable to the Holder upon redemption shall be pro-rated for Transaction Consideration that is between the amounts specified below provided, however, that in no event shall the Redemption Event Amount exceed $40,000 per share.
Transaction Consideration Redemption Event Amount Per Share ------------------------- --------------------------------- $75,000,000 ($37,500,000 $35,000 in the event of an Equity Transaction) More than $75,000,000 $35,000, plus an additional $0.025 (more than $37,5000,000 in the for each dollar that the Transaction event of an Equity Transaction) Consideration is in excess of $75,000,000 (or in the event of an Equity Transaction, $35,000, plus an additional $0.50 for each dollar that the Transaction Consideration is in excess of $37,500,00)
On or before the tenth day following notice delivered in accordance with Subsection 5.6 hereof, the Holder shall deliver to AAi at its principal offices, all Series A Preferred Shares owned by such Holder endorsed in blank for transfer or with blank stock powers attached. The Redemption Event Amount pursuant to this Subsection 5.2 shall be payable by AAi in immediately available funds within ten (10) days of the later of (i) the completion of a Redemption Event, or (ii) delivery by Holder of all of its Series A Preferred Shares. 5.3 SUPPLEMENTAL PAYMENT. Subsection 5.2 notwithstanding, if (i) a Redemption Event occurs after the Redemption Date, and (ii) the per share Redemption Amount received by the Holder pursuant to Section 5.1 was less than the per share Redemption Event Amount that would have been received had the Redemption Event occurred on or prior to the Redemption Date pursuant to Section 5.2, the Corporation shall pay the persons who were Holders on the Redemption Date an amount equal to the difference, if any, between the per share Redemption Amount paid to such Holders on the Redemption Date and the per share Redemption Event Amount that would have been received had the Redemption Event occurred on or prior to the Redemption Date (the "Supplemental Payment"). The Corporation's obligation to pay the Supplemental Payment shall survive the redemption of the Series A Preferred Shares pursuant to Subsection 5.1, and shall be payable in immediately available funds within ten (10) days following the completion of a Redemption Event pursuant to this Subsection 5.3. 6 7 5.4 RIGHT OF INSPECTION. On request, the Corporation will provide Holder with an opportunity at Holder's sole cost and expense to inspect the Corporation's books and records upon reasonable notice during normal business hours and for a reasonable period of time in order to determine the accuracy of the Corporation's determination of the Redemption Amount or the Redemption Event Amount. In the event of any dispute over the Redemption Amount or the Redemption Event Amount, the parties shall first attempt to resolve such dispute through mutual consultation. If such dispute cannot be resolved within thirty (30) days of the Holder's written notice, the dispute shall be submitted to an independent certified accountant acceptable to the parties for resolution. The determination of such accountant shall be final and binding on the parties. 5.5 NOTICE OF REDEMPTION. Written notice of Redemption pursuant to Subsection 5.1 shall be given by the Corporation not fewer than thirty (30) days prior to the Redemption Date by first class mail, postage prepaid, to each Holder of record of Series A Preferred Shares at the address of such Holder on the books of the Corporation. Each such notice shall state: (a) the Redemption Date; (b) the number of shares of the Series A Preferred Stock to be redeemed; (c) the Redemption Amount; and (d) the place or places where certificates for such shares are to be surrendered for payment of the Redemption Amount. 5.6 NOTICE OF EARLY REDEMPTION. Written notice of a Redemption Event pursuant to Subsection 5.2 shall be given by the Corporation not more than ten (10) days following the completion of the Redemption Event by first class mail, postage prepaid, to each Holder of record of Series A Preferred Shares at the address of such Holder on the books of the Corporation. Each such notice shall state: (a) the date of the Redemption Event; (b) the number of shares of the Series A Preferred Stock to be redeemed; (c) the Redemption Event Amount; and (d) the place or places where certificates for such shares are to be surrendered for payment of the Redemption Event Amount. 5.7 NOTICE OF SUPPLEMENTAL PAYMENT. Written notice of the completion of Redemption Event pursuant to Subsection 5.3 shall be given by the Corporation not more than five (5) days following the completion of the Redemption Event by first class mail, postage prepaid to each former Holder of Series A Preferred Shares on the Redemption Date at the last known address of such Holder on the books of the Corporation. Such notice shall state: (a) the date of the completion of the Redemption Event; (b) the number of Series A Preferred Shares previously redeemed; (c) the Redemption Amount; (e) the Redemption Event Amount; and (f) the Supplemental Payment, if any. 5.8 SPECIFIC PERFORMANCE If any Holder becomes obligated so to deliver any shares of Series A Preferred Shares to the Corporation upon any redemption under Section 5 hereof and fails to deliver the certificate therefor in accordance with this Certificate of Amendment, the Corporation may, at its option, irrevocably deposit or set aside funds sufficient to pay (i) the Redemption Amount (if such redemption is pursuant to Section 5.1 hereof) or (ii) the Redemption Event Amount (if such redemption is pursuant to Section 5.2 hereof) against delivery of such certificates and in addition to all other 7 8 remedies it may have, cancel on its books such certificate representing such shares to be redeemed." (c) Bolle hereby consents to the approval of the FGH Amendment as set forth in Section (b) hereof and agrees that in any circumstance upon which a vote, consent or other approval of the FGH Amendment as set forth in Section (b) hereof is sought, Bolle will vote, or cause to be voted, its FGH Series A Preferred Stock in favor the FGH Amendment, and does hereby irrevocably grant to and appoint, AAi and Gerald F. Cerce, President of AAi, and Duane M. DeSisto, Chief Financial Officer of AAi, in their respective capacities as officers of AAi, and any individual who shall hereafter succeed to any such office of AAi, and each of them individually, Bolle's proxy and attorney-in-fact (with full power of substitution), for and in the name, place and stead of Bolle, to vote Bolle's FGH Series A Preferred Stock, or grant a consent or approval in respect of such shares in favor of the FGH Amendment. Bolle hereby affirms that this irrevocable proxy is coupled with an interest and may not be revoked. (d) That the FGH Amendment shall take effect immediately upon filing said FGH Amendment with the Secretary of State of Delaware which filing shall take place immediately following approval of said FHG Amendment by the Board of Directors and stockholders of FGH in accordance with Delaware law. 4. COMPLETE AGREEMENT. This Agreement contains the entire agreement and understanding of the parties with respect to its subject matter. There are no agreements, premises, warranties, covenants, or undertakings other than those expressly set forth herein. This Agreement supersedes all prior agreements and understandings between and among the parties, both oral and written, with respect to its subject matter. 5. COUNTERPARTS. This Agreement may be executed in one or more counterparts all of which shall be considered one and the same agreement and each of which shall be deemed an original. 6. GOVERNING LAW. This Agreement shall be governed in accordance with the laws of the State of Rhode Island. 7. HEADINGS. The Section headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 8. CONSENT TO ASSIGNMENT. AAi and FGH hereby acknowledge and agree that they have consented to the assignment by BEC Group, Inc. to Bolle of all of its rights, duties and obligations under the Agreement and any ancillary agreements, and to the assumption by Bolle of all such rights, duties and obligations. AAi and FGH further acknowledge and agree that they have released BEC Group, Inc. from any and all liabilities or claims related to or arising from the Agreement and any such ancillary agreements. 8 9 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first above written. BOLLE INC. By: /s/ Gary Kiedaisch ----------------------------------- Name: Gary Kiedaisch Title: Chief Executive Officer FOSTER GRANT GROUP, L.P. By: /s/ Gerald F. Cerce ----------------------------------- Name: Gerald F. Cerce ---------------------------- Title: Chairman ---------------------------- FOSTER GRANT HOLDINGS, INC. By: /s/ Gerald F. Cerce ----------------------------------- Name: Gerald F. Cerce ---------------------------- Title: Chairman ---------------------------- AAI.FOSTERGRANT, INC. By: /s/ Gerald F. Cerce ----------------------------------- Name: Gerald F. Cerce ---------------------------- Title: Chairman ---------------------------- 9 EX-10.3 28 STOCK PURCHASE AGREEMENT 1 EXHIBIT 10.3 STOCK PURCHASE AGREEMENT BY AND AMONG BEC GROUP, INC., FOSTER GRANT GROUP, L.P., FOSTER GRANT HOLDINGS, INC. AND ACCESSORIES ASSOCIATES, INC. DATED AS OF NOVEMBER 13, 1996 2 TABLE OF CONTENTS Page No. ----- 1. Definitions............................................................ 2 2. Purchase and Sale of Shares; Adjustment to Purchase Price; Excluded Liabilities .................................................. 5 2.1 Purchase and Sale of Shares..................................... 5 2.2 Consideration .................................................. 6 2.3 Excluded Liabilities and Transfer of Dallas Property ........... 6 2.4 Litigation Liabilities.......................................... 7 3. Closing .............................................................. 8 3.1 The Closing .................................................... 8 3.2 Deliveries at the Closing ...................................... 8 3.3 Generally....................................................... 8 4. Representations and Warranties of the Seller .......................... 8 4.1 Organization, Qualification and Corporate Power................. 8 4.2 Capitalization.................................................. 9 4.3 Financial Statements ........................................... 9 4.4 Absence of Undisclosed Liabilities ............................. 10 4.5 Income Taxes ................................................... 10 4.6 Litigation and Claims........................................... 11 4.7 Status of Property Owned or Leased.............................. 12 4.8 Contracts and Other Instruments................................. 15 4.9 Employee Benefits .............................................. 16 4.10 Intellectual Property .......................................... 18 4.11 Authority to Sell............................................... 21 4.12 Environmental Matters........................................... 22 4.13 Labor Practices................................................. 23 4.14 Compliance with Laws, Permits and Licenses...................... 23 4.15 Directors, Officers and Key Employees .......................... 23 4.16 Absence of Certain Changes...................................... 24 4.17 Insurance ...................................................... 24 4.18 Transactions With Interested Persons............................ 25 4.19 Brokers' Fees................................................... 25 4.20 Sales Representatives........................................... 25 4.21 Processes and Customer Lists.................................... 25 4.22 General Representation.......................................... 25 4.23 Non-Distributive Intent......................................... 25 i 3 Page No. ----- 5. Representations and Warranties of the Purchaser........................ 26 5.1 Organization.................................................... 26 5.2 Authorization of Transaction.................................... 26 5.3 Validity of Preferred Stock..................................... 26 5.4 Litigation...................................................... 26 5.5 Non-Distributive Intent ........................................ 27 5.6 No Conflicts ................................................... 27 5.7 Brokers' Fees................................................... 27 5.8 Independent Investigation....................................... 27 6. Conditions to the Obligations of the Purchaser and the Seller.......... 28 6.1 Conditions to the Obligations of the Purchaser.................. 28 6.2 Conditions to the Obligations of the Seller .................... 32 7. Covenants and Agreements of the Purchaser and the Seller............... 33 7.1 Confidentiality................................................. 33 7.2 Best Efforts.................................................... 34 7.3 Operation of Business .......................................... 34 7.4 Full Access..................................................... 36 7.5 Occupation of the Dallas Property............................... 36 7.6 Payment of Certain Employee Bonuses............................. 36 7.7 Further Assurances.............................................. 36 7.8 Name Change..................................................... 36 7.9 Bolle(R)Brand................................................... 36 7.10 Non-Competition................................................. 37 7.11 Income Taxes and Income Tax Preparation......................... 37 7.12 Characterization of Certain Payments............................ 40 7.13 Inventory Price Adjustment...................................... 40 7.14 Certain Employee Benefits....................................... 40 7.15 Hart-Scott Rodino............................................... 41 7.16 Release of Guaranties........................................... 41 8. Indemnification ....................................................... 41 8.1 By the Seller................................................... 41 8.2 By the Purchaser and AAi........................................ 42 8.3 Limitations..................................................... 42 8.4 Indemnity Procedures............................................ 43 ii 4 Page No. ----- 9. Miscellaneous.......................................................... 44 9.1 Public Statements............................................... 44 9.2 Survival of Representations, Warranties and Covenants........... 44 9.3 No Third-Party Beneficiaries.................................... 45 9.4 Entire Agreement ............................................... 45 9.5 Succession and Assignment....................................... 45 9.6 Counterparts.................................................... 45 9.7 Headings and Recitals........................................... 45 9.8 Notices......................................................... 45 9.9 Governing Law................................................... 47 9.10 Amendments and Waivers.......................................... 47 9.11 Severability ................................................... 48 9.12 Agreements, Documents and Instruments........................... 48 9.13 Expenses........................................................ 48 9.14 AAi Guaranty ................................................... 48 iii 5 STOCK PURCHASE AGREEMENT STOCK PURCHASE AGREEMENT, dated as of November 13, 1996, by and among BEC GROUP, INC., a Delaware corporation with offices at 555 Theodore Fremd Avenue, Rye, New York 10580 (the "Seller"), FOSTER GRANT GROUP, L.P., a Delaware limited partnership with offices at 1601 Valley View Lane, Dallas, Texas 75234 (the "Partnership"), FOSTER GRANT HOLDINGS, INC., a Delaware corporation with offices at 1601 Valley View Lane, Dallas, Texas 75234 (the "Purchaser") and Accessories Associates, Inc., a Rhode Island corporation with offices at 500 George Washington Highway, Smithfield, Rhode Island 02917 (the "AAi"). WHEREAS, the Seller owns all of the issued and outstanding shares of capital stock of The Bonneau Company, a corporation organized under Texas law ("Bonneau"), Opti-Ray, Inc., a corporation organized under New York law ("Opti-Ray"), and Asian Buying Source, Inc., a corporation organized under Delaware law ("ABS"); WHEREAS, Opti-Ray owns all of the issued and outstanding shares of capital stock of O-Ray Holdings, Inc., a corporation organized under Delaware law ("O-Ray Holdings"); WHEREAS, Bonneau owns all of the issued and outstanding shares of capital stock of BEC Distribution, Inc., a Delaware corporation ("BEC Distribution"), Bonneau General, Inc., a Delaware corporation ("Bonneau General"), Bonneau Holdings, a Delaware corporation ("Bonneau Holdings") and Maximum Merchandising, Inc., a New York corporation ("MMI"); WHEREAS, Bonneau General is the sole general partner, and Bonneau Holdings and O-Ray Holdings are all of the limited partners, of the Partnership; WHEREAS, Bonneau, Opti-Ray and ABS, together with their respective subsidiaries, and the Partnership (collectively, the "Foster Grant Group", and individually, a "member" of the Foster Grant Group); WHEREAS, AAi owns all of the issued and outstanding shares of capital stock of the Purchaser; WHEREAS, the Purchaser desires to acquire the Foster Grant Group from the Seller, and the Seller desires to sell the Foster Grant Group to the Purchaser; WHEREAS, AAi desires to facilitate such transaction and in connection therewith desires to guarantee the performance by the Purchaser of its obligations hereunder and to enter into the agreements set forth herein; WHEREAS, in order to effect such purchase and sale, the Seller will sell, and the Purchaser will purchase, all issued and outstanding shares of capital stock owned by the Seller of Bonneau (the "Bonneau Shares"), Opti-Ray (the "Opti-Ray Shares") and ABS (the "ABS 6 Shares") (the Bonneau Shares, ABS Shares and Opti-Ray Shares are collectively referred to as the "Shares"), all in accordance with and subject to the terms and conditions of this Agreement. NOW THEREFORE, the parties hereto, in consideration of the mutual promises contained herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged hereby, agree as follows: 1. DEFINITIONS. For purposes of this Agreement, the following terms shall have the following definitions: "AAi" has the meaning set forth in the preface, above. "ABS Shares" has the meaning set forth in the preface, above. "Affiliate" means, with respect to any Person, any other Person which directly or indirectly controls, is controlled by or is under common control with such Person and the officers, directors, and partners of such Person and such other Persons. "Bonneau Shares" has the meaning set forth in the preface, above. "Cash Consideration" has the meaning set forth in Section 2.2, below. "Closing" has the meaning set forth in Section 3.1, below. "Closing Date" is the date on which the Closing occurs. "Code" has the meaning set forth in Section 4.9(b), below. "Confidential Information" means all non-public information, of whatever kind and in whatever form, concerning the businesses and affairs of the Seller, the Foster Grant Group, the Purchaser and AAi, provided such information has been adequately identified as or can reasonably be construed to be confidential, and excluding the exceptions set forth in Section 7.1(b), below. "Contaminants" means (i) any pollutant, contaminant, petroleum, crude oil or any fraction thereof or hazardous substance (within the meaning of such terms under the Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (and any implementing regulations) ("CERCLA") or any similar applicable state or local legal requirements); (ii) any hazardous or toxic substance or material within the meaning of any law applicable to the Foster Grant Group; or (iii) any hazardous waste within the meaning of the Federal Resource Conservation and Recovery Act, as amended (and any implementing regulations) ("RCRA"). "Contract" means any contract, agreement, letter agreement or other obligation, written or oral. 2 7 "Copyrights" has the meaning set forth in Section 4.10(a). "Dallas Property" means the real property described more fully in Attachment I hereto, including the buildings located thereon, and located at 1601 Valley View Lane, Farmer's Branch, Texas 75234. "Closing Date" has the meaning set forth in Section 3.1, below. "Employee Benefit Plan" mean any (a) Employee Pension Benefit Plan (including any Multiemployer Plan), (b) Employee Welfare Benefit Plan, (c) other employee benefit, deferred compensation, excess benefit, stock and incentive plans, contracts, program, funds, or arrangements (whether written or oral, qualified or nonqualified, funded or unfunded, foreign or domestic, currently effective), or (d) any trust, escrow or similar agreement related thereto. "Employee Pension Benefit Plan" has the meaning set forth in ERISA Sec. 3(2). "Employee Welfare Benefit Plan" has the meaning set forth in ERISA Sec. 3(1). "Encumbrance" has the meaning set forth in Sec. 4.7(a)(ii). "Environmental Laws" means all federal, state and location environmental, health and safety laws, codes and ordinances and all rules, regulations and ecological standards promulgated thereunder, including without limitation, laws relation to emissions, discharges, releases or threatened releases of Contaminants, into the environment (including, without limitation, air, surface water, ground water, land, surface or subsurface strata) or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, generation, refining, production, transportation or handling of Contaminants. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "Excluded Liabilities" has the meaning set forth in Section 2.3, below. "Financial Statements" has the meaning set forth in Section 4.3, below. "Foster Grant Group" has the meaning set forth in the preface. "Income Tax" means any applicable federal, state, local, or foreign income tax, including any interest, penalty, or addition thereto. "Income Tax Return" means any federal, state, local, or foreign income tax return, declaration, report, claim for refund or information return or statement relating to Income Taxes, including any schedule or attachment thereto. 3 8 "Indemnified Loss" has the meaning set forth in Section 8.1, below. "Indemnified Party" has the meaning set forth in Section 8.4(a), below. "Indemnifying Party" has the meaning set forth in Section 8.4(a), below. "Intellectual Property" has the meaning set forth in Section 4.10, below. "Last Balance Sheet" has the meaning set forth in Section 4.3, below. "Leases" has the meaning set forth in Section 4.7(a)(v). "Litigation Costs" has the meaning set forth in Section 2.4(b), below. "Litigation Liabilities" has the meaning set forth in Section 2.4(a), below. "Material Adverse Effect" means a material adverse effect upon the business, assets, financial condition, results of operations, income, properties or liabilities taken as a whole of either (i) the Foster Grant Group or of (ii) any member of the Foster Grant Group. "Mortgage" has the meaning set forth in Section 2.3, below. "Multiemployer Plan" has the meaning set forth in ERISA Sec. 3(37). "Net Working Capital" means the positive difference, if any, between (x) sum of (a) Net Receivables and (b) Net Inventory less (y) Accounts Payable representing amounts due to non-Affiliates, all determined in accordance with Generally Accepted Accounting Principles and consistent with prior practices of Foster Grant Group. "Opti-Ray Shares" has the meaning set forth in the preface, above. "Ordinary Course of Business" means the conduct of business consistent with past custom and practice; provided, that Purchaser acknowledges that Seller has actively sought to divest the Foster Grant Group, and Purchaser agrees that actions taken through the date of this Agreement and disclosed to Purchaser and any actions permitted by this Agreement to be taken by Seller prior to the Closing by Seller, members of the Foster Grant Group and/or the Partnership in connection with or in preparation for such proposed transaction, together with actions expressly contemplated by this Agreement, shall for the purposes of this Agreement be deemed to have been taken or done in the Ordinary Course of Business. "Partnership" has the meaning set forth in the preface. "Patents" has the meaning set forth in Section 4.10(a). 4 9 "Person" means an individual, a partnership, a corporation, an association, a joint stock company, a trust, a joint venture, an unincorporated organization, or a governmental entity (or any department, agency, or political subdivision thereof). "Preferred Stock" has the meaning set forth in Section 2.2, below. "Purchase Price" has the meaning set forth in Section 2.2, below. "Records" has the meaning set forth in Section 7.4, below. "Security Interest" means any mortgage, pledge, lien, encumbrance, charge, or other security interest other than any of the following that has been disclosed to the Purchaser in this Agreement (a) mechanic's, materialmen's, and similar liens, (b) liens for taxes not yet due and payable (or for taxes that the taxpayer is contesting in good faith through appropriate proceedings), (c) purchase money, security interests, or liens, arising in the Ordinary Course of Business, and liens securing rental payments under capital lease arrangements, and (d) other liens arising in the Ordinary Course of Business and not incurred in connection with the borrowing of money. "Seller" has the meaning set forth in the preface above. "Seller's Knowledge" means (i) actual knowledge of the management of the Seller and of the senior management of the Partnership or (ii) knowledge that any such individual should or could reasonably be expected to discover or otherwise become aware of in the course of performing his or her duties and/or conducting a reasonably comprehensive investigation in connection with the negotiation of this Agreement and the transactions contemplated hereby. "Shares" has the meaning set forth in the preface, above. "Subsidiary" means any corporation with respect to which a specified Person (or a Subsidiary thereof) owns a majority of the common stock or has the power to vote or direct the voting of sufficient securities to elect a majority of the directors. "Threshold" has the meaning set forth in Section 8.3(a), below. "Trademarks" has the meaning set forth in Section 4.10(a). 2. PURCHASE AND SALE OF SHARES; ADJUSTMENT TO PURCHASE PRICE; EXCLUDED LIABILITIES: 2.1 PURCHASE AND SALE OF SHARES. Subject to the terms and conditions of this Agreement, the Seller shall sell, assign, transfer, and convey to the Purchaser at the Closing (as hereinafter defined) all of the issued and outstanding Bonneau Shares, which consist of 1,000 shares of common stock, par value $1.00 per share; Opti-Ray Shares, 5 10 which consist of 100 shares of common stock, no par value per share; and ABS Shares, which consist of 1,000 shares of common stock, par value $.001 per share. 2.2 CONSIDERATION. (i) In consideration for the sale of the Shares, at the Closing the Purchaser shall deliver: $29,000,000 (the "Cash Consideration") in immediately available funds to the Seller, together with (ii) a certificate, registered in the Seller's name, representing 100 shares of Purchaser's Class A Non-Dividend Preferred Stock (the "Preferred Stock") having an aggregate face and liquidation value and such other rights as are described in SCHEDULE 5.3 hereto and (iii) an amount equal to all cash advances to the Foster Grant Group or any member of the Foster Grant Group made by the Seller and approved by AAi during the period from November 13, 1996 to the Closing Date provided, however, that notwithstanding any approval by AAi of any such advance, Purchaser shall not be obligated to make any payments under this clause (iii) in excess of the increase, if any, in the Net Working Capital on the Closing Date as determined by AAi's independent public accountants over $21,931,693 being the Net Working Capital determined at September 30, 1996 according to the Balance Sheet of such date. Purchaser and Seller shall make an estimate of the amount due hereunder on or prior to the Closing (the "Estimated Payment"). If the Estimated Payment shall be greater or less than the amount determined due under clause (iii) by Purchaser's accountant, then the party who shall have overpaid or underpaid, as the case may be, shall pay the amount due to the other party within ten (10) days. The Cash Consideration and the Preferred Stock are referred to hereinafter jointly as the "Purchase Price." 2.3 EXCLUDED LIABILITIES AND TRANSFER OF DALLAS PROPERTY. In connection with the Purchaser's purchase of the Shares, the Purchaser will assume all liabilities of the Foster Grant Group (subject to the indemnification provisions set forth in Section 8.1, below) excluding: (a) any liabilities arising under or in connection with that certain Contingency Agreement, dated as of June 30, 1993 between Benson Eyecare Corporation and Edwin Bonneau; (b) any liabilities arising under or in connection with patent litigation previously initiated by Al-Site Corporation against Bonneau and Pennsylvania Optical Company; (c) any liabilities arising under or in connection with a mortgage attached to the Dallas Property dated March 31, 1995 by and between the Partnership as mortgagor, Seller as guarantor and First Interstate Bank of Texas, N.A. (the "Mortgage") and all amendments to the Mortgage. In connection with this subsection 2.4(c), the Seller (or its designee) shall on or before the Closing Date acquire from the Partnership all right, title and interest in and to the Dallas Property, and in connection therewith shall assume all liability in connection with such existing mortgage. 6 11 (The foregoing liabilities are hereafter referred to as the "Excluded Liabilities"). The Seller shall be solely responsible for satisfying and or defending against any and all claims, demands or other liabilities with respect to the Excluded Liabilities, and shall have sole control and direction of any defense in connection therewith; provided, that Purchaser shall, and after the Closing Date shall cause the Foster Grant Group and/or its members to, cooperate reasonably with the Seller in connection with any such defense, and the Seller shall reimburse promptly any and all direct out-of-pocket expenses incurred in connection with or as a result of providing such cooperation. 2.4 LITIGATION LIABILITIES. (a) In connection with the Purchaser's purchase of the Shares, the Purchaser will, subject to Section 2.4(b) below, assume any and all liabilities of the Foster Grant Group and/or the Partnership other than the Excluded Liabilities, including (without limitation) liabilities arising out of any litigation pending, threatened or commenced against any member of the Foster Grant Group or the Partnership or pending, threatened or commenced against the Seller and relating to the Foster Grant Group or its business and not referred to in Section 2.3 hereinabove, including any litigation or administrative or governmental proceeding (i) pending prior to the Closing Date or (ii) arising out of or relating to any events occurring prior to the Closing Date, including, without limitation, liabilities resulting from any past or present violation of any environmental laws (the liabilities described in this Section 2.4(a) are referred to as the "Litigation Liabilities"). No such assumption of liability shall release Seller from any breach of any representations or warranties made by Seller herein. Without limiting the generality of the foregoing, Purchaser, and after the Closing, the members of the Foster Grant Group and the Partnership, shall be solely responsible for defending against any such Litigation Liabilities and shall have sole direction of any defense thereof; provided, that Purchaser shall consult periodically with Seller and its counsel regarding the status of individual claims or cases and the Purchaser shall not enter into any settlement agreement or otherwise compromise or settle any Litigation Liability, claim or case without the prior written consent of Seller, which approval shall not be withheld or delayed unreasonably. (b) It is understood and agreed that, as between the Purchaser and the Seller, Purchaser shall have no liability for any direct out-of-pocket costs or expenses relating to or arising from the Litigation Liabilities (including, without limitation, defense costs, attorneys fees, amounts assessed as damages and settlement costs) ("Litigation Costs") to the extent such Litigation Costs exceed $500,000. Purchaser shall be solely responsible for the first $100,000 of any and all Litigation Costs, and Purchaser and Seller shall share equally all Litigation Costs exceeding $100,000 and up to $500,000. To the extent any such Litigation Costs are recoverable from third parties or indemnified against by applicable insurance 7 12 policies, Purchaser shall seek to recover the same and Seller shall be entitled to receive from the proceeds of any such recovery (reduced by the legal fees and other expenses incurred by Purchaser) fifty percent (50%) of all recoveries in excess of $100,000 but less than $500,000 and one hundred percent (100%) of all recoveries in excess of $500,000. 3. CLOSING. 3.1 THE CLOSING. The closing of the purchase of the Shares contemplated by this Agreement (the "Closing") shall take place at the offices of Hinckley, Allen & Snyder, at 1500 fleet Center, Providence, Rhode Island 02903, no more than five days after the conditions precedent to Purchaser's obligations have been satisfied or waived. 3.2 DELIVERIES AT THE CLOSING. (i) The Seller shall deliver or cause the delivery to the Purchaser of the various certificates, instruments, and documents referred to in Section 6.1 below, including, without limitation, one or more share certificates representing all the Shares and registered in the name of Purchaser, or duly endorsed in blank and accompanied by stock powers duly endorsed in blank, in each case in proper form for transfer, and with all stock transfer and any other required documentary stamps affixed thereto; (ii) the Purchaser shall deliver or cause the delivery to the Seller of the various certificates, instruments, and documents referred to in Section 6.2 below and (iii) the Purchaser shall deliver to the Seller the Purchase Price as provided in Section 2.2. 3.3 GENERALLY. All proceedings to be taken and all documents to be executed and delivered at the Closing shall be deemed to have been taken, executed and delivered simultaneously as of the Closing Date unless otherwise expressly stated, and no proceeding shall be deemed taken or documents deemed executed or delivered until all have been taken, executed and delivered. 4. REPRESENTATIONS AND WARRANTIES OF THE SELLER. The Seller represents and warrants to the Purchaser with respect to the Seller and on behalf of each member of Foster Grant Group, as follows: 4.1 ORGANIZATION, QUALIFICATION AND CORPORATE POWER. The Seller owns directly all the outstanding shares of common stock of Bonneau, Opti-Ray and ABS. Bonneau owns directly all the outstanding shares of common stock of BEC Distribution, Bonneau General, Bonneau Holdings and MMI. Opti-Ray owns directly all the outstanding shares of common stock of O-Ray Holdings. Bonneau General is the sole general partner, and Bonneau Holdings and O-Ray Holdings are all of the limited partners, of the Partnership. Bonneau, Opti-Ray and ABS, together with their respective subsidiaries, including the Partnership, comprise all of the members of the Foster Grant Group. SCHEDULE 4.1 sets forth as to each member of the Foster Grant Group, its place of incorporation, principal place of business, jurisdictions in which it is qualified to do business, its authorized capitalization, its shares of common stock outstanding, and the record and beneficial owner of those shares. Each member of the Foster Grant Group is a corporation or a 8 13 partnership (in the case of the Partnership), duly organized or formed (in the case of the Partnership), validly existing, and in good standing under the laws of its jurisdiction of incorporation or formation (in the case of the Partnership). Each member of the Foster Grant Group has all requisite corporate or partnership (in the case of the Partnership) power and authority, and all necessary material consents, authorization, approvals, orders, licenses, certificates, and permits of and from, and declaration and filings with, all federal, state, local, and other governmental authorities and all courts and other tribunals, to own, lease, license, and use its properties and assets and to carry on the business in which it is now engaged, except where the failure to have the same would not have a Material Adverse Effect. Each member of the Foster Grant Group is duly qualified to transact the business in which it is engaged and is in good standing as a foreign corporation or partnership (in the case of the Partnership) in every jurisdiction in which its ownership, leasing, licensing, or use of property or assets or the conduct of the Foster Grant Group makes such qualification necessary, except where the failure to be so qualified would not have a Material Adverse Effect. No member of the Foster Grant Group is in violation or breach of, or in default with respect to, and term of its certificate of incorporation (or other charter document) or by-laws or in the case of the Partnership, its partnership agreement. Complete copies of the Articles of Incorporation and Bylaws or the Certificate and Agreement of Limited Partnership (in the case of the Partnership) of such member of the Foster Grant Group have been previously delivered to Purchaser and AAi. 4.2 CAPITALIZATION. The authorized, issued and outstanding shares of capital stock or other equity interest of each member of the Foster Grant Group are set forth on SCHEDULE 4.1. None of the Shares are held in treasury. Each of such outstanding shares of capital stock or other equity interests is duly authorized, validly issued, fully paid, and nonassessable, has not been issued and is not owned or held in violation of any preemptive right of stockholders, and is owned of record and beneficially by those Persons set forth on SCHEDULE 4.1, in each case free and clear of all Security Interests, stockholders' agreements, and voting trusts, other than as set forth on SCHEDULE 4.2. There are no outstanding or existing options, warrants, conversion rights, subscriptions or other rights obligating any member of the Foster Grant Group to issue, deliver or sell any stock or securities or partnership interest (in the case of the Partnership) or any agreements, understandings or commitments to issue the same. 4.3 FINANCIAL STATEMENTS. The Seller has delivered to the Purchaser true and correct copies of the unaudited consolidated balance sheet of the Foster Grant Group and the unaudited consolidated statements of income and cash flows of the Foster Grant Group as of and for the fiscal year ended December 31, 1995 (the "Last Balance Sheet"), which have been extracted from the Seller's audited financial statements as of and for the year ended December 31, 1995, together with the unaudited consolidated balance sheet and statements of income and cash flows of the Foster Grant Group as of and for the nine month period ended September 30, 1996 (which have been prepared by management of the Foster Grant Group) (all of the foregoing collectively referred to as the "Financial Statements"). The Last Balance Sheet and the September 30, 1996 Balance Sheet are attached hereto as EXHIBIT A and EXHIBIT B, respectfully. The Financial Statements, 9 14 subject to the purchase accounting entries detailed on the September 30, 1996 Balance Sheet,: (a) have been prepared in accordance with the books of account and records of the Foster Grant Group; (b) fairly present, in all material respects, the Foster Grant Group's financial condition and the results of their operations at the dates and for the periods specified in those statements; and (c) have been prepared in accordance with generally accepted accounting principles consistently applied with all prior periods, except for changes noted therein. 4.4 ABSENCE OF UNDISCLOSED LIABILITIES. No member of the Foster Grant Group has any material liabilities, commitments or obligations of any nature whatsoever, whether written, oral, absolute, accrued or contingent, which are required to be reflected or reserved against in the Financial Statements (or disclosed in a footnote thereto) in accordance with generally accepted accounting principles, except for those (a) disclosed or reflected as liabilities or reserved for on the Financial Statements, (b) incurred or accrued since September 30, 1996 in the Ordinary Course of Business, or (c) set forth on SCHEDULE 4.4 or any other Schedule hereto and, to the Seller's Knowledge, there is no basis for assertion against any member of the Foster Grant Group of any such material liability, commitment or obligation. 4.5 TAXES. (a) Each corporate member of the Foster Grant Group is a member of the Seller's consolidated tax group, and the Seller has paid or caused to be paid all federal, state, local, foreign, and other taxes, including without limitation income taxes, estimated taxes, alternative minimum taxes, excise taxes, sales taxes, use taxes, value-added taxes, gross receipts taxes, franchise taxes, capital stock taxes, employment and payroll-related taxes, withholding taxes, stamp taxes, transfer taxes and property taxes, whether or not measured in whole or in part by net income, and all deficiencies, or other additions to tax, interest, fines and penalties owed by it (collectively, "Taxes"), required to be paid by it through the date hereof, whether disputed or not, except as disclosed in SCHEDULE 4.5 attached hereto. (b) Except as disclosed in SCHEDULE 4.5 attached hereto, the Seller has in accordance with applicable law filed (or has filed for available extensions) all federal, state, local and foreign tax returns required to be filed by it through the date hereof, and all such returns correctly and accurately set forth the amount of any Taxes relating to the applicable period. SCHEDULE 4.5 contains a description of those returns that have been audited or currently are the subject of an audit. Furthermore, SCHEDULE 4.5 contains a schedule of all examination reports and statements of deficiencies assessed against or agreed to by the Seller or any member of the Foster Grant Group. SCHEDULE 4.5 attached hereto sets forth all federal tax elections under the Internal Revenue Code of 1986, as amended (the "Code"), that are in effect with respect to each member of the Foster Grant Group or for which an application by any member of the Foster Grant Group is pending. 10 15 (c) Except as disclosed in SCHEDULE 4.5 attached hereto, neither the Internal Revenue Service nor any other governmental authority is now asserting or, to the best knowledge of the Seller, threatening to assert against the Seller or any member of the Foster Grant Group, any deficiency or claim for additional Taxes. Except as disclosed in SCHEDULE 4.5 attached hereto, no claim has ever been made by any authority in a jurisdiction where the Seller does not file reports and returns that the Seller is or may be subject to taxation by that jurisdiction. There are no material Security Interests on any of the assets of the Seller or any member of the Foster Grant Group that arose in connection with any failure (or alleged failure) to pay any tax. Neither the Seller nor any member of the Foster Grant Group has entered into a closing agreement pursuant to Section 7121 of the Code. (d) Except as set forth in SCHEDULE 4.5 attached hereto, there has not been any audit of any tax return filed by the Seller or any member of the Foster Grant Group since June 30, 1992 or, to the Seller's knowledge, prior thereto, no audit of any tax return of the Seller or any member of the Foster Grant Group is in progress, and neither the Seller nor any member of the Foster Grant Group has been notified by any tax authority that any such audit is contemplated or pending. Except as set forth in SCHEDULE 4.5, no extension of time with respect to any date on which a tax return was or is to be filed by the Seller or any member of the Foster Grant Group is in force, and no waiver or agreement by the Seller or any member of the Foster Grant Group is in force for the extension of time for the assessment or payment of any Taxes. (e) Neither the Seller nor any member of the Foster Grant Group have ever consented to have the provisions of Section 341(f)(2) of the Code applied to it. Neither the Seller nor any member of the Foster Grant Group have agreed to, and neither the Seller nor any member of the Foster Grant Group have been requested by any governmental authority to, make any adjustments under Section 281(a) of the Code by reason of a change in accounting method or otherwise. Neither the Seller nor any member of the Foster Grant Group have ever made any payments, is obligated to make any payments, or is a party to any agreement that under certain circumstances would obligate it to make any payments, that will not be deductible under Section 280G of the Code. The Seller disclosed in its consolidated federal income tax returns all positions taken therein that could give rise to a penalty for underpayment of federal Tax under Section 6662 of the Code. Neither the Seller nor any member of the Foster Grant Group ever had any liability for unpaid Taxes because it was a member of an "affiliated group" (as defined in Section 1504(a) of the Code). Except as set forth in SCHEDULE 4.5 attached hereto, none of the members of the Foster Grant Group are a party to any tax sharing agreement. (f) For purposes of this Section 4.5 all references to Sections of the Code shall include any predecessor provision to such Sections and any similar provisions of federal, state, local or foreign law. 4.6 LITIGATION AND CLAIMS. Except as set forth on SCHEDULE 4.6: None of the members of the Foster Grant Group is involved in any pending or, to Seller's knowledge, threatened 11 16 litigation, action, suit, proceeding, claim or investigation which, singly or in the aggregate, could have a Material Adverse Effect upon the members of the Foster Grant Group, or which would prevent or hinder the consummation of the transactions contemplated by this Agreement including, without limitation, the execution, delivery and performance of any related documents; and no member of the Foster Grant Group is subject to or bound by any agreement, judgment, decree or order which could have a Material Adverse Effect upon the members of the Foster Grant Group. 4.7 STATUS OF PROPERTY OWNED OR LEASED. (a) REAL PROPERTY. The real property identified as being owned by the members of the Foster Grant Group on SCHEDULE 4.7 is collectively referred to herein as the "Owned Real Property"; the real property identified as being leased by the members of the Foster Grant Group on SCHEDULE 4.7 is collectively referred to herein as the "Leased Real Property"; the Owned Real Property and the Leased Real Property are collectively referred to herein as the "Real Property." The Owned Real Property constitutes all the real property owned by the members of the Foster Grant Group and the Leased Real Property constitutes all the real property leased by the members of the Foster Grant Group. (i) TITLE. Each member of the Foster Grant Group has good, clear, record, marketable and insurable fee simple title to the Owned Real Property owned by it, in all cases free and clear of all Encumbrances, liens, assessments, licenses, claims, rights of first offer or refusal, options, or options to purchase, or any covenants, conditions, restrictions, rights of way, easements, judgments or other encumbrances or matters affecting title, except as set forth on SCHEDULE 4.8. There are no leases, tenancies or occupancy rights of any kind affecting any of the Owned Real Property. Each member of the Foster Grant Group has a valid leasehold interest in all of the Leased Real Property leased by it, free and clear of all Encumbrances. (ii) SECURITY INTERESTS. All of the mortgages, deeds of trust, ground leases, security interests or similar encumbrances on the Real Property are set forth on SCHEDULE 4.8 (collectively, the "Encumbrances"). All payments required under each Encumbrance to the date hereof have been made in full or are accrued in accordance with Section 4.3. There is not now, nor, as a result of the consummation of the transactions contemplated hereby, will there by, any default under the terms and provisions of any Encumbrance. No condition or fact does or will exist, as a result of the consummation of the transactions contemplated hereby, which, with the lapse of time or the giving of notice or both, would constitute a material default thereunder or result in any acceleration of the indebtedness secured thereby or any increase in the amount of interest, premiums or penalties payable on such indebtedness. SCHEDULE 4.8 also specifically indicates all Encumbrances which are, by their terms, by means of a separate guaranty or otherwise, recourse, in whole or in part, to the members of the Foster Grant Group. 12 17 (iii) LEASES. All of the leases of any of the Leased Real Property (collectively, the "Leases") are as set forth on SCHEDULE 4.7. The copies of the Leases delivered or furnished by the Seller to AAi constitute all of the leases or tenancy agreements of or with respect to the Leased Real Property, and are complete and correct copies of each of the Leases. All Leases are currently in full force and effect. Each party to the Leases has performed all of its obligations under each of such Leases in all material respects and is not in default thereunder, and the Seller is not aware of any event or condition which exists or as a result of the passage of time or the giving of notice could result in a default under any such Lease. Except as disclosed on SCHEDULE 4.7, the consummation of the transactions contemplated by this Agreement will not result in any modification, termination, breach or default or require any consent under any such Lease. (iv) COMMISSIONS. There are no brokerage or leasing fees or commissions or other compensation due or payable on an absolute or contingent basis to any person, firm, corporation, or other entity with respect to or on account of any of the Leases, the Encumbrances or the Real Property, and no such fees, commissions or other compensation shall, by reason of any existing agreement, become due after the date hereof. (v) PHYSICAL CONDITION. There is no material defect in the physical condition of any of the Owned Real Property or the Leased Real Property. There is no material defect in any improvements located on or constituting a part of any of the Real Property, including, without limitation, the structural elements thereof, the mechanical systems (including without limitation all heating, ventilating, air conditioning, plumbing, electrical, elevator, security, telephone, utility, and sprinkler systems) therein, the roofs or the parking and loading areas (collectively, the "Improvements"). All of the improvements located on or constituting a part of any of the Real Property, including, without limitation, the structural elements thereof, the mechanical systems therein, the roofs and the parking and loading areas are in generally good operating condition and repair and have been maintained in the Ordinary Course of Business, normal wear and tear excepted. (vi) UTILITIES. All water, sewer, gas, electric, telephone, drainage and other utility equipment, facilities and services required by law or necessary for the operation of the Real Property as it is now being operated and as required for operation are installed and connected pursuant to valid permits, are sufficient to service the Real Property and as a whole are in generally good repair and operating condition, normal wear and tear excepted. Neither the Seller nor any member of the Foster Grant Group has received any notice of and the Seller and each member of the Foster Grant Group has no knowledge of any fact, condition or proceeding which would result in the termination or impairment of the furnishing of, or any material increase in rates for, services to any of the Real Property of water, sewer, gas electric, telephone, drainage and other utility services, except ordinary and usual rate increases applicable to all customers (or all customers of a certain class) of a utility provider. To the best knowledge of the Seller, the facilities servicing the Real Property are in compliance, in all material respects, with all applicable governmental statutes, ordinances, rules and regulations. 13 18 (vii) COMPLIANCE. Neither the Seller nor any member of the Foster Grant Group has received any notice from any municipal, state, federal or other governmental authority with respect to, and the Seller has no knowledge of, any violation of any zoning, building, fire, water, use, health, environmental or other statute, ordinance, code or regulation issued in respect of any of the Real Property that has not been heretofore corrected, and no such violation or violations now exist which would have a material adverse effect on the operation or Improvements on the Real Property. The construction, installation, use and operation of the Real Property or the Improvements thereon (including, without limitation, the construction, installation, use and operation of any signs located thereon) were completed and installed and are in compliance, in all material respects, with all applicable municipal and governmental laws, ordinances, regulations, licenses, permits and authorizations, including, without limitation, applicable building, zoning, environmental and fire safety laws and regulations, and there are presently in effect all material certificates of occupancy, licenses, permits, authorizations and approvals required by law or by any governmental or private authority having jurisdiction over any of the Real Property or any portion thereof, occupancy thereof or any present use thereof, including but not limited to such other permits as are necessary for the operation of the Real Property. (viii) GOVERNMENT APPROVALS. Neither the Seller nor any member of the Foster Grant Group has received any notice of and the Seller has no knowledge of any plan, study or effort by any governmental agency or authority which would adversely affect the present use, zoning or value of any of the Real Property or which would modify or realign any adjacent street or highway. All of the Real Property has access from a publicly dedicated roadway and all such access is at least the minimum access required by applicable subdivision or similar law for all Improvements constituting a part of the Real Property. All lessee improvements are in substantial accordance with applicable Lease requirements. (ix) REAL PROPERTY TAXES. Other than the amounts disclosed by the copies of the tax bills for the Owned Real Property delivered to AAi by Seller, no other taxes have been or, to the best knowledge of the Seller, will be assessed on any of the Owned Real Property or any portion thereof, in respect of the current tax year or any prior year, except as set forth in SCHEDULE 4.8. (x) SERVICE CONTRACTS. A complete and correct list of all material existing service, management, supply or maintenance and equipment lease contracts and other contractual agreements affecting the Real Property or any portion thereof (the "Service Contracts") as set forth on SCHEDULE. 4.8. Each of the Service Contracts is currently valid and in full force and effect and, with respect to each of the Service Contracts, no situation exists which, with the passage of time or notice or both, would cause any member of the Foster Grant Group to be in default thereunder, except where such default would not have a Material Adverse Effect. 14 19 (b) PERSONAL PROPERTY. The personal property located on the Real Property is all of the personal property necessary for the continued operation of the business of each member of the Foster Grant Group as currently conducted. Except as specifically disclosed in SCHEDULE 4.8, each member of the Foster Grant Group has good and marketable title to all of the personal property owned by it. None of such personal property or assets is subject to any Encumbrance or other charge except as specifically disclosed in SCHEDULE 4.8. The Financial Statements reflect all material personal property of each member of the Foster Grant Group, subject to dispositions and additions in the ordinary course of business consistent with this Agreement. Except as otherwise specified in SCHEDULE 4.8, all material leasehold improvements, furnishings, machinery and equipment of the Foster Grant Group are in generally good repair, normal wear and tear excepted, have been well maintained, and conform in all material respects with all applicable ordinances, regulations and other laws. 4.8 CONTRACTS AND OTHER INSTRUMENTS. Except as disclosed in SCHEDULE 4.8 hereto, neither the Partnership nor any member of the Foster Grant Group is a party to or bound by any executory oral or written: (a) Contract or agreement for the purchase of any materials or equipment necessary for the continued operation of the Foster Grant Group, except purchase orders in the Ordinary Course of Business; (b) Contract or agreement providing for the purchase from a particular supplier of all or substantially all of the Foster Grant Group's requirements of any material product or other item sold or used by the Foster Grant Group in the Ordinary Course of Business; (c) Contract or commitment in connection with the Foster Grant Group which by its terms does not terminate or is not terminable without penalty by any member of the Foster Grant Group or any successor or assign within thirty (30) days after notice from such party thereto; (d) Contract or agreement related to the Foster Grant Group not made in the Ordinary Course of Business; (e) Contract or agreement with any officer, director or stockholder of the Foster Grant Group or with any Affiliate and which relates to the Foster Grant Group; (f) Employment, agency, consulting, or similar contract in connection with the members of the Foster Grant Group that cannot be canceled by it without cost or penalty on less than thirty (30) days' notice; (g) License or secrecy agreements involving intellectual property rights or non-competition agreements; 15 20 (h) Loan or guaranty agreement, credit agreement, note or other agreement or instrument evidencing indebtedness of any member of the Foster Grant Group to any third party or of any third party to any member of the Foster Grant Group, and any related forbearance, waiver or after amending agreement or any conditional sale agreement, sale-leaseback agreement, mortgage, pledge, indenture or other agreement or instrument evidencing a Security Interest or secured transactions; (i) Lease, sublease or other occupancy agreement affecting the Real Property or any option, right of first refusal or agreement for sale affecting such property in any material respect; or (j) Other contracts or agreements creating any material obligation on any member of the Foster Grant Group with respect to the Foster Grant Group or the transactions contemplated by this Agreement. The Seller has delivered to the Purchaser and AAi a correct and complete copy of each Contract (or, in the case of similar form Contracts, a copy of the form of such Contract together with a list of parties having executed such form) (as amended to date) listed on or described in SCHEDULE 4.8. Except as specifically disclosed on SCHEDULE 4.8, the Foster Grant Group, or the relevant member thereof, has performed all material obligations required to be performed by it to date under all such Contracts. Except to the extent any of the same may have been terminated or expired prior to the Closing Date, or as disclosed in SCHEDULE 4.8, no member of the Foster Grant Group is, nor, to the Seller's knowledge, is any other party to any such contract, agreement, instrument, lease, or license in violation or breach of, or in default with respect to complying with, any material provision thereof, and each such contract, agreement, instrument, lease, or license is in full force and is the legal, valid, and binding obligation of such member of the Foster Grant Group, as the case may be, and is enforceable as to it in accordance with its terms, subject to bankruptcy, insolvency, reorganization, moratorium or other similar laws in effect relating to creditors rights generally, and that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to general principles of equity. 4.9 EMPLOYEE BENEFITS. Except as set forth in SCHEDULE 4.9: (a) Neither the Partnership nor any member of the Foster Grant Group has in the period since their respective dates of acquisition by the Seller contributed to a Multiemployer Plan, and to Seller's knowledge no member of the Foster Grant Group has contributed to any Multiemployer Plan prior to the acquisition by Seller. No member of the Foster Grant Group currently maintains, or is a participating employer in, or contributes to, any pension, profit-sharing, option, other incentive plan, or any other type of Employee Benefit Plan, or has any obligation to or customary arrangement with employees for bonuses, incentive compensation, vacations, severance pay, insurance, or other benefits. The Seller has furnished to the Purchaser copies of all material documents evidencing such plans, obligations, or arrangements referred to in SCHEDULE 4.9 (or written 16 21 summaries of such plans, obligations, or arrangements to the extent not evidenced by documents) and copies of all documents evidencing trusts relating to any such plans. (b) There has been no violation of the reporting and disclosure requirements imposed either under ERISA or the Internal Revenue Code of 1986, as amended ("Code"), for which a penalty has been or may be imposed with respect to any such Employee Benefit Plan of the Foster Grant Group. There is no litigation, arbitration, claim, governmental or other proceeding (formal or informal), pending and, to the knowledge of the Seller, there is no litigation, arbitration, claim, governmental or other proceeding (formal or informal), or investigation threatened with respect to any such Employee Benefit Plan or related trust or with respect to any fiduciary, administrator, or sponsor (in its capacity as such) of any such Employee Benefit Plan. No event has occurred or (to the knowledge of the Seller) is threatened which would constitute a non-exempt prohibited transaction under Section 406 of ERISA. (c) Each Employee Benefit Plan has been maintained, operated and administered in accordance with its terms and any related document and agreements and complies in all material respects with the applicable requirements of ERISA and the Internal Revenue Code. (d) Each Employee Benefit Plan intended to qualify under the Internal Revenue Code Sec. 401(a) is so qualified, and each trust maintained in connection with each such plan is tax exempt under the Internal Revenue Code Sec. 501(a). (e) With respect to each Employee Benefit Plan that is a group health plan subject to Internal Revenue Code Sec. 4980B or 162(k), the Foster Grant Group has complied in all material respects with the continuation coverage requirements of Internal Revenue Code Sec. 4980B and 162(k), as applicable, and Part 6 of Subtitle B of Title I of ERISA. (f) With respect to each Employee Benefit Plan that is a group health plan subject to section 1862(b)(1) of the Social Security Act (42 U.S.C. ss. 1395y(b)), the Foster Grant Group has complied in all material respects with the secondary payer requirements of section 1862(b)(1) of such Act. (g) Any Employee Benefit Plan that provides for "parachute payments" within the meaning of Internal Revenue Code Sec. 280G provides that "excess parachute payments" will not be paid thereunder. (h) No Employee Benefit Plan is funded through a "welfare benefit fund" as defined in Internal Revenue Code Sec. 419(e). (i) The execution and performance of this Agreement will not constitute a stated triggering event under any Employee Benefit Plan that will result in the payment (whether of severance pay or otherwise) becoming due from the Foster Grant Group to 17 22 any officer, employee or former employee (or dependents of such employee), or accelerate the time of payment or vesting, or increase the amount of compensation due to any employee, officer or trustee of the Foster Grant Group. (j) The Foster Grant Group has reserved all rights necessary to amend or terminate each of the Employee Benefit Plan, other than Employee Benefit Plans maintained or sponsored by Seller and with respect to which the members of the Foster Grant Group are participating employers. (k) Each "fiduciary" and every "plan official" (as defined in ERISA Sec. 412) of each Employee Benefit Plan is bonded to the extent required under ERISA Sec. 412. 4.10 INTELLECTUAL PROPERTY. (a) Intellectual Property" means: (i) all rights and incidents of interest in and to all trademarks, service marks, trademark registrations, service mark registrations, and trade names (whether registered or arising under common law, state law, federal law or the law of a foreign country) and applications for registration of trademarks and service marks used in or necessary to the conduct of the business of the Foster Grant Group as of the Closing Date (collectively, "Trademarks"), including, without limitation, all and any rights to any variations thereof, together with the good will of the Foster Grant Group in connection with which each Trademark is used and which is symbolized by each such Trademark; (ii) all licenses granted by or to the Foster Grant Group and any other agreements to which the Foster Grant Group is a party which create rights in or to the Trademarks, or trade name properties described in subsection (i), above and in effect as of the Closing Date; (iii) all rights and incidents of interest in and to all works of authorship, including all copyrights, copyright registrations, certificates of copyright, copyrighted literary interests, applications for copyrights and all literary, property and author rights related thereto (collectively, "Copyrights") as of the Closing Date that are embodied in or associated with the assets of the Foster Grant Group or used in or necessary to the conduct of the business of the Foster Grant Group as of the Closing Date; (iv) all inventions, whether patentable or unpatentable and whether or not reduced to practice, all improvements thereto and letters patent, design patents and utility patents, all applications for grant of any such patents pending as of the Closing Date, industrial models, industrial designs, petty patents, patents of importation, patents of addition, utility models, certificate of invention and other government issued or granted indicia of invention ownership, together with all reissuances, continuations, continuations-in-part, revisions, extensions and reexaminations thereof, ("Patents"), that are owned by 18 23 Foster Grant Group or are part of or used in or necessary to the conduct of the business of the Foster Grant Group. (v) all renewals, modifications, and extensions of any items referred to in subsections (i) through (iv), above; (vi) all rights and incidents of interest in and to all technical documentation, trade secrets (including trade secret rights arising under common law, state law, federal law, and the law of a foreign country), designs, plans, new product development, formulas, know-how and show-how, that are as of the Closing Date part of, used in or necessary to the conduct of the business of the Foster Grant Group; (vii) all marketing, export, import, and licensing records, sales literature, supplier lists, vendor lists, customer lists, trade lists, sales forces and distributor networks, form manuals and forms, advertising, marketing and promotional materials and know-how, sales tools, and other customer or potential customer data or marketing and service information, customer contracts (whether form or custom-developed) that are as of the Closing Date used in or necessary for the conduct of the business of the Foster Grant Group; (viii) all rights to develop, manufacture, use or sell under all licenses in effect as of the Closing Date granted to the Foster Grant Group that are part of, used in or necessary to the conduct of the business of the Foster Grant Group; (ix) all rights and incidents of interest in and to all noncompetition confidentiality agreements in effect as of the Closing Date that were entered into or made in connection with the business of the Foster Grant Group; (x) all of the Foster Grant Group's software and computer programs, applicable to various environments ("Software"), including all such software and computer programs in human readable source code forms and in machine executable object code forms and all related specifications (including, without limitation, all logic architectures, algorithms and logic flows and all physical, functional, operating and design parameters), all work in progress relating to corrections, modifications or enhancements, current and prior versions, operating systems and procedures (including development methodology), designs, design revisions, related applications software in any language, concepts, ideas, processes, techniques, software design and test tools, third party software interfaces written by such party and all methods of implementation and packaging, together with all associated know-how and show-how and all related documentation, specifications, manuals and other materials relating thereto which are used to install, operate, maintain, correct, test, repair, enhance, modify, prepare derivative works based upon, design, develop, reproduce and package such software and computer programs. 19 24 (xi) all goodwill associated with any of the foregoing and all rights to sue and recover damages for present and past infringement of any rights of ownership or use of any of the foregoing items listed in subsections (i) through (xi), above. (xii) Notwithstanding the foregoing, "Intellectual Property" does not include the names or marks "Benson", "BEC", "Bolle", "Optical Radiation Corporation" or "ORC" or any name or mark including or incorporating such names, or any right or license therein or thereto. (b) Except as set forth in SCHEDULE 4.10, the members of the Foster Grant Group own or are licensed to use (as the case may be) all rights and incidents of interest as of the Closing Date in and to all material Intellectual Property used in or intended for use in, part of or necessary for the operation of the business as presently conducted and as presently proposed to be conducted by the members of the Foster Grant Group. Each item of Intellectual Property owned or used by the Foster Grant Group immediately prior to the Closing Date will be owned or available for use by them on identical terms and conditions immediately subsequent to the Closing Date, and except as set forth in SCHEDULE 4.10, the Foster Grant Group is not in default under any agreement pursuant to which it uses or has the right to use any such Intellectual Property right. To Seller's Knowledge, the Foster Grant Group has taken all necessary and desirable action to maintain and protect each item of Intellectual Property that it owns. Except as set forth in SCHEDULE 4.10, no owned item of Intellectual Property has been abandoned except where and to the extent such abandonment has occurred in the ordinary course of business and does not have a Material Adverse Effect. To Seller's Knowledge, each item of Intellectual Property used by the Foster Grant Group pursuant to license or other authorization of a third party is used with the authorization of every other claimant thereto and the execution, delivery and performance of this Agreement by the Foster Grant Group will not impair such use. (c) Except as set forth in SCHEDULE 4.10, (i) to the Seller's Knowledge, none of the members of the Foster Grant Group have interfered with, infringed upon misappropriated or otherwise come into conflict with any Intellectual Property rights of any third party, and (ii) no member of the Foster Grant Group has received any unresolved charge, complaint, claim demand or notice alleging any such interference, infringement, misappropriation or violation (including any claim that the Foster Grant Group must license or refrain from using any intellectual property rights of any third party). Except as set forth in SCHEDULE 4.10, to the Seller's Knowledge, no third party has interfered with, infringed upon, misappropriated or otherwise come into conflict with any Intellectual Property rights of any member of the Foster Grant Group. (d) SCHEDULE 4.10 identifies each material Patent, Trademark, Copyright or other Intellectual Property covered by a governmental registration or registration certificate, or application for registration, whether from the United States or any foreign country, and identifies each license, agreement or other permission that the Foster Grant Group has granted to any third party with respect to any of its Intellectual Property 20 25 (together with any exceptions thereto). Except as set forth on SCHEDULE 4.10, with respect to each item of Intellectual Property required to be identified therein: (i) the item is not subject to any outstanding injunction, judgment, order, decree, ruling or charge; (ii) no action, suit, proceeding, hearing, investigation, charge, complaint, claim or demand is pending, or the knowledge of the Foster Grant Group, is threatened which challenges the legality, validity, enforceability, use or ownership of the item; (iii) the Foster Grant Group has not licensed or permitted any third party to use any such item; and (iv) all royalties or other payments to any third party relating to or arising out of the Foster Grant Group's marketing, sale, or use of any Intellectual Property owed by the Foster Grant Group for the period up to and including the Closing Date have been paid or accrued consistent with Section 4.3. (e) The Foster Grant Group has the right to use the name "Foster Grant" in connection with its business in the United States and in such other countries where the name has been registered as a trademark and are identified in SCHEDULE 4.10; provided, that Eyecare Products, plc, a United Kingdom company holds all right, title and interest in and to the name "Foster Grant" throughout the whole of Europe and the Middle East (excluding Israel). 4.11 AUTHORITY TO SELL. The Seller and the Partnership each has all requisite corporate (or partnership, as applicable) power and authority to execute, deliver, and perform this Agreement. This Agreement has been duly authorized, executed, and delivered by the Seller and the Partnership, is the legal, valid, and binding obligation of each of them, and is enforceable in accordance with its terms, subject to bankruptcy, insolvency, reorganization, moratorium or other similar laws in effect relating to creditors rights generally, and that the remedy relating to creditors rights generally, and that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to general principles of equitable relief may be subject to general principles of equity. No material consent, authorization, approval, order, license, certificate, or permit of or form, or declaration or filing with, any federal, state, local, or other governmental authority or any court or other tribunal is required by the Seller or the Partnership for the execution, delivery, or performance of this Agreement by the Seller or the Partnership, other than the filings and approvals required by the Hart-Scott Rodino Antitrust Improvements Act of 1976. Except as set forth on SCHEDULE 4.11, no consent of any party to any material contract, agreement, instrument, lease, license, arrangement, or understanding to which the Foster Grant Group is a party, or to which any of its material properties or assets are subject, is required for the execution, delivery, or performance of this Agreement (except such consents referred to in SCHEDULE 4.11 as have been obtained at or prior to the date of 21 26 this Agreement, copies of which have been delivered to the Purchaser); and the execution, delivery, and performance of this Agreement will not violate, result in a breach of, conflict with, or (with or without the giving of notice or the passage of time or both) entitle any party to terminate or call a default under any such material contract, agreement, instrument, lease, license, arrangement, or understanding; or violate or result in a breach of any term of the certificate of incorporation (or other charter document) or by-laws, or partnership agreement, as applicable, of any member of the Foster Grant Group; or in any material respect, violate, result in a breach of, or conflict with any material law, rule, regulation, order, judgment, or decree binding on the Seller or any member of the Foster Grant Group or to which any of its material operations, business, properties, or assets are subject. 4.12 ENVIRONMENTAL MATTERS. Except as set forth on SCHEDULE 4.12, to the Seller's knowledge: (a) No Contaminants have at any time been treated, recycled or disposed of in any way by any member of the Foster Grant Group in or about any real estate owned, leased or operated by any member of the Foster Grant Group except as permitted under and in accordance with applicable law; (b) There are no locations not presently owned, leased or operated by any member of the Foster Grant Group where Contaminants from the operation of the business of any member of the Foster Grant Group have been stored, treated, recycled or disposed of except as permitted under and in accordance with applicable law; (c) There are no underground storage tanks located on or about real property owned, leased or operated by any member of the Foster Grant Group; (d) There are no past or continuing releases of Contaminants into the environment from real property owned, leased or operated by any member of the Foster Grant Group or from other locations where wastes from the operation of the Foster Grant Group's properties or business have been or are located; (e) No member of the Foster Grant Group has treated, stored or disposed of any hazardous waste (within the meaning of such terms under the federal Resource Conservation and Recovery Act, as amended (and any implementing regulations)), or any similar state or local legal requirements except as permitted under and in accordance with applicable law; and (f) Neither the Seller nor any member of the Foster Grant Group has received any notice from any Person advising the Seller or any member of the Foster Grant Group that any member of the Foster Grant Group is potentially responsible for response costs with respect to a release or threatened release of Contaminants. 22 27 4.13 LABOR PRACTICES. To Seller's Knowledge, there are no material claims for unfair labor practices or threatened between any member of the Foster Grant Group and any of their employees. No strikes, work slowdowns or stoppages or other labor disputes involving any member of the Foster Grant Group's employees are pending or, to the Seller's Knowledge, threatened. There is not pending any material grievance procedure or arbitration proceeding under any collective bargaining agreement covering any member of the Foster Grant Group's employees or former employees. Except as disclosed in SCHEDULE 4.6, no charges, audits, investigations or complaint proceedings are pending, or are to Seller's Knowledge threatened, before the Equal Employment Opportunity Commission or any state or local agency responsible for the prevention of unlawful employment practices. No member of the Foster Grant Group has experienced any work stoppage or other similar labor difficulty. 4.14 COMPLIANCE WITH LAWS, PERMITS AND LICENSES. Except as disclosed on SCHEDULE 4.14, each member of the Foster Grant Group has complied with all material applicable laws, rules, regulations, codes, plans, injunctions, judgments, orders, decrees, rulings, and charges thereunder (collectively "Laws") of federal, state, local, and foreign governments (and all agencies thereof), except where the failure to comply would not have a Material Adverse Effect. Except as disclosed on SCHEDULE 4.14, no material expenditures or actions are, or will be, required by any member of the Foster Grant Group to bring the Foster Grant Group into compliance with such Laws. Except as set forth on SCHEDULE 4.14, to Seller's Knowledge, neither the Seller nor any member of the Foster Grant Group, nor any of their respective executive officers, employees or agents has received any written or oral notice of or citation for material noncompliance with any Laws including, without limitation, Environmental Laws (as defined herein), directly in connection with the Foster Grant Group. To the Seller's Knowledge except as set forth on SCHEDULE 4.14, there exists no fact, condition, situation or circumstance, which individually or in the aggregate, and after notice or lapse of time or both, would constitute material noncompliance with or give rise to material future liability with respect to any such Laws. All material permits and licenses required under applicable Laws to operate the Foster Grant Group as currently operated are listed in SCHEDULE 4.14 hereto. 4.15 DIRECTORS, OFFICERS AND KEY EMPLOYEES. SCHEDULE 4.15 sets forth a true and complete list of the names and work addresses and total compensation received from Foster Grant Group or any member thereof of all current directors and officers of the members of the Foster Grant Group, and each other current employee of the Foster Grant Group who received base compensation of $50,000 or more in calendar year 1995 or as of October 31, 1996 would receive or accrue base compensation of $50,000 or more of projected remuneration for the calendar year 1996. Except as set forth in SCHEDULE 4.15 or in any Contract disclosed pursuant to Section 4.8, none of the persons listed therein have received any wage or salary increase or bonus since October 31, 1996, other than in the Ordinary Course of Business and consistent with the Foster Grant Group's policies and procedures, and there has not been any accrual for or commitment or agreement by any member of the Foster Grant Group to pay the same. Set forth on SCHEDULE 4.15 is a correct and complete list of each employee of each member of the Foster Grant Group 23 28 whose employment terminated, whether voluntarily or involuntarily and whether temporarily or permanently, within thirty (30) days prior to the Closing Date. No member of the Foster Grant Group employs any person in a manner that violates any non-competition, non-disclosure or other similar agreement (including without limitation those entered into in connection with any former employment). 4.16 ABSENCE OF CERTAIN CHANGES. Since September 30, 1996, there has not been: (a) Any change in the financial condition, properties, assets, liabilities, or operations related to the Foster Grant Group, which change by itself or in conjunction with all other such changes, whether or not arising in the ordinary course of business, has a Material Adverse Effect; (b) Any material Security Interest placed on any assets of the Foster Grant Group that remains undischarged on the Closing Date; (c) Any obligation, liability or commitment incurred by any member of the Foster Grant Group that has a Material Adverse Effect; (d) Any purchase, sale or other disposition or any agreement or other arrangement for the purchase, sale or other disposition of any of assets of the Foster Grant Group, other than those that are immaterial or are in the Ordinary Course of Business, except those expressly contemplated by this Agreement; (e) Any lease, license or other agreement that has had a Material Adverse Effect, other than as set forth on SCHEDULE 4.16; (f) Any damage, destruction or loss, whether or not fully covered by insurance, that has a Material Adverse Effect; or (g) Any other matter that has a Material Adverse Effect that has not been disclosed herein or in a schedule or attachment furnished herewith. 4.17 INSURANCE. SCHEDULE 4.17 sets forth a list of all material insurance policies providing insurance coverage of any nature to the Foster Grant Group. The Seller has previously made available to the Purchaser a copy of all of such insurance policies, as amended to the date hereof. Such policies are sufficient for compliance in all material respects by the Foster Grant Group with all material requirements of law and all material agreements to which the Foster Grant Group is a party or by which any of its assets are bound. All of such policies are in full force and effect and to the knowledge of the Seller, are valid and enforceable in accordance with their terms, and the Foster Grant Group has complied with all material terms and conditions of such policies, including premium payments. None of the insurance carriers has provided written notice to the Seller an intention to cancel any such policy. Purchaser acknowledges that all such policies are 24 29 issued in the name of Seller and will remain the property of Seller in all respects from and after the Closing Date. 4.18 TRANSACTIONS WITH INTERESTED PERSONS. Other than as disclosed on SCHEDULE 4.18 no officer, supervisory employee, director or shareholder of any member of the Foster Grant Group, and no spouse or children of any of such persons owns, directly or indirectly, on an individual or joint basis, any interest in or serves as an officer or director of any of the Foster Grant Group's customers, competitors or suppliers, or any organization that has a contract or arrangement with any member of the Foster Grant Group relating to the Foster Grant Group. 4.19 BROKERS' FEES. No finder, broker, or similar agent has acted on behalf of, or has been retained by the Seller or is entitled to any fee from the Sellers as a result of any of the transactions contemplated by this Agreement. 4.20 SALES REPRESENTATIVES. Attached as SCHEDULE 4.20 is an accurate list of all sales agents, dealers, or distributors of any member of the Foster Grant Group. Copies of all written agreements currently or previously in effect with such representatives will be furnished to Buyer prior to Closing. Except as disclosed in SCHEDULE 4.20, to its knowledge, no member of the Foster Grant Group has received notice of nor does any member of the Foster Grant Group have reason to believe that any sales representative listed on SCHEDULE 4.20 intends to terminate its relationship with such member (notwithstanding the expiration of any written agency agreement) or to decline to renew any written agreement. 4.21 PROCESSES AND CUSTOMER LISTS. Each member of the Foster Grant Group has the right to use, free and clear of any material claims or rights of others, its customer lists and all material processes required for or incident to the distribution or marketing of products in connection with the Foster Grant Group. To the Seller's Knowledge, the Foster Grant Group is not using or in any way making use of any confidential information or trade secrets of any third party. 4.22 GENERAL REPRESENTATION. None of the information contained in this Agreement, the Financial Statements, or any of the related documents or schedules attached or related hereto is or will be materially false or misleading or contains any misstatement of fact or omits any fact necessary to be stated in order to make the statements herein or therein not misleading in any material respect. Neither the Seller nor any officer of the Foster Grant Group knows of any fact relating to the Foster Grant Group that has not been disclosed herein or in any document or schedule attached thereto or delivered in connection herewith and which has a Material Adverse Effect or materially and adversely affects the ability of the Seller to perform its obligations under this Agreement and related documents or to consummate the transactions contemplated herein. 4.23 NON-DISTRIBUTIVE INTENT. The Seller is acquiring the Preferred Stock for its own account (and not for the account of others) for investment and not with a view to the 25 30 distribution thereof. The Seller will not sell or otherwise dispose of such Preferred Stock without registration under the Securities Act of 1933, as amended (the "Securities Act"), or an exemption therefrom, and the certificate or certificates representing such Preferred Stock may contain a legend to the foregoing effect. The Seller understands that it may not sell or otherwise dispose of such Preferred Stock in the absence of either a registration statement under the Securities Act or an exemption from the registration provisions of the Securities Act. Nothing contained herein shall be deemed to preclude the Seller from disposing the Preferred Stock acquired by it under this Agreement in accordance with applicable federal and state securities laws. 5. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER. The Purchaser and AAi represent and warrant to the Seller as follows: 5.1 ORGANIZATION. The Purchaser and AAi are corporations duly organized, validly existing, and in good standing under the laws of the jurisdictions of their incorporation, with all requisite power and authority to own, lease, license, and use their properties and assets and to carry on the business in which they are now engaged and in which they contemplate engaging. 5.2 AUTHORIZATION OF TRANSACTION. The Purchaser and AAi have all requisite corporate power and authority to execute, deliver, and perform this Agreement. All necessary corporate proceedings of the Purchaser and AAi have been duly taken to authorize the execution, delivery, and performance of this Agreement by the Purchaser and AAi. This Agreement has been duly authorized, executed, and delivered by the Purchaser and AAi, is the legal, valid, and binding obligation of the Purchaser and AAi, and is enforceable in accordance with its terms, subject to bankruptcy, insolvency, reorganization, moratorium or other similar laws in effect relating to creditors rights generally, and the remedies of specific performance and injunctive and other forms of equitable relief may be subject to general principles of equity. 5.3 VALIDITY OF PREFERRED STOCK. Upon delivery to the Seller pursuant to the terms hereof, the Preferred Stock will be duly authorized, validly issued, fully paid and nonassessable, and the Seller will own the Preferred Stock free and clear of all liens, encumbrances, claims, charges or interests of others, subject to no restrictions with respect to transferability, other than applicable securities laws. At the Closing, the Purchaser's capital structure will be as described in detail in SCHEDULE 5.3 hereto, including (without limitation) a description of all classes of capital stock and their respective rights and numbers of shares authorized, issued and outstanding of each such class. Purchaser has not authorized or issued any other class of capital stock or any other instrument convertible into or exchangeable for capital stock of the Purchaser. There are no outstanding options, warrants or other rights granting any person a right to purchase or otherwise acquire capital stock of the Purchaser. 5.4 LITIGATION. No action, suit, claim, arbitration, proceedings or investigation is pending or, to the knowledge of the Purchaser or AAi, threatened which questions or 26 31 challenges the validity of this Agreement or any other agreement identified herein or any action taken or to be taken in connection with the transaction contemplated hereby or thereby. 5.5 NON-DISTRIBUTIVE INTENT. The Purchaser is acquiring the Shares for its own account (and not for the account of others) for investment and not with a view to the distribution thereof. The Purchaser will not sell or otherwise dispose of such Shares without registration under the Securities Act of 1933, as amended (the "Securities Act"), or an exemption therefrom, and the certificate or certificates representing such Shares may contain a legend to the foregoing effect. By virtue of its position, the Purchaser has access to the kind of financial and other information about the Foster Grant Group as would be contained in a registration statement filed under the Securities Act. The Purchaser understands that it may not sell or otherwise dispose of such Shares in the absence of either a registration statement under the Securities Act or an exemption from the registration provisions of the Securities Act. Nothing contained herein shall be deemed to preclude the Purchaser from disposing the Shares acquired by it under this Agreement in accordance with applicable federal and state securities laws. 5.6 NO CONFLICTS. No consent, authorization, approval, order, license, certificate, or permit of or form, or declaration or filing with, any federal, state, local, or other governmental authority or any court or other tribunal is required by the Purchaser or AAi for the execution, delivery, or performance of this Agreement by the Purchaser, other than the filings and approvals required by the Hart-Scott Rodino Antitrust Improvements Act of 1976. No consent of any party to any material contract, agreement, instrument lease, license arrangement, or understanding to which the Purchaser or AAi is a party, or to which any of their properties or assets are subject, is required for the execution, delivery, and performance of this Agreement by the Purchaser or AAi will not violate, result in a breach of, conflict with, or (with or without the giving of notice or the passage of time or both) entitle any party to terminate or call a default under any material contract, agreement, instrument, lease, license, arrangement, or understanding of the Purchaser or AAi; or violate or result in a breach of any term of the certificate of incorporation (or other charter document) or by-laws of the Purchaser or AAi; or violate, result in a breach of, or conflict with any law, rule, regulation, order, judgment, or decree binding on the Purchaser or AAi or to which any of their operations, business, properties or assets are subject. 5.7 BROKERS' FEE. No finder, broker, or similar agent has acted on behalf of, or has been retained by the Purchaser or AAi and no finder, broker or similar agent is entitled to any fee as a result of any of the transactions contemplated by this Agreement, which fee the Purchaser and AAi represent will be paid by the Purchaser or AAi, as the case may be. 5.8 INDEPENDENT INVESTIGATION. Purchaser and AAi, or their independent accountants, attorneys and agents acting on its behalf, (i) have reviewed the Financial Statements, and has had the opportunity to review information related to the Financial Statements, (ii) have reviewed the corporate records of the members of the Foster Grant Group, material 27 32 agreements and other information relating to the Foster Grant Group and such documents that have been made available to Purchaser or AAi by Seller and the Partnership in response to Purchaser's or AAi's due diligence requests, and (iii) have had the opportunity to ask questions of and receive such information from Seller and the Partnership, as well as the members of the Foster Grant Group, and their representatives, with respect to the Foster Grant Group and its business and operations, which Purchaser and AAi believe is material to their assessment of the Foster Grant Group and Purchaser's purchase of the Shares pursuant to this Agreement. Purchaser and AAi have (i) had access to the books and records, financial and otherwise, of the members of the Foster Grant Group and the Partnership, and have inspected such books and records as they have deemed appropriate in connection with their investigation of the Foster Grant Group, (ii) been afforded an opportunity to investigate and make inquiries regarding the condition of the members of the Foster Grant Group, the Partnership and the assets, financial and otherwise, of the Foster Grant Group, and in the course thereof has not received actual knowledge of any matters or things that are inconsistent with any representation or warranty of Seller contained in this Agreement or that may give rise to any liability on the part of Seller under the Agreement, and Purchaser and AAi are not relying on any representations (other than those contained in this Agreement), oral or otherwise, by Seller or any of its officers, employees, directors, shareholders, agents or representatives, in regard to the purchase of the Shares. 6. CONDITIONS TO THE OBLIGATIONS OF THE PURCHASER AND THE SELLER. 6.1 CONDITIONS TO THE OBLIGATIONS OF THE PURCHASER. The obligations of Purchaser and AAi under this Agreement are subject, at the option of the Purchaser and AAi, to the following conditions: (a) The representations and warranties of the Seller and the Partnership contained in this Agreement shall be true and correct in all material respects on and as of the Closing Date as though made on and as of such date, except for changes contemplated by this Agreement. (b) The Seller shall have performed and complied in all material respects with all covenants and agreements required to be performed or complied with by it on or prior to the Closing Date. (c) The parties to this Agreement shall have obtained at or prior to the Closing all consents required for the consummation of the transactions contemplated by this Agreement from any party to any contract, agreement, instrument, lease, license, arrangement, or understanding to which any of them is a party, or to which any of their respective businesses, properties, or assets are subject, except where the failure to obtain the same would not have a Material Adverse Effect. 28 33 (d) There shall not be any injunction, judgment, order, decree, ruling, or charge in effect preventing consummation of any of the transactions contemplated by this Agreement. (e) The Seller shall have delivered to Purchaser and AAi a certificate to the effect that each of the conditions specified above in Section 6.1(a)-(n) is satisfied in all material respects; provided, however, that with respect to the condition set forth in Section 6.1(c), the Seller shall only provide such certification with respect to those consents that the Seller or any member of the Foster Grant Group is required to obtain. (f) The Partnership shall have delivered to the Purchaser and AAi a certificate to the effect that the condition specified above in Section 6.1(a) is satisfied in all respects with respect to the Partnership. (g) The Seller shall have delivered to the Purchaser and AAi at the Closing: certified copies of each member of the Foster Grant Group's Certificate or Articles of Incorporation and By-laws; the partnership agreement; a good standing certificate from the Secretary of State of each state of incorporation of each member of the Foster Grant Group is incorporated, as of a date not more than thirty (30) business days prior to the Closing Date; original stock certificates or other evidences of equity ownership of each member of the Foster Grant Group. The Seller shall deliver at the Closing or thereafter: all stock books, minute books and corporate records of the Foster Grant Group; and all other material original agreements computer disks, documents, books and records relating to the Foster Grant Group and necessary to conduct the Foster Grant Group as currently or heretofore conducted. For the purposes of this paragraph, items described herein and located on the premises of the Partnership or any member of the Foster Grant Group shall be deemed delivered upon Closing by virtue of Purchaser taking control of such premises. (h) All directors of each member of the Foster Grant Group shall have resigned at or prior to the Closing as directors and members of all committees of the Board of Directors in writing effective immediately after the Closing. All non-employee officers of each member of the Foster Grant Group shall have resigned at or prior to the Closing in writing effective immediately after the Closing. (i) All applicable waiting periods in respect of the transactions contemplated under this Agreement under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 shall have expired at or prior to the Closing or there shall have been an early termination of such periods in accordance with the parties' (or their affiliates', as appropriate) request therefor. (j) AAi on the one hand and Marlin Capital, L.P. and its affiliates (jointly, "Marlin"), on the other shall, at or prior to the Closing, have executed and 29 34 delivered a Shareholder Agreement, containing terms and conditions mutually agreed by and among such parties, pursuant to which AAi and Marlin shall have each invested in Purchaser $5,000,000; and all such commitments shall have been fully funded on or before the Closing. (k) The parties to this Agreement shall have obtained at or prior to the Closing an agreement by and between Purchaser and Eyecare Products PLC ( the "Eyecare") granting Purchaser the right to purchase from Eyecare, for Fair Market Value, the trademarks assigned to Eyecare as provided under the terms and conditions set forth in the Trademark Assignment and Conditional Agreements between Kitty Little, plc and Bonneau (the "Agreements"), if at any time after the Closing (i) Seller has fewer than two (2) appointed individuals on the Eyecare board of directors or (ii) Seller's ownership interest in the issued and outstanding common stock of Eyecare decreases to less than ten percent (10%). No provision of this or any other agreement will in any way diminish any right held by Purchaser under the Agreements, and in particular no provision of this or any other agreement shall in anyway diminish the buy back rights provided to Bonneau in the Agreements. (l) At or prior to the Closing, a sales representative agreement by and between the Partnership and Jacobs Marketing, Inc., ("Jacobs") shall have been executed and a copy thereof delivered to Purchaser whereby the Partnership agrees to appoint and Jacobs agrees to act as the Partnership's exclusive sales representative to Target Stores division of Dayton Hudson Corporation under terms and conditions reasonably satisfactory to Purchaser. (m) The Seller shall have executed and delivered to Purchaser and AAi at or prior to the Closing a copy of a settlement and release by and between Oakley, Inc., Seller and Bonneau whereby the parties thereto forever discharge each other from any and all claims, complaints, causes of action, demands or liabilities with regard to the acts set forth in Civil Action No. 96-3420 B CGA, United District Court for the Southern District of California. (n) The Seller shall have delivered to Purchaser and AAi a letter from Seller's accountants to the effect that Seller's independent accountants agree to provide Purchaser and AAi with (i) stand alone audited consolidated financial statements for the Foster Grant Group for the years 1995 and 1996 and an estimate of the costs of such audits; and (ii) at the appropriate time in connection therewith, a written consent of such accountants to permit the Purchaser and AAi to use the stand alone audited financial statements described herein in any registration statements prepared in connection with an initial public offering by AAi, subject to being provided normal satisfaction from the "Big Six" accounting firm then auditing AAi. 30 35 (o) Michael A. Aviles, at or prior to the Closing, shall have executed and delivered to Purchaser an agreement modifying certain provisions of his Offer of Employment dated January 15, 1996, and any amendments thereto, and in particular such modifications shall include the re-defining of "severance" whereby Mr. Aviles shall not receive severance as a result of the consummation of the transaction contemplated hereby. (p) At or prior to the Closing, the Seller shall have delivered to the Purchaser and AAi a copy of the Finance and Security Agreement by and between the Partnership and NATIONSBANK, N.A. (the "Operating Loan"), and such agreement shall be in a form and of a substance reasonably satisfactory to the Purchaser and AAi, including (without limitation) the right to draw down not less than 19 million dollars at the Closing to be used towards the Purchase Price as set forth in this Agreement. (q) At or prior to the Closing, the Seller shall have delivered to the Purchaser a release of any and all obligations of the Partnership as set forth in the Deed of Trust and First Amendment to Loan Agreements dated May 3, 1996 by and between First Interstate Bank of Texas, N.A. (the "Bank"), BEC Group, Inc. and the Partnership. Such release shall be in form and substance reasonably satisfactory to the Purchaser and AAi. (r) At or prior to the Closing the Seller shall have delivered to the Purchaser a release from any and all liability and obligations of the Partnership under the Essilor Indemnity Agreement dated as of February 11, 1996 by and between Essilor International S.A. and BEC Group, Inc. to which the Partnership is a party. Such release shall be in form and substance reasonably satisfactory to the Purchaser and AAi. (s) The Purchaser and AAi shall have received from Kane Kessler, P.C. counsel for the Seller, a favorable opinion, dated as of the Closing Date and reasonably satisfactory in form and substance to AAi and AAi's counsel, to the effect as stated in 4.1, 4.2, and 4.6, as well as to the effect that the consummation by the Seller of the transactions contemplated by this Agreement and the documents described herein have been duly authorized by all necessary corporate action of the Seller. (t) At or prior to the Closing, the Partnership shall have conveyed the Dallas Property to the Seller (or its designee), and the Seller (or its designee) shall have assumed the existing mortgage on such Dallas Property; and Seller (or such designee) and the Partnership shall have executed and delivered a lease agreement, in accordance with Section 7.5 below, pursuant to which the Foster Grant Group shall lease its current premises located at the Dallas Property. 31 36 (u) Subject to Section 2.2 (iii), above, at or prior to Closing, all intercompany loans and advances existing among the Seller and the members of the Foster Grant Group shall have been forgiven and released in full. (v) At or prior to the Closing, AAi will have concluded discussions with HMG World Wide In Store Marketing, Inc. to the effect that the terms and provisions of the Display Purchase Agreement dated September 30, 1995 are in form and substance reasonably satisfactory to the Purchaser and AAi. 6.2 CONDITIONS TO THE OBLIGATIONS OF THE SELLER. The obligations of the Seller under this Agreement are subject, at the option of the Seller, to the following conditions: (a) The representations and warranties of the Purchaser and AAi contained in this Agreement shall be true and correct in all material respects on and as of the Closing Date as though made on and as of such date, except for changes contemplated by this Agreement. (b) The Purchaser and AAi shall have performed and complied in all material respects with all covenants and agreements required to be performed or complied with by it on or prior to the Closing Date. (c) There shall not be any injunction, judgment, order, decree, ruling, or charge in effect preventing consummation of any of the transactions contemplated by this Agreement. (d) The Purchaser and AAi shall have delivered to the Seller a certificate to the effect that each of the conditions specified above in Section 6.2(a)-(l) is satisfied in all material respects; provided, however, that with respect to the condition set forth in Section 6.2(c), the Purchaser shall only provide such certification with respect to consents the Purchaser is required to obtain. (e) The Purchaser and the Partnership shall have delivered the Purchase Price to the Seller. (f) The Purchaser shall have delivered to the Seller at the Closing: a certified copy of the Purchaser's Certificate or Articles of Incorporation and By-laws, and a good standing certificate from the Secretary of State of the Purchaser's state of incorporation, as of a date not more than thirty (30) business days prior to the Closing Date. (g) All applicable waiting periods in respect of the transactions contemplated under this Agreement under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 shall have expired at or prior to the Closing or there shall have been an early termination of such periods in accordance with the parties' (or their affiliates', as appropriate) request therefor. 32 37 (h) The Seller shall have received from Hinckley, Allen & Snyder, counsel for the Purchaser and AAi, a favorable opinion, dated as of the Closing Date and reasonably satisfactory in form and substance to Seller and Seller's counsel, to the effect as stated in 5.1, 5.2, and 5.3, as well as to the effect that the consummation by the Purchaser and AAi of the transactions contemplated by this Agreement and the documents described herein have been duly authorized by all necessary corporate action of the Purchaser and AAi. 7. COVENANTS AND AGREEMENTS OF THE PURCHASER AND THE SELLER. The Purchaser and the Seller covenant and agree with each other as follows: 7.1 CONFIDENTIALITY. (a) In order to consummate the transactions contemplated by this Agreement Confidential Information may be disclosed among the parties. Therefore, the Seller, on its own behalf and on behalf of each member of the Foster Grant Group, the Partnership, on its own behalf, and the Purchaser agree that in consideration of the other party's disclosure of Confidential Information the receiving party hereunder shall: (i) treat and safeguard such Confidential Information with at least the same degree of care as it normally exercises to protect its own confidential information but in no event with less than a reasonable degree of care; (ii) restrict disclosure of Confidential Information solely to its employees, advisors or representatives ("Representatives") with a need to know and not disclose such Confidential Information to any other parties; and (iii) use the Confidential Information provided hereunder only in connection with the performance of its duties hereunder and for no other purposes. (b) The parties agree that the foregoing restrictions shall not apply to information that: (i) is known by the recipient at the time of disclosure; (ii) is or becomes, through no fault of the recipient, available to the public; 33 38 (iii) is obtained by the recipient from a third party without breach of any agreement with, or obligation or confidentiality to the disclosing party; (iv) is independently developed by the recipient without use of Confidential Information received from the disclosing party; (v) is required by law or court order to be disclosed. If this Agreement is terminated for any reason whatsoever, each party shall (i) return to the other all tangible embodiments (and all copies) of such Confidential Information that are in its possession; (ii) not use any such Confidential Information in its own operations or (iii) not disclose any such Confidential Information to any Person for any purpose or reason whatsoever unless required to do so by law. Without limiting the generality of the foregoing, the existing Confidentiality Agreement between AAi and Seller, dated October 2, 1996, shall remain in full force and effect according to its terms. 7.2 BEST EFFORTS. Subject to the terms and conditions provided in this Agreement, each of the parties shall use their respective best efforts in good faith to take or cause to be taken as promptly as practicable all reasonable actions that are within its power to cause to be fulfilled each of the conditions precedent to its obligations or the obligations of the other parties to consummate the transactions contemplated by this Agreement that are dependent upon its actions, including obtaining all necessary consents, authorizations, orders, approvals and waivers. 7.3 OPERATION OF BUSINESS. The Seller and the Partnership, with respect to itself only, covenant with the Purchaser as follows: without the prior written consent of the Purchaser, between the date hereof and the Closing Date they shall not, in connection with the Foster Grant Group, cause or permit any member of the Foster Grant Group to, and no member of the Foster Grant Group shall in any material respect: (a) adopt, amend or modify any material employment or personnel contract or plan, or increase the level of compensation payable to any officer, director or employee of the Foster Grant Group, other than increases not greater than 4% annually over the current level of compensation and in accordance with past practice; (b) make any change in its authorized capital stock including, without limitation, any stock split or reclassification in respect of its outstanding capital stock, or declaration, payment or setting aside for payment of any dividend, fees, or other distribution, including the grant of any stock options, in respect of any of the Foster Grant Group's capital stock or any redemption, purchase or other acquisition of any shares of the capital stock or other securities of the Foster Grant Group; 34 39 (c) sell, transfer or otherwise dispose of any assets of the Foster Grant Group, except for sales of inventory in the Ordinary Course of Business consistent with past practices; (d) incur any obligation or liability (fixed or contingent) relating to the Foster Grant Group, except trade or business obligations incurred in the Ordinary Course of Business consistent with past practice; (e) cancel or compromise any material debt or claim, or waive or release any rights of value other than in the Ordinary Course of Business; (f) transfer, abandon, fail to maintain in good standing or grant any rights under or with respect to any material leases, licenses, agreements or Intellectual Property, or enter into any agreement limiting the Foster Grant Group's ability in any material respect to conduct its operations or distribute its products anywhere in the world; (g) issue, sell, or otherwise dispose of any shares of capital stock or any evidences of indebtedness or other securities (except extensions or renewals or replacements of evidences of indebtedness which extensions, renewals or replacements are issued in the Ordinary Course of Business consistent with past practice with respect to evidences of indebtedness reflected in the Financial Statements); (h) except as expressly contemplated hereby, amend articles of incorporation or bylaws or the partnership agreement; (i) enter into any material contract or arrangement other than in the Ordinary Course of Business; (j) fail to maintain the material properties and assets of the Foster Grant Group, whether owned or leased, in their current operating condition and repair, reasonable wear and tear excepted; (k) fail to maintain in full force and effect insurance for the Foster Grant Group providing coverage and amounts of coverage in accordance with its current and industry practice; (l) merge or consolidate with any other corporation or acquire any stock, business, or substantially all of the property or assets of any other Person; (m) do any act which, with or without the giving of notice or the passage of time, or both, would result in a material breach of or material default under any Contract required to be listed in SCHEDULE 4.8; 35 40 (n) enter into any material agreement or understanding to do any of the foregoing; or (o) do or omit to do anything else that has a Material Adverse Effect. 7.4 FULL ACCESS. The Seller shall permit and shall cause each member of the Foster Grant Group to permit representatives of the Purchaser and AAi to have reasonable access at all reasonable times, and in a manner so as not to unreasonably interfere with the normal business operations of the Foster Grant Group, to all premises, properties, personnel, personnel records (including tax records), contracts, and documents ("Records") of or pertaining to the Foster Grant Group. The Purchaser shall treat and hold such Records in accordance with the provisions of Section 7.1 hereof. 7.5 OCCUPATION OF THE DALLAS PROPERTY. The Purchaser and the Seller shall execute and deliver a Lease and Services Agreement, in form mutually agreed pursuant to which the Partnership shall occupy the space currently occupied by the Partner at the Dallas Property and pursuant to which the Seller shall provide the Partnership certain services to be agreed therein. 7.6 PAYMENT OF CERTAIN EMPLOYEE BONUSES. The Purchaser shall pay (or shall cause Foster Grant Group to pay), no later than April 30, 1997, up to $500,000 in the aggregate in bonuses to certain key employees, in accordance with Attachment II to SCHEDULE 4.15. 7.7 FURTHER ASSURANCES. At any time and from time to time, each party agrees, at its or his expense, to take such actions and to execute and deliver such documents as may be reasonably necessary to effectuate the purposes of this Agreement. 7.8 NAME CHANGE. On or before the Closing Date, Seller shall have effected a change of the corporate name of BEC Distribution, Inc. The Purchaser shall have designated a name of its choosing. In the event such name change has not been effected prior to Closing, the parities shall cooperate after the Closing to effect the name change. After the Closing Date or the Closing Date, whichever is earlier, the Purchaser, the members of the Foster Grant Group and the Partnership shall not have any right, title or other interest in or to the names "BEC", "Benson" or "Bolle" or any variations thereof or any names containing or incorporating such names. 7.9 BOLLE(R) BRAND. The Purchaser agrees for itself and on behalf of the members of the Foster Grant Group and the Partnership, from and after the Closing, not to copy, or to sell, market or otherwise distribute products copying Bolle(R) brand products in violation of any applicable statute, law, ordinance or regulation; provided, that the parties acknowledge and agree hereby that the Foster Grant Group and the Partnership may, notwithstanding anything contained in this Section 7.9 to the contrary, such, market and distribute any such product presently included in their product lines for the 1997 season. 36 41 7.10 NON-COMPETITION. The Seller hereby agrees that for a period of three (3) years from the Closing Date, neither the Seller nor any other individual, partnership, firm, corporation, association, trust, unincorporated organization or other entity that directly or indirectly controls or is controlled by the Seller shall directly or indirectly engage in, own, manage, operate, join, assist, advise or control, any person, corporation or entity engaged in a business directly competitive with the Foster Grant Group as it exists as of the Closing Date. Notwithstanding anything contained herein to the contrary, (i) The restrictions set forth herein shall not apply to or to be deemed in any way to restrict the existing business, as of the Closing Date, of Seller Bolle(R) America, Inc.; Optical Radiation Corporation; or Eyecare Products, PLC; and (ii) The following shall not be deemed to be in violation of the above restrictions: (1) ownership of publicly traded securities having no more than 5% of the outstanding voting power of any competitive entity, or (2) any association by the Seller or any of its affiliates subsequent to the Closing Date which results from the acquisition by the Seller or any of its affiliates of an entity who is engaged in a business directly competitive with the Foster Grant Group, if such entity's gross revenues resulting from such competitive activities are less than $10,000,000 per year. 7.11 INCOME TAXES AND INCOME TAX PREPARATION. (a) The companies making up the Foster Grant Group shall be included in the consolidated federal Income Tax Return filed by the Seller for the period from January 1, 1996 through the end of the day on the Closing Date, and Seller shall be responsible for making all required Income Tax payments for such period pursuant to such consolidated Income Tax Return. The parties agree that for the purpose of preparing such consolidated federal Income Tax Return, as well as any Income Tax Returns for which the taxable year does not close at the end of the day on the Closing Date, there will be an interim closing of the books of the members of the Foster Grant Group and of the Partnership as of the end of the day on the Closing Date and all payments (if any) representing cancellation of options to purchase shares of the Seller held by Foster Grant Group employees shall be treated as extraordinary items within the meaning of Reg. Section 1.1502-76(b)(2)(ii)(C) which shall be allocated to the period ending at the end of the day on the Closing Date for all tax purposes. (b) Seller shall be responsible for the preparation and filing of all Income Tax Returns in respect of federal and state income taxes for the Foster Grant Group, the Partnership or any member of the Foster Grant Group for taxable years or 37 42 periods ending on or before the end of the day of the Closing Date and shall be responsible for the payment of any Income Taxes. The Seller shall also be responsible for preparing and filing the Partnership's 1996 calendar year federal, state and local Income Tax Returns. The Purchaser shall be responsible for the preparation and filing of any other federal, state and local Income Tax Returns for the Foster Grant Group, the Partnership, or the members of the Foster Grant Group for periods beginning after the Closing Date. (c) With respect to any period beginning before and ending after the Closing Date, the determination of income, losses and taxes for the portion of the year or period ending on, and the portion of the year or period beginning after, the Closing Date shall be made by an interim closing of the books at the end of the day of the Closing Date, except that extraordinary items shall be allocated in accordance with the principles of Reg. Section 1.1502-76(b)(2)(ii)(C) and that any exemptions, allowances or deductions that are calculated on a calendar year basis and annual property taxes shall be prorated on the basis of the number of days in the calendar year elapsed through the Closing Date as compared to the number of days in the calendar year elapsing after the Closing Date. All such Income Tax Returns shall be prepared in accordance with prior practice. Any taxes due with respect to any such periods shall be pro rated in accordance with the interim closing of the books as herein provided. In addition, notwithstanding anything to the contrary contained herein, the Seller shall prepare the 1996 calendar year Income Tax Return of the Partnership on the basis of an interim closing of the books at the end of the day of the Closing Date and based on a package of Income Tax information provided by Purchaser covering the period from the day after the Closing date through the end of the calendar year 1996 and delivered to Seller no later than forty-five (45) days after the end of the calendar year 1996. Except as indicated above, such package shall be completed in accordance with the past practice of the Seller as to the method of computation of taxable income and other relevant measures of income. (d) At least thirty (30) days prior to the due date (including extensions) for the filing of Seller's 1996 consolidated federal Income Tax Return, Seller shall provide Purchaser, for its approval and the signature (with respect to the Partnership income tax return) of the appropriate officers or partners, copies of the Seller's 1996 consolidated federal income tax return and the Partnership's 1996 calendar year Income Tax Return or Returns. No later than thirty (30) days before the due date thereof, Purchaser shall provide Seller, for its approval, copies of all other Income Tax Returns for which Seller may have an obligation for a portion or all of the Incomes Taxes shown thereon. Approval by either party shall not be unreasonably withheld, and signed Returns shall be returned no less than fifteen (15) days prior to the due date; notwithstanding the foregoing, the Purchaser's right to approve the Seller's 1996 consolidated Income Tax Return shall be limited to those items included therein which relate directly to the Foster Grant Group or any member thereof. No later than 5 business days before the due date for 38 43 payments of Income Taxes with respect to any such Income Tax Return prepared by Purchaser but for which Seller has an obligation for a portion or all of the Income Taxes shown thereon, Seller shall pay to Purchaser an amount equal to the Income Taxes agreed to be allocable to Seller pursuant to this Agreement, if any. (e) In addition to the foregoing, the parties agree to cooperate with each other in the preparation of any Income Tax Return and in the conduct of any audit or other proceedings involving the Foster Grant Group or any member thereof, and to provide each other such assistance and documents as may be reasonably requested in connection with the preparation of any return or the conduct of any audit or other proceeding. The provisions of Section 8.4 shall apply to any audit or contest of any Income Tax Return. (f) The Purchaser will not, nor will it permit members of the Foster Grant Group, to make any changes in Income Tax accounting methods or conventions, make or rescind any election, or report or treat any specified item on any Income Tax Return for any taxable period ending after the Closing Date in a manner inconsistent with the manner in which such specific item was reported or treated on any such Income Tax Return for a taxable period ending on or prior to the Closing Date, if such action would have an effect of either increasing the Income Tax liability or reducing the Income Tax benefits of the Foster Grant Group on or prior to the Closing Date or of the Seller for any taxable period. The Purchaser agrees that any sales of assets by the Foster Grant Group after the Closing Date but before the end of the calendar year shall be treated as an extraordinary item for Income Tax purposes. (g) If Purchaser or any member of the Foster Grant Group receives any refund of Income Taxes or utilizes the benefit of any overpayment of Income Taxes which relates to an income Tax paid by Seller or the Foster Grant Group with respect to a period ending on or prior to the Closing Date, the Purchaser shall make a payment to Seller at the time of and equal to the amount of the refund or overpayment utilized. Purchaser agrees, that without the express permission of Seller, it will not carry back to periods ending on or before the Closing Date any loss or credit recognized by the Foster Grant Group subsequent to the Closing Date. (h) In addition to (and not in limitation of) the indemnities provided in Section 8, Seller shall indemnify and save Purchaser and AAi harmless from any and all Taxes imposed on Purchaser or AAi either (i) arising as a result of the transactions contemplated by this Agreement; (ii) with respect to or relating to any period ending on or before the Closing Date, or, in the case of any taxable period that includes, but does not end on, the Closing Date, the portion of said period ending on the Closing Date; (iii) resulting from any member of the Foster Grant Group ceasing to be affiliated with Seller; and (iv) attributable to Seller for any taxable period. 39 44 (i) Notwithstanding anything contained in this Agreement to the contrary, the Seller shall have the benefit (without reimbursement to the Partnership) of any tax losses through the Closing Date, other than tax loss carry-forwards not utilized as of such Closing Date. 7.12 CHARACTERIZATION OF CERTAIN PAYMENTS. All payments paid by the Seller or the Purchaser under Sections 2.2 and 7.11 and Section 8 shall be treated for all tax purposes as adjustments to the Purchase Price. 7.13 INVENTORY PRICE ADJUSTMENT. If the Purchaser or the Foster Grant Group (as the case may be) has not realized, and is not reasonably in a position to realize, within two (2) years from the Closing Date at least $15,355,000 from the inventory appearing on the September 30, 1996 Balance Sheet, the Seller will promptly pay the Purchaser the difference in cash; any amount due hereunder may be offset against the redemption of the Preferred Stock. 7.14 CERTAIN EMPLOYEE BENEFITS. (a) Notwithstanding anything contained in this Agreement to the contrary, the Seller hereby acknowledges that the Purchaser is not acquiring and shall not assume sponsorship of any Employee Benefit Plan maintained by the Seller and in which employees of the Foster Grant Group, the Partnership or any members of the Foster Grant Group participate, including (without limitation) the BEC Group, Inc. 401(K) Retirement Plan and any group health and welfare insurance plans sponsored by the Seller. (b) Effective on the Closing Date, all employees of the Foster Grant Group, the Partnership and the members of the Foster Grant Group shall cease to be active participants in the BEC Group, Inc. 401(k) Retirement Plan (the "401(k) Plan"), and they shall be fully vested in their account balances under the Plan without regard to their years of service under the Plan. The parties acknowledge and agree that Seller shall, to the extent permitted by applicable law and the effective terms and conditions of any such Employee Benefit Plan other than the 401(k) Plan, permit employees of the Foster Grant Group, the Partnership and the members of the Foster Grant Group to participate in existing health and welfare Employee Benefit Plans after the Closing Date for a reasonable transition period, provided, that the Purchaser hereby agrees to reimburse Seller any and all extraordinary, out-of-pocket or other costs or expenses incurred by Seller as a result of or in connection with the participation of any such employees in any such Employee Benefit Plans, and the Purchaser (for itself and, after the Closing Date, on behalf of the Foster Grant Group, the Partnership and the members of the Foster Grant Group) agrees that it (or such entities, as appropriate) shall be solely responsible for all employer contributions, costs, or other expenses relating to or resulting from the participation of any such employees. 40 45 (c) From and after the Closing Date, the Purchaser and the Foster Grant Group shall be solely responsible for (i) health insurance coverage with respect to any former employee of the Foster Grant Group, the Partnership or any member of the Foster Grant Group who (1) has in place, as of the Closing Date, a valid health care contribution election pursuant to Section 601 ET SEQ. of ERISA (known as "COBRA") or (2) has retired from the employ of any such entities and is entitled to coverage under any retiree or other medical plan, policy or arrangement. (d) Nothing herein contained shall serve as a guarantee to any of the individuals referred to in Section 7.14 (c) above with regard to any health insurance coverage other than health insurance coverage available to persons actively employed by the Purchaser or AAi. 7.15 HART- SCOTT RODINO The Purchaser and the Seller shall execute all filings required under the Hart- Scott Rodino Anti Trust Improvements Act of 1976 prior to the Closing. The Parties agree that any and all fees associated with such filings, excluding attorneys fees, shall be borne equally by the Purchaser and the Seller and each party agrees to submit its respective portion of the fee upon filing its submission. 7.16 RELEASE OF GUARANTIES. From and after the Closing Date, the Purchaser shall cooperate, and shall cause the Foster Grant Group, to provide the Seller reasonable assistance in obtaining the release of any guaranties by Seller or its predecessor, Benson Eyecare Corporation, of obligations of the Foster Grant Group or any of its members. The Purchaser or the Foster Grant Group agrees to provide equivalent guaranties, to the extent reasonably requested. The Seller shall reimburse any direct out-of-pocket expenses and costs incurred as a result of cooperation provided under this Section 7.16. 8. INDEMNIFICATION. 8.1 BY THE SELLER. The Seller and its respective successors and permitted assigns agree to indemnify the Purchaser and AAi (including each of their employees, directors and officers and agents), and any permitted successor or assignee of the Purchaser and AAi, to hold each of them harmless from and against any and all actual costs, losses, claims, obligations, liabilities, fines, penalties, damages, deficiencies, actions, suits, proceedings, demands, assessments, orders, judgments, costs and expenses, including fees, disbursements and expenses of attorneys, accountants and consultants of any kind or nature whatsoever (whether or not arising out of third-party claims and including all amounts paid in investigation, defense or settlement of the foregoing) sustained, suffered or incurred by any of them (hereafter, an "Indemnified Loss") in connection with, or incident to: (a) Conditions, circumstances or occurrences which constitute or result in any breach of any representation, warranty or covenant of the Seller on its own behalf or on behalf of any member of the Foster Grant Group contained in this 41 46 Agreement or in any agreement, Schedule or Exhibit referred to herein or attached hereto, or in the Financial Statements or in any other certificate or related document delivered at or prior to the Closing, or by reason of any claim, action or proceeding asserted or instituted arising out of any matter or thing covered by any such representations, warranty or covenants made by the Seller; (b) Any liabilities arising out of the Excluded Liabilities. Provided, however, that no indemnification shall be payable with respect to claims asserted by the Purchaser to the extent the Indemnified Parties have insurance that would cover such Indemnified Losses. 8.2. BY THE PURCHASER AND AAI. The Purchaser and AAi agree to indemnify the Seller (including its employees, directors and officers), and any other permitted successor or assignee of the Seller, to hold harmless from and against any and all Indemnified Losses incurred by any of them in connection with, or incident to: (a) conditions, circumstances or occurrences which constitute or result in any breach in any representation, warranty, covenant or agreement of the Purchaser contained in this Agreement or in any Schedule or Exhibit referred to herein attached hereto, or in any agreement referred to herein or in any schedule, certificate or other related document delivered at or prior to the Closing, or by reason of any claim, action or proceeding asserted or instituted arising out of any matter or thing covered by any such representations, warranty or covenants made by the Purchaser or AAi (other than as a result of a breach or violation actually known to the Indemnified Party, hereafter defined, prior to the Closing). (b) any failure by the Purchaser, or, after the Closing Date, by any member of the Foster Grant Group or the Partnership, to pay amounts due third parties or other indebtedness, or otherwise arising from or relating to (i) obligations or liabilities of the members of the Foster Grant Group or the Partnership (other than the Excluded Liabilities) or (ii) the liabilities described in Section 2.6, above. Provided, however, that no indemnification shall be payable with respect to claims asserted by the Seller to the extent the Indemnified Parties have insurance that would cover such Indemnified Losses. 8.3 LIMITATIONS. (a) No indemnification shall be payable by either party through claims asserted by an Indemnified Party more than two (2) years after the Closing Date, other than indemnification claims based upon Income Tax liabilities of the Foster Grant Group, with respect to which the Seller's obligation to indemnify shall extend until the applicable statutes of limitations on enforcement thereof has expired, but in no event more than seven (7) years after the Closing Date, or until the conclusion of 42 47 any proceeding commenced within such period. Seller and Purchaser, respectively, shall not be liable for indemnification under Section 8.1(a) or Section 8.2(a) unless and until the aggregate amount of Indemnified Loss for the Indemnified Party under the appropriate Section referred to above shall equal or exceed $250,000 (the "Threshold"), and in no case shall either party assert any claim for indemnification under this Article 8 for any Indemnified Loss included within such party's Threshold; provided, that, notwithstanding anything contained in the foregoing to the contrary, the Threshold shall not apply in the case of an Indemnified Loss described in Section 8.1(b) or Section 8.2(b). Notwithstanding anything contained in this Agreement to the contrary, in no event shall Seller be liable for any Indemnified Losses in excess of the Purchase Price, as adjusted pursuant to this Agreement. (b) Notwithstanding anything contained in this Article 8 to the contrary, the parties have agreed to share in the Litigation Costs as set forth more fully in Section 2.4(b), above. Such agreed cost sharing shall apply with respect to such Litigation Costs and the Litigation Liabilities, and neither party shall assert a claim for indemnification under this Article 8 unless and until the other party shall have failed to perform its obligations under such Section 2.4, in which case the Threshold provided in Section 8.3(a), above, shall not apply; or, in the event aggregate Litigation Costs exceed $500,000, in which case Purchaser may assert a claim for indemnification hereunder and the Threshold provided in Section 8.3(a) shall not apply. 8.4 INDEMNITY PROCEDURES. (a) Any party entitled to indemnification hereunder ("Indemnified Party") shall give prompt, written notice to the other party ("Indemnifying Party") of any claim hereunder specifying the amount and nature of the claim. The failure to so notify an Indemnifying Party will not relieve the Indemnifying Party of any liability that it may otherwise have under this Agreement, unless such failure materially and adversely prejudices the Indemnifying Party; (b) The Indemnifying Party shall have the right to take such action as in its judgment is necessary or desirable to contest any matter involving a third party that gives rise to an Indemnified Loss and shall conduct at its expense the defense, by counsel mutually and reasonably satisfactory to the parties, of any claim or legal proceeding commenced by a third party insofar as it relates to an Indemnified Loss; (c) The Indemnified party will not pay or satisfy any obligation constituting and Indemnified Loss if it is advised in writing that such amount is being contested in good faith by the Indemnifying Party, and if and so long as the Indemnifying Party in fact actively contests the same, or, in the case of a proceeding described in clause (b) above, actively defends the same as set forth in (b) above. No 43 48 settlement of any such proceeding shall be made without the consent of the Indemnifying Party, which consent will not be unreasonably withheld, delayed or conditioned. The Indemnified Party shall have the right to participate in (but not to control, unless the Indemnified Party, after receiving notice of a claim, has failed to take any action with respect to such claim) the defense of any such legal proceeding at its expense by counsel of its choice and shall cooperate in the defense of any such claim (including providing such access to its books, records and properties as the Indemnifying Party shall reasonably request with respect to any matter for which indemnification is sought hereunder), but shall be entitled to be reimbursed as provided herein for all costs and expenses (including reasonable attorney's fees) incurred in connection with cooperation furnished at the request of the Indemnifying Party. The parties shall use all reasonable efforts to resolve equitably and expeditiously any dispute between them as to an Indemnified Loss, pursuant to Section 8.1 hereof. (d) With regard to claims of third parties for which indemnification is payable hereunder, such indemnification shall be paid the Indemnifying Party upon the earlier to occur of: (1) the entry of a judgment against the Indemnified Party and the expiration of any applicable appeal period, or if earlier, five (5) days prior to the date that the judgment creditor has the right to execute the judgment; (2) the entry of an unappealable judgment or final appellate decision against the Indemnified Party; or (3) a settlement of the claim. With regard to other Indemnified Losses payable hereunder, such indemnification shall be paid promptly by the Indemnifying Party upon demand by the Indemnified Party. 9. MISCELLANEOUS. 9.1 PUBLIC STATEMENTS. Except as may be required by law, or as otherwise provided under Section 7.1 of this Agreement, before any party hereto shall release any information concerning this Agreement that is intended for or may result in public dissemination thereof, they shall cooperate with the other party hereto, shall furnish drafts of all documents or proposed oral statements to each other for comments, and shall not release any such information without the consent of the other party hereto, which consent shall not be unreasonably withheld. Nothing contained herein shall prevent any party from furnishing any information required by law, rule or regulation, including the rules of a national securities exchange; or to any governmental authority if required to do so by law or court order. 9.2 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS. All representations, warranties and covenants herein or in any attached schedule, certificate, statement or other supporting document shall be deemed to have been relied upon by the party in whose favor such provisions operate and, subject to applicable time and recovery limitations thereon in Section 8 hereof, shall survive the execution and delivery of this Agreement and the Closing Date and continue in full force and effect regardless of any investigation made by or on behalf of such party at any time, except to the extent that a party had actual, 44 49 specific knowledge of a breach or violation thereof prior to the Closing Date, which the party alleging such knowledge must prove by a preponderance of the evidence. 9.3 NO THIRD-PARTY BENEFICIARIES. This Agreement shall not confer any rights or remedies upon any person other than the parties hereto and the Indemnified Parties and their respective successors and permitted assigns and other than the Foster Grant Group employees identified pursuant to the Schedules hereto as intended recipients of certain bonuses pursuant to Section 7.6 hereto. 9.4 ENTIRE AGREEMENT. This Agreement, including the Schedules, Exhibits and other documents attached hereto and referred to herein, constitutes the entire agreement among the parties and supersedes and prior understandings, agreements, or representations by or among the parties, written or oral, to the extent they have related in any way to the subject matter hereof. 9.5 SUCCESSION AND ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of and be binding upon the parties named herein and their respective successors (including, without limitation, successors by operation of law) and permitted assigns. No party may assign either this Agreement or any of its rights, interests, or obligations hereunder, except to a wholly-owned subsidiary, without the consent of the other party, which shall not be unreasonably withheld. 9.6 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument. 9.7 HEADINGS AND RECITALS. The section Headings and Recitals contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement. 9.8 NOTICES. All notices, requests, demands, claims, and other communications hereunder will be in writing. Any notice, request, demand, claim, or other communication hereunder shall be deemed duly given if it is sent by registered or certified mail, return receipt requested, postage prepaid, and addressed to the intended recipient as set forth below: If to the Seller: BEC Group, Inc. 555 Theodore Fremd Avenue Suite B-302 Rye, New York 10580 Telecopier: (914) 967-9405 Attn: Martin Franklin, CEO 45 50 with a copy to: Kane Kessler, P.C. 1350 Avenue of the Americas New York, New York 10019-4896 Attn: Robert Lawrence If to the Purchaser: Foster Grant Holdings, Inc. 1601 Valley View Lane Dallas, Texas 75234 Attn: Duane DeSisto with a copy to: Stephen J. Carlotti, Esq. Hinckley, Allen & Snyder 1500 Fleet Center Providence, Rhode Island 02903 If to AAi: Accessories Associates, Inc 500 George Washington Highway Smithfield, Rhode Island 02917 Attn: Gerald F. Cerce with a copy to: Stephen J. Carlotti, Esq. Hinckley, Allen & Snyder 1500 Fleet Center Providence, Rhode Island 02903 Any party may send any notice, request, demand, claim, or other communication hereunder to the intended recipient at the address set forth above using any other means (including personal delivery, expedited courier, messenger service, telecopy, telex, ordinary mail, or electronic mail), but no such notice, request, demand, claim, or other communication shall be deemed to have been duly given unless and until it actually is received by the intended recipient. Any party may change the address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving the other parties notice in the manner herein set forth. 46 51 9.9 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the internal substantive laws of the State of New York, without regard to its principles of conflicts of law. 9.10 AMENDMENTS AND WAIVERS. No amendment of any provision of this Agreement shall be valid unless the same shall be in writing and signed by authorized representatives of the Purchaser, AAi and the Seller. No waiver by any party or any default, [THIS SPACE INTENTIONALLY LEFT BLANK] 47 52 misrepresentation or breach of warranty or covenant hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent default, misrepresentation, or breach of warranty or covenant hereunder or affect in any way any rights incorporated herein by reference and made a part hereof. 9.11 SEVERABILITY. Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. 9.12 AGREEMENTS, DOCUMENTS AND INSTRUMENTS. Unless otherwise expressly provided or unless the context requires otherwise, references to any agreement, document or instrument shall be deemed to mean and include such agreement, document or instrument as amended, modified or supplemented from time to time in accordance with the terms hereof. 9.13 EXPENSES. Except as expressly provided in Section 7.15, above, each party agrees to pay, without right of reimbursement from the other party, the costs incurred by it incident to the performance of its obligations under this Agreement and the consummation of the transactions contemplated hereby, including, without limitation, costs incident to the preparation of this Agreement, and the fees and disbursements of counsel, accountants and consultants employed by such party in connection herewith. 9.14 AAI GUARANTY. AAi hereby guarantees the full and complete performance by the Purchaser of all of the Purchaser's obligations under this Agreement, subject to the terms and conditions contained herein. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first written above. FOSTER GRANT HOLDINGS, INC. By: /s/ Duane DeSisto ------------------------------------- Title: Treasurer ----------------------------------- BEC GROUP, INC. By: /s/ Martin Franklin ------------------------------------- Title: Chairman ----------------------------------- 48 53 FOSTER GRANT GROUP, L.P. By: /s/ Martin Franklin ------------------------------------- Title: ---------------------------------- ACCESSORIES ASSOCIATES, INC. By: /s/ Duane DeSisto ------------------------------------- Title: Chief Financial Officer ---------------------------------- 49 54 SCHEDULE 5.3 CAPITAL STRUCTURE Class A Preferred Non-Voting Stock: Voting Rights: None Dividend Rights: None Convertible: No Redemption Date: February 28, 2000 Redemption Pay-Out: Will be redeemed by the Purchaser by payment of an amount determined with reference to the combined net sales of sunglasses, reading glasses and accessories by the Foster Grant Group and AAi for the year ending December 31, 1999, determined in accordance with generally accepted accounting principles consistently applied and excluding an amount equal to the net sales determined in accordance with generally accepted accounting principles consistently applied, by AAi of such products for the year ending December 31, 1996, as follows:
FOSTER GRANT GROUP NET SALES: REDEMPTION AMOUNT: ----------------------------- ------------------ $90,000,000 or less: $1,000,000 > $100,000,000: $2,000,000 > $110,000,000: $4,000,000 > $120,000,000: $6,000,000
The amount payable by Purchaser shall be prorated for net sales between the targets specified above. Optional Payment: AAi will agree that Seller may, at its option, exchange the Preferred Stock for shares of AAi common stock in the event AAi completes an initial public offering ("IPO") at any time within three (3) years of the Closing Date. The Seller shall have sixty (60) days from the date of the closing of the IPO in which to exchange the Preferred Stock. In the event that the Seller shall fail to exchange the Preferred Stock in accordance with the terms of this Optional Payment, then the Seller shall forever forfeit the right and privilege to effect such exchange. The number of shares to be issued by AAi upon such exchange shall be equal to the maximum potential Redemption Pay-Out divided by the per share initial offering price, multiplied by .85. Any AAi shares so issued will be restricted securities. AAi will afford the holder "piggyback" registration rights. Common Stock: Ten thousand (10,000) shares of common stock, par value of $.01 per share. 55 Exhibit 10.3 BEC Group, Inc. 555 Theodore Fremd Avenue Suite B-302 Rye, New York 10580 December 11, 1996 Accessories Associates, Inc. 500 George Washington Highway Smithfield, RI 02917 Gentlemen: Reference is made to that certain Stock Purchase Agreement dated November 13, 1996 (the "Purchase Agreement") amongst BEC Group, Inc., Foster Grant Holdings, Inc., a Delaware corporation ("Holdings") and Accessories Associates, Inc., a Rhode Island corporation ("AAI"), and certain other persons, whereby Holdings acquired all the issued and outstanding capital stock as well as partnership interests in certain subsidiaries and affiliates of BEC. The Purchase Agreement contemplated, and had as a condition to closing, a satisfactory bank loan and security agreement amongst Holdings and its subsidiaries and NationsBank, as agent for certain lenders (the "Financing Agreement"). Capitalized terms contained herein referring to the Financing Agreement shall have the same meaning as set forth in the Financing Agreement. Section 2.l.1(c) of the Financing Agreement provides that the Borrowers therein will have the right to an over-advance of $2,000,000 for a limited period of time provided that the Borrowers shall have caused to be provided to the Agent a $2,000,000 irrevocable letter of credit in the form of Exhibit F to the Financing Agreement. In order to induce you to close the transactions contemplated by the Purchase Agreement, we agree that at your request if you require the use of the over-line, we will provide to NationsBank one or more letters of credit at no cost and expense to you in the amount of the over-line drawing in the aggregate not to exceed $2,000,000 in the form of Exhibit F to the Financing Agreement within five (5) days of receipt of written notice from you. As part of the Purchase Agreement, you have delivered to us 100 shares of the Series A Preferred Stock of Holdings. We agree that in the event that we shall fail to provide the letters of credit as aforesaid, we will forthwith return all shares of Series A Preferred Stock to you endorsed to the bank for transfer or with blank stock powers attached, and we will 56 thereby forfeit our interest in said Preferred Stock. You shall have the right to specific performance to enforce the provisions requiring return of such Preferred Stock if we fail to do so after being requested to do so under this Agreement. If the foregoing is satisfactory to you, please acknowledge your acceptance of this Agreement on the copy of this letter which is enclosed. Very truly yours, BEC Group, Inc. By: /s/ Ian Ashken ----------------------------------- Accepted: Foster Grant Holdings, Inc. By: /s/ Duane DeSisto --------------------------- Accessories Associates, Inc. By: /s/ Duane DeSisto --------------------------- Enclosure EX-10.4 29 SECURITIES PURCHASE AGREEMENT 1 - -------------------------------------------------------------------------------- EXHIBIT 10.4 SECURITIES PURCHASE AGREEMENT Among ACCESSORIES ASSOCIATES, INC. WESTON PRESIDIO CAPITAL II, L.P. AND CERTAIN OTHER INVESTORS As of May 31, 1996 - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS 1. DEFINITIONS.................................................................1 2. SALE AND PURCHASE OF SECURITIES.............................................7 2.1. Investor Securities....................................................7 2.2. Agreement to Sell and Purchase.........................................8 2.3. Closing................................................................8 2.4. Use of Proceeds........................................................8 3. CONDITIONS TO PURCHASE......................................................8 3.1. Investor Agreements....................................................9 3.2. Accountants Report.....................................................9 3.3. Legal Opinion..........................................................9 3.4. Representations and Warranties; Officer's Certificate..................9 3.5. Issuance of Investor Securities........................................9 3.6. SBA Compliance.........................................................9 3.7. Key Executive Insurance...............................................10 3.8. Legality; Governmental Authorization..................................10 3.9. General...............................................................10 4. REPRESENTATIONS AND WARRANTIES.............................................10 4.1. Material Agreements...................................................10 4.2. Organization and Subsidiaries; Business...............................11 4.2.1. The Company......................................................11 4.2.2. Subsidiaries.....................................................11 4.2.3. Conduct of Business..............................................11 4.3. Capitalization........................................................11 4.3.1. Capital Stock of the Company.....................................12 4.3.2. Options, etc.....................................................12 4.3.3. Capital Stock of the Subsidiaries................................12 4.3.4. Subsidiary Options, etc..........................................12 4.4. Reports, Financial Statements and Other Documents.....................12 4.5. Changes in Condition..................................................13 4.5.1. Material Adverse Effect..........................................13 4.5.2. Extraordinary Transactions, etc..................................13 4.6. Solvency..............................................................14 4.7. Contractual Obligations, etc..........................................14 4.7.1. Certain Contracts................................................14 4.7.2. Nature of Contracts..............................................15 4.7.3. Charter or By-Laws...............................................15 4.7.4. Insurance........................................................15 4.7.5. Transactions with Affiliates.....................................15 4.8. Operations in Conformity With Law, etc................................15 4.9. Environmental Matters.................................................16 4.10. Employee Benefit Plans...............................................16 4.11. Labor Relations......................................................16 4.12. Taxes................................................................17 4.13. Litigation...........................................................17 4.14. Violation of Other Instruments.......................................17 4.15. Filings, Broker's Fees, etc..........................................18 4.16. SBA Matters..........................................................18 4.17. Governmental Regulation..............................................18 4.18. Margin Stock.........................................................18 4.19. Real Property Holding Corporation....................................18 4.20. Disclosure...........................................................18 -i- 3 5. GENERAL COVENANTS..........................................................18 5.1. Covenants Relating to the Company's Board of Directors................18 5.1.1. Board of Directors.................................................19 5.1.2. Directors Expenses.................................................19 5.1.3. Indemnity..........................................................19 5.2. Information and Reports to be Furnished...............................19 5.2.1. Annual Statements..................................................19 5.2.2. Quarterly Reports..................................................20 5.2.3. Monthly Reports....................................................20 5.2.4. Annual Budgets.....................................................20 5.2.5. Officers' Certificates.............................................20 5.2.6. Notice of Litigation, Defaults, etc................................20 5.2.7. Notices under Material Agreements..................................21 5.2.8. Information Provided to Stockholders...............................21 5.2.9. Information Provided to Banks......................................21 5.2.10. Other Information.................................................21 5.2.11. Interview Rights..................................................21 5.3. Conduct of Business...................................................21 5.3.1. Type of Business.................................................21 5.3.2. Maintenance of Properties, etc...................................22 5.3.3. Compliance with Laws.............................................22 5.3.4. Insurance........................................................22 5.3.5. Foreign Qualification............................................22 5.4. Charter Amendment, etc................................................22 5.5. Merger, Consolidation and Sale of Assets..............................23 5.6. Indebtedness..........................................................23 5.7. Guarantees............................................................23 5.8. Liens.................................................................24 5.9. Investments and Acquisitions..........................................25 5.10. Distributions........................................................25 5.11. Capital Expenditures.................................................26 5.12. Lease Obligations....................................................26 5.13. Compensation, etc....................................................26 5.14. Stock Issuance, Etc..................................................27 5.15. Closing Costs........................................................27 5.16. Amendment of Material Agreements, etc................................27 5.17. Replacement of Chief Executive.......................................27 5.18. Ownership of Subsidiary Stock........................................28 5.19. Transactions with Affiliates........................................28 5.21. SBA Requirements.....................................................28 5.21.1. Information......................................................28 5.21.2. Compliance; Rescission Right.....................................28 5.22. Annual Meeting.......................................................29 5.23. Listing of Shares....................................................29 5.24. Real Property Holding Corporation...................................29 5.25. Regulatory Compliance Cooperation....................................29 6. INVESTOR SECURITIES; RESTRICTIONS ON TRANSFER.............................30 6.1. Representations and Warranties of the Investors.......................30 6.2. Home Office Payment...................................................31 6.3. Replacement of Lost Securities........................................31 6.4. Transfer, Exchange and Conversion of Capital Stock....................31 6.5. Restrictions on Transfer.................................................32 -ii- 4 6.5.1. Restrictive Legend..................................................32 6.5.2. Transfer Restrictions; Notice of Proposed Transfer; Opinions of Counsel................................................32 6.5.3. Termination of Restrictions........................................33 7. EXPENSES, ETC..............................................................33 7.1. Expenses.............................................................33 7.2. Indemnification......................................................33 7.3. Survival.............................................................34 8. NOTICES....................................................................34 9. CONFIDENTIALITY............................................................34 10. AMENDMENTS AND WAIVERS....................................................34 11. SURVIVAL AND TERMINATION OF COVENANTS.....................................35 12. SERVICE OF PROCESS........................................................35 13. WAIVER OF JURY TRIAL......................................................35 14. GENERAL...................................................................36 -iii- 5 EXHIBITS 1 Investors, Preferred Stock and Purchase Price 2.1A Warrant 2.1B Investor Note 2.1C Certificate of Designation 2.4 Use of Proceeds on Closing Date 3.3 Opinion of Counsel to the Company 4.1.1 Stock Option Plan 4.1.2 Employment Agreements 4.2.2 Subsidiaries 4.3.1 Capitalization and Stock Ownership 4.3.3 Capital Stock of Subsidiaries 4.4 Pro Forma Balance Sheet and Projections 4.5.2 Extraordinary Transactions 4.7 Contracts, etc. 4.9 Environmental Matters 4.10 Employee Benefit Plans 4.12 Taxes 4.15 Filings, Broker's Fees, etc. 5.7 Guarantees 5.13 Compensation -iv- 6 SECURITIES PURCHASE AGREEMENT This Agreement, dated as of May 31, 1996, is among Accessories Associates, Inc., a Rhode Island corporation (the "COMPANY"), Weston Presidio Capital II, L.P. and the other Investors set forth in Exhibit 1 hereto. The parties agree as follows: 1. Certain capitalized terms are used in this Agreement as specifically defined below in this Section 1. Except as the context otherwise explicitly requires, (a) the capitalized term "Section" refers to sections of this Agreement, (b) the capitalized term "Exhibit" refers to exhibits to this Agreement, (c) references to a particular Section include all subsections thereof, (d) the word "including" shall be construed as "including without limitation", (e) accounting terms not otherwise defined herein have the meaning provided under GAAP, (f) references to a particular statute or regulation include all rules and regulations thereunder and any successor statute, regulation or rules, in each case as from time to time in effect and (g) references to a particular Person include such Person's successors and assigns to the extent not prohibited by this Agreement and the other Investor Documents. References to "the date hereof" mean the date first set forth above. 1.1. "AFFILIATE" means any Person directly or indirectly controlling, controlled by or under direct or indirect common control with the Company (or other specified Person) and shall include (a) any Person who is an officer, director or beneficial holder of at least 10% of the outstanding capital stock of the Company (or other specified Person), (b) any Person of which the Company (or other specified Person) or an Affiliate (as defined in clause (a) above) of the Company (or other specified Person) shall, directly or indirectly, either beneficially own at least 10% of the outstanding equity securities or constitute at least a 10% participant, and (c) in the case of a specified Person who is an individual, Members of the Immediate Family of such Person; PROVIDED, HOWEVER, that the Investors shall not be Affiliates of the Company for purposes of this Agreement. 1.2. "BALANCE SHEET" is defined in Section 4.4. 1.3. "BY-LAWS" means all written rules, regulations, procedures and by-laws and all other similar documents, relating to the management, governance or internal regulation of a Person other than an individual, or interpretive of the Charter of such Person, each as from time to time amended or modified. 1.4. "CAPITAL EXPENDITURES" means amounts which should in accordance with GAAP be added to the fixed assets account on the consolidated balance sheet of the Company and its Subsidiaries, in respect of (a) the acquisition, construction, improvement or replacement of assets or leaseholds, and (b) to the extent related to and not included in clause (a) above, 7 expenditures on account of materials, contract labor and director labor (excluding expenditures properly chargeable to repairs and maintenance in accordance with GAAP). 1.5. "CAPITALIZED LEASE" means any lease which is or should be capitalized on the balance sheet of the lessee in accordance with GAAP and Statement No. 13 of the Financial Accounting Standards Board. 1.6. "CERTIFICATE OF DESIGNATION" is defined in Section 2.1. 1.7. "CFR" is defined in Section 4.16. 1.8. "CHARTER" means the articles of organization, certificate of incorporation, statute, constitution, joint venture or partnership agreement, management agreement or other charter of any Person other than an individual, each as from time to time amended or modified. 1.9. "CLOSING" is defined in Section 2.3. 1.10. "CLOSING COSTS" means the sum of expenses recognized in the Company's fiscal year ending in December 1996 for amortization of transaction expenses, including investment banker's fees and legal fees and expenses relating to the financings contemplated by this Agreement and the Investor Agreements. 1.11. "CLOSING DATE" is defined in Section 2.3. 1.12. "CODE" means the federal Internal Revenue Code of 1986. 1.13. "COMMON STOCK" means the common stock, $0.01 par value, of the Company. 1.14. "COMMISSION" means the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act, the Exchange Act or both. 1.15. "COMPANY" is defined in the Preamble. 1.16. "COMPENSATION" as applied to any Person means the aggregate of all salaries, compensation, remuneration or bonuses of any character, retirement or pension benefits of any kind, or other payments of any kind whatsoever (other than health and medical benefits made available to employees generally and advances and reimbursements of business expenses) made directly or indirectly by the Company, any of its Subsidiaries or other specified Persons to such Person and Affiliates of such Person. 1.17. "CONSOLIDATED", when used with reference to any term, means that term as applied to the accounts of the Company or other indicated Person and each of its respective -2- 8 Subsidiaries, consolidated or combined in accordance with GAAP after eliminating all inter-company items and with appropriate deductions for minority interests in Subsidiaries. 1.18. "CONTRACTUAL OBLIGATION" means, with respect to any Person, any contracts, agreements, deeds, mortgages, leases, licenses, other instruments, commitments, undertakings, arrangements or understandings, written or oral, or other documents, including any Charter or By-law provisions and any document or instrument evidencing Indebtedness, to which any such Person is a party or otherwise subject to or bound by or to which any asset of any such Person is subject. 1.19. "DISTRIBUTION" means (a) the declaration or payment of any dividend on or in respect of any shares of any class of capital stock of the Company, any of its Subsidiaries or other specified Person, other than dividends payable solely in shares of the common stock of the payor; (b) the purchase, redemption or other retirement of any shares of any class of capital stock of the Company, any of its Subsidiaries or other specified Person directly, or indirectly through a Subsidiary or otherwise; or (c) any other distribution on or in respect of any shares of any class of capital stock of the Company, any of its Subsidiaries or other specified Person. 1.20. "EMPLOYEE BENEFIT PLAN" means each "employee benefit plan" as defined in section 3(3) of ERISA, maintained or contributed to by the Company, any of its Affiliates of any of their respective predecessors, or in which the Company, any of its Affiliates or any of their respective predecessors participates or participated and which provides benefits to employees of the Company or their spouses or covered dependents or with respect to which the Company has or may have a material liability, including, (i) any such plans that are "employee welfare plans" as defined in section 3(1) of ERISA and (ii) any such plans that are "employee pension benefit plans" as defined in section 3(2) of ERISA. 1.21. "ERISA" means the federal Employee Retirement Income Security Act of 1974. 1.22. "ERISA GROUP", with respect to any entity, means any Person which is a member of the same "controlled group" or under "common control", within the meaning of section 414(b) or (c) of the Code or section 4001(b)(1) of ERISA, with such entity. 1.23. "EXCHANGE ACT" means the federal Securities Exchange Act of 1934. 1.24. "GAAP" means generally accepted accounting principles, as in effect from time to time, applied on a basis consistent with that used in preparation of the financial statements referred to in Section 4.4, consistently applied. 1.25. "GUARANTEE" means (a) any guarantee of the payment or performance of, or any contingent obligation in respect of, any Indebtedness or other obligation of any other Person, (b) any other arrangement whereby credit is extended to one obligor on the basis of any promise -3- 9 or undertaking of another Person (i) to pay the Indebtedness of such obligor, (ii) to purchase any obligation owed by such obligor, or (iii) to maintain the capital, working capital, solvency or general financial condition of such obligor, whether or not such arrangement is disclosed in the balance sheet of such other Person or is referred to in a footnote thereto or appears in a "keep well" agreement, "comfort letter" or "take or pay" agreement, and (c) any liability of the Company or any of its Subsidiaries as general partner of a partnership or as a venturer in a joint venture in respect of Indebtedness or other obligations of such partnership or venture; PROVIDED, HOWEVER, that in no event shall Guarantees include product warranties given in the ordinary course of business. 1.26. "HAZARDOUS MATERIAL" is defined in Section 4.9. 1.27. "INDEBTEDNESS" means (a) all debt for borrowed money and similar monetary obligations evidenced by bonds, notes, debentures, capitalized lease obligations, deferred purchase price of property (other than ordinary trade payables) or otherwise, whether direct or indirect; and (b) all liabilities secured by any Liens existing on property owned or acquired, whether or not the liability secured thereby shall have been assumed. 1.28. "INVESTMENT" means (a) any share of capital stock, evidence of Indebtedness or other security issued by any other Person, (b) any loan, advance, or extension of credit to, or contribution to the capital of, any other Person, (c) any purchase of the securities or assets constituting a business or a division or similar portion of the business of any other Person, (d) any commitment or option to make such an investment if, in the case of an option, the consideration therefor exceeds $100,000, and (e) any other investment; PROVIDED, HOWEVER, that the term "Investment" shall not include (i) current trade and customer accounts receivable arising in the ordinary course of business and payable in accordance with customary trade terms or prepaid assets arising in the ordinary course of business, (ii) advances to employees for travel expenses, drawing accounts and similar expenditures, (iii) stock or other securities acquired in connection with the satisfaction or enforcement of Indebtedness or claims due to the Company or any of its Subsidiaries or as security for any such Indebtedness or claim or (iv) demand deposits in banks or trust companies. The amount of an Investment outstanding at any time shall be determined in accordance with GAAP; PROVIDED, HOWEVER, that no Investment shall be increased as a result of an increase in the undistributed retained earnings of the Person in whom an Investment was made or decreased as a result of an equity in the losses of any such Person. 1.29. "INVESTOR AGREEMENTS" is defined in Section 3.1. 1.30. "INVESTOR NOTES" means the $2,000,000 aggregate principal amount 7.04% notes due 2002 issued by the Company to the Investors on the Closing Date in substantially the form of Exhibit 2.1B. 1.31. "INVESTOR SECURITIES" is defined in Section 2.1. -4- 10 1.32. "INVESTORS" means the holders of Investor Securities, the original holders of which are listed in Exhibit 1. 1.33. "LEGAL REQUIREMENT" means any federal, state, local or foreign law, statute, standard, ordinance, code, order, rule, regulation, resolution, promulgation or any final order, judgment or decree of any court, arbitrator, tribunal or governmental authority, or any license, franchise, permit or similar right granted under any of the foregoing. 1.34. "LIEN" means (a) any mortgage, pledge, lien, charge, security interest or other similar encumbrance upon any property or assets of any character, or upon the income or profits therefrom; or (b) any conditional sale or other title retention agreement or arrangement (including a capitalized lease); or (c) any sale, assignment, pledge or other transfer for security of any accounts, general intangibles, or chattel paper, with or without recourse. 1.35. "MANAGEMENT NOTES" means, collectively, (a) the $3,000,000 aggregate principal amount 7.04% notes due 2006 issued by the Company to its existing stockholders on the Closing Date in the form previously furnished to the Investors and (b) the notes in an aggregate principal amount equal to the excess, if any, of the "accumulated adjustments account" (as defined in section 1368(e) of the Code) of the Company as of the Closing Date over $13,000,000 and issued by the Company to its existing stockholders (other than the Investors) in the form previously furnished to the Investors. 1.36. "MARGIN STOCK" means "margin stock" within the meaning of any regulation, interpretation or ruling of the Board of Governors of the Federal Reserve System, all as from time to time in effect. 1.37. "MATERIAL AGREEMENTS" is defined in Section 4.1. 1.38. "MATERIAL ADVERSE EFFECT" means a material adverse effect upon the business, assets, financial condition, income or prospects of the Company and its Subsidiaries on a Consolidated basis. 1.39. "MEMBERS OF THE IMMEDIATE FAMILY," as applied to any individual, means each parent, spouse, child, brother, sister or the spouse of a child, brother or sister of the individual, and each trust created for the benefit of one or more of such persons and each custodian of a property of one or more such persons. 1.40. "PENSION PLAN" means each pension plan (as defined in section 3(2) of ERISA) established or maintained, or to which contributions are or were made, by the Company or any of its Subsidiaries or former Subsidiaries, or any Person which is a member of the same ERISA Group with any of the foregoing. -5- 11 1.41. "PERSON" means an individual, partnership, corporation, company, association, trust, joint venture, unincorporated organization, business trust, limited liability company and any governmental department or agency or political subdivision. 1.42. "PREFERRED DIRECTOR" is defined in Section 5.1.1. 1.43. "PREFERRED STOCK" means the Series A Redeemable Convertible Preferred Stock, par value $0.01 per share, of the Company. 1.44. "PRINCIPAL HOLDER" means each original holder of Preferred Stock set forth on Exhibit 1 (and their Affiliates) so long as it holds any Investor Securities originally purchased at an aggregate cost of at least $1 million and any other Person holding Preferred Stock originally purchased at an aggregate cost of $1 million or more. 1.45. "PROJECTIONS" is defined in Section 4.4. 1.46. "QUALIFIED PUBLIC OFFERING" is defined in section 8.2 of the Certificate of Designation. 1.47. "REGISTRATION RIGHTS AGREEMENT" is defined in Section 3.1. 1.48. "REGULATED INVESTOR" means BancBoston Ventures, Inc., National City Capital Corporation, St. Paul Fire and Marine Insurance Company and any other Investor subject to regulation by a Regulatory Agency. 1.49. "REGULATORY AGENCY" means the U.S. Small Business Administration (or any successor body or agency), the Board of Governors of the Federal Reserve System (or any successor body or agency) or any other governmental body or agency charged with the administration of the federal Small Business Investment Act of 1958, the federal Holding Company Act of 1956 or any similar, related or successor laws regulating banks, bank holding companies, insurance companies, insurance holding companies, SBICs and their respective subsidiaries. 1.50. "REGULATORY PROBLEM" means the assertion by any Regulatory Agency (or the reasonable belief by a Regulated Investor that a substantial risk of such assertion exists) that a Regulated Investor is not entitled to hold, or exercise any significant right with respect to, the Investor Securities. 1.51. "REQUIRED HOLDERS" means the holders at the relevant time (excluding the Company or any of its Subsidiaries) of two thirds or more of the voting power of all classes and types of capital stock constituting Investor Securities (calculated to give pro forma effect to the conversion of all Preferred Stock), voting together as a single class. -6- 12 1.52. "SBA" is defined in Section 3.6. 1.53. "SBIC" means a small business investment company licensed by the SBA pursuant to the Small Business Investment Act. 1.54. "SECURITIES ACT" means the federal Securities Act of 1933. 1.55. "SHAREHOLDERS' EQUITY" means, at any date, stockholders' equity of the Company and its Subsidiaries determined in accordance with GAAP on a consolidated basis, excluding the effect of any foreign currency translation adjustment. 1.56. "SMALL BUSINESS INVESTMENT ACT" is defined in Section 4.16. 1.57. "STOCK OPTION PLAN" is defined in Section 4.1.1. 1.58. "SUBSIDIARY" means any Person of which the Company or other specified Person now or hereafter shall at the time (a) own directly or indirectly through a Subsidiary at least 50% of the outstanding capital stock (or other shares of beneficial interest) entitled to vote generally or (b) constitute a general partner. 1.59. "TAG-ALONG AGREEMENT" is defined in Section 3.1. 1.60. "WARRANTS" is defined in Section 2.1. 1.61. "WELFARE PLAN" means each welfare plan as defined in section 3(1) of ERISA) established or maintained, or to which any contributions are or were made, by the Company or any of its Subsidiaries or any Person which is a member of the same ERISA Group with any of the foregoing. 1.62. "WPC" means Weston Presidio Capital II, L.P. 2. SALE AND PURCHASE OF SECURITIES. 2.1. The following securities are referred to collectively as the "INVESTOR SECURITIES": (a) the Preferred Stock being purchased by the Investors hereunder, together with any securities issued with respect thereto, upon exercise, conversion or transfer thereof or in exchange therefor, including the Common Stock issuable upon conversion of the Preferred Stock and the Warrants in substantially the form of Exhibit 2.1A (the "WARRANTS") (and the Common Stock issuable upon exercise of the Warrant), (b) the Common Stock being purchased by the Investors hereunder and (c) the Investor Notes being purchased by the Investors hereunder in substantially the form of Exhibit 2.1B; PROVIDED, HOWEVER, that once any such securities have been sold in a Qualified Public Offering they shall cease to be Investor Securities for all purposes of this Agreement. The powers, preferences and rights of the Preferred Stock are -7- 13 set forth in Article Fourth of the Company's Articles of Incorporation, as amended as of May 30, 1996 in the form set forth in Exhibit 2.1C (the "CERTIFICATE OF DESIGNATION"). 2.2. AGREEMENT TO SELL AND PURCHASE. Based on the Investors' representations and warranties contained in Section 6, the Company agrees to issue and sell to the Investors and, subject to all of the terms and conditions hereof and in reliance on the representations and warranties of the Company set forth or referred to herein, the Investors severally, and not jointly or jointly and severally, agree to purchase at the Closing the number of shares of Preferred Stock and Common Stock, and the principal amount of Investor Notes, all specified in Exhibit 1 for each Investor at the purchase price, payable by wire transfer or Investor check, so specified in such Exhibit. The Company shall have the right to terminate this Agreement without recourse or liability if the total purchase price set forth in Exhibit 1 is not delivered for any reason. 2.3. CLOSING. The closing of the purchase and sale of Investor Securities (the "CLOSING") shall take place in Boston, Massachusetts at the offices of Ropes & Gray on May 31, 1996 or at such other place and on such other date as the Company and the Required Holders may agree upon (the "CLOSING DATE"). At the Closing the Company will delivery to the Investors certificates and promissory notes evidencing the respective Investor Securities set forth in Exhibit 1 against payment of the purchase price therefor in immediately available funds. 2.4. USE OF PROCEEDS. The Company covenants that it will apply the cash proceeds of the Investor Securities solely for the following lawful purposes: (a) repayment of its existing debt, (b) paying its stockholders a dividend not exceeding $10,500,000 and other Distributions permitted by Section 5.10, (c) transaction costs and (d) working capital. No portion of such proceeds will be used: (i) to acquire or maintain Margin Stock, (ii) to provide capital to a corporation licensed under the Small Business Investment Act, (iii) outside the United States (except (A) to acquire abroad materials and industrial property rights for a domestic operation or (B) for transfer to a controlled foreign subsidiary, so long as at least 51% of the assets and activities of the Company will remain within the United States), or (iv) for any purpose contrary to the public interest (including activities which are in violation of law) or inconsistent with free competitive enterprise, in each case, within the meaning of 13 CFR ' 107.901. The Company's primary business activity does not involve, directly or indirectly, providing funds to others, the purchase or discounting of debt obligations, factoring or long-term leasing of equipment with no provision for maintenance or repair, and the Company is not classified under Major Group 65 (Real Estate) of the federal Standard Industrial Code Manual. Exhibit 2.4 sets forth the specific use of proceeds to be disbursed on or about the Closing Date. 3. CONDITIONS TO PURCHASE. The Investors' several obligations to purchase the Investor Securities pursuant to this Agreement on the Closing Date are subject to the satisfaction, on or prior to such Closing Date, of the following conditions: -8- 14 3.1. INVESTOR AGREEMENTS. The Company and the stockholders (other than the Investors) party thereto shall have duly authorized, executed and delivered to WPC the following agreements: (a) Tag-Along, Transfer Restriction and Voting Agreement dated as of the Closing Date among the Company, the Investors and certain other stockholders of the Company (as from time to time in effect, the "TAG-ALONG AGREEMENT"). (b) Registration Rights Agreement dated as of the Initial Closing Date among the Company, the Investors and certain other stockholders of the Company (as from time to time in effect, the "REGISTRATION RIGHTS AGREEMENT"). The Investor Agreements referred to in Section 3.1 shall be in full force and effect in the respective forms referred to in Section 3.1 with no term or condition thereof having been amended, modified or waived without the prior written consent of the Required Holders. All material covenants and conditions contained in the Investor Agreements which are to be performed or complied with by the Company and its Subsidiaries at or prior to closing under the Investor Agreements shall have been performed, complied with or waived prior thereto. 3.2. ACCOUNTANTS REPORT. The Investors have received a report about the Company's financial condition and the Projections prepared by independent accountants selected by the Investors, which report is satisfactory in all respects to the Investors. 3.3. LEGAL OPINION. On the Closing Date, the Investors shall have received from Hinckley, Allen & Snyder, counsel to the Company and its Subsidiaries, their opinion in substantially the form of Exhibit 3.3. 3.4. REPRESENTATIONS AND WARRANTIES; OFFICER'S CERTIFICATE. The representations and warranties contained herein shall be true and correct on and as of the Closing Date with the same force and effect as though made on and as of such Closing Date; between the Balance Sheet Date and such Closing Date, no Material Adverse Effect shall have occurred (in the judgment of the Required Holders); the Company shall have performed all obligations required to be performed by it under this Agreement, the Certificate of Designation and the Investor Agreements; and the Investors shall have received on the Closing Date a certificate to these effects signed by the Chairman and the President of the Company. 3.5. ISSUANCE OF INVESTOR SECURITIES. The Company shall have issued to the Investors shown on Exhibit 1 the number of shares of Preferred Stock and Common Stock, and the principal amount of Investor Notes, shown opposite their names in Exhibit 1 for an aggregate consideration as shown in Exhibit 1. 3.6. SBA COMPLIANCE. The Company shall have furnished to the Investors that are SBICs all forms which such Investors shall have informed the Company are required by the Small -9- 15 Business Administration ("SBA") in connection with the transactions contemplated hereby, including a Size Status Declaration on SBA Form 480, an Assurance of Compliance on SBA Form 652D and a Portfolio Financing Report on SBA Form 1031, which forms shall be in proper form for filing with the SBA. 3.7. KEY EXECUTIVE INSURANCE. The Company will have received from its existing stockholders the life insurance policies on its existing stockholders in effect on the Closing Date, including a policy covering the life of Gerald Cerce in an amount of at least $1,000,000, the proceeds of all of which shall be payable to the Company. 3.8. LEGALITY; GOVERNMENTAL AUTHORIZATION. The purchase of the Investor Securities shall not be prohibited by any law or governmental order or regulation, and shall not subject the Investors to any penalty or special tax (other than a penalty or special tax that has been reimbursed by the Company). All necessary consents, approvals, licenses, permits, orders and authorizations of, or registrations, declarations or filings with, any governmental or administrative agency or of any other Person, if any, with respect to any of the transactions contemplated by this Agreement or the Investor Agreements, the absence of which could have a Material Adverse Effect, shall have been duly obtained or made and shall be in full force and effect. 3.9. GENERAL. All instruments and legal and corporate proceedings in connection with the transactions contemplated by this Agreement and the Investor Agreements shall be reasonably satisfactory in form and substance to the Required Holders, and the Investors shall have received copies of all documents, including records of corporate proceedings and officers certificates, which the Required Holders may have reasonably requested in connection therewith. 4. REPRESENTATIONS AND WARRANTIES. In order to induce the Investors to enter into this Agreement and to purchase the Investor Securities hereunder, the Company represents and warrants that: 4.1. MATERIAL AGREEMENTS. The Company has furnished to the Investors correct and complete copies of the documents listed below which have been executed on or prior to the date hereof and any amendments thereto, modifications thereof or waivers granted thereunder as of the date hereof. The documents listed below, are referred to collectively as the "MATERIAL AGREEMENTS". References to any of the Material Agreements mean the Material Agreements in the form so furnished to the Investors, without regard to any amendment, modification, waiver or termination of such document which is made or otherwise becomes effective after the date hereof, unless such amendment, modification, waiver or termination has been consented to in writing by the Required Holders: 4.1.1. Stock Option Plan and the related form of Stock Option Agreement in substantially the form of Exhibit 4.1.1 (the "STOCK OPTION PLAN"), indicating the allocation of at least 5% of the shares of Common Stock to be reserved for options to be granted to outside directors, directors selected by the Company's management -10- 16 (which directors are not also employees or officers of the Company) or other employees approved by the Board of Directors. 4.1.2. Employment Agreements and non-competition agreements dated on or about the date hereof between the Company and Gerald F. Cerce, Felix A. Porcaro, Jr., John H. Flynn, Jr., Duane DeSisto and Robert V. Lallo, respectively, in substantially the form of Exhibit 4.1.2. 4.1.3. Revolving Term and Loan Agreement dated November 5, 1991 between the Company and Fleet Precious Metals, Inc., as amended. Other than customary subscription agreements with respect to the issuance of shares of Common Stock to the stockholders listed in Exhibit 4.3.1 or as otherwise set forth in Exhibit 4.3.1, neither the Company nor any of its Subsidiaries is a party to or bound by any agreement or understanding affecting the capital stock of the Company or its Subsidiaries or the voting thereof which is not a Material Agreement or contemplated by or referred to in the Material Agreements. 4.2. ORGANIZATION AND SUBSIDIARIES; BUSINESS. 4.2.1. THE COMPANY. The Company is a duly organized and validly existing corporation in good standing under the laws of Rhode Island. The Company has all necessary corporate power and authority to enter into and perform this Agreement and the Investor Agreements to which it is party, to issue and sell the Investor Securities to be issued and sold by it hereunder, and to carry on the businesses now conducted or presently proposed to be conducted by it. The Company has taken all corporate action necessary to authorize the Investor Agreements to which it is party and the issuance of the Investor Securities to be issued and sold by it hereunder. The Investor Agreements to which the Company is party and the Investor Securities to be issued and sold by the Company hereunder have been duly executed and delivered by the Company and are the legal, valid and binding obligations of the Company, enforceable in accordance with their terms. 4.2.2. SUBSIDIARIES. The Company does not own or control, directly or indirectly, or have an interest in, any other corporation, partnership, association or business entity, except for the corporations described in Exhibit 4.2.2. 4.2.3. CONDUCT OF BUSINESS. The Company has conducted no business other than developing, manufacturing, distributing and marketing consumer jewelry and accessory products. -11- 17 4.3. CAPITALIZATION. 4.3.1. CAPITAL STOCK OF THE COMPANY. The authorized capital stock of the Company is set forth in Exhibit 4.3.1. On the Closing Date, after giving effect to the issuance of the Investor Securities and the consummation of the Investor Agreements, the Company will have no outstanding capital stock except for the shares of Common Stock and Preferred Stock owned beneficially and of record as set forth in Exhibit 4.3.1, all of which will be validly issued, fully paid, nonassessable and, to the best knowledge of the Company, subject to no lien or restriction on transfer, except restrictions on transfer imposed by the Investor Agreements and applicable securities laws or as otherwise set forth in Exhibit 4.3.1. 4.3.2. OPTIONS, ETC. Other than as set forth in Exhibit 4.3.1 or in the Investor Agreements, the Company does not have outstanding (a) any rights (either preemptive or otherwise) or options to subscribe for or purchase, or any warrants or other agreements providing for or requiring the issuance of, any capital stock or any securities convertible into or exchangeable for its capital stock, (b) any obligation to repurchase or otherwise acquire or retire any of its capital stock, any securities convertible into or exchangeable for its capital stock or any rights, options or warrants with respect thereto, (c) any rights to require the Company to register the offering of any of its securities under the Securities Act or (d) any restrictions on voting any of the Company's securities. 4.3.3. CAPITAL STOCK OF THE SUBSIDIARIES. The authorized capital stock of each Subsidiary of the Company is set forth in Exhibit 4.3.3. Each such Subsidiary has no outstanding capital stock except for shares of capital stock owned beneficially and of record by the Company, all of which will be validly issued, fully paid, nonassessable and subject to no lien or restriction on transfer, except restrictions on transfer imposed by the Investor Agreements, the Material Agreements and applicable securities laws and Liens. 4.3.4. SUBSIDIARY OPTIONS, ETC. Except as set forth in Exhibit 4.3.3, none of the Company's Subsidiaries has outstanding (a) any rights (either preemptive or otherwise) or options to subscribe for or purchase, or any warrants or other agreements providing for or acquiring the issuance of, any capital stock or any securities convertible into or exchangeable for its capital stock, (b) any obligation to repurchase or otherwise acquire or retire any of its capital stock, any securities convertible into or exchangeable for its capital stock or any rights, options or warrants with respect thereto, (c) any rights to require the Subsidiary to register the offering of any of its securities under the Securities Act or (d) any restrictions on voting any of the Subsidiary's securities. 4.4. REPORTS, FINANCIAL STATEMENTS AND OTHER DOCUMENTS. The Investors have been furnished with complete and correct copies of the following: -12- 18 (a) Audited consolidated balance sheet (the "BALANCE SHEET") of the Company and its Subsidiaries as of December 31, 1995 (the "BALANCE SHEET DATE"), together with the related statements of income, cash flows and stockholders' equity for the year then ended, accompanied by the audit report of Arthur Andersen & Co. (b) Balance sheet of the Company and its Subsidiaries as of March 31, 1996, together with the related statement of income for the three-month period then ended. (c) Pro forma opening balance sheet, operating budget and three-year projections, including income statements, balance sheets and cash flow statements, set forth in Exhibit 4.4 (the "PROJECTIONS"). The financial statements referred to in clauses (a) and (b) above have been prepared in accordance with GAAP and fairly present the financial condition of the Company and its Subsidiaries at the dates thereof and the results of their operations for the periods covered thereby, subject to normal year-end adjustments in the case of the financial statements referred to in clause (b) above. Except as set forth in Exhibit 4.4, neither the Company nor any of its Subsidiaries has any material liabilities, contingent or otherwise, which are not referred to in the Balance Sheet. The Projections were based on (i) assumptions and accounting methods consistent with the historical financial statements described in paragraph (a) above and (ii) the financings contemplated hereby. To the best knowledge of the Company the Projections constitute a reasonable basis for assessing the future performance of the Company and its Subsidiaries, but no representation or warranty is made that the Company and its Subsidiaries can actually achieve the results set forth in the Projections. 4.5. CHANGES IN CONDITION. Since the Balance Sheet Date: 4.5.1. MATERIAL ADVERSE EFFECT. No Material Adverse Effect has occurred. 4.5.2. EXTRAORDINARY TRANSACTIONS, ETC. Other than as set forth in Exhibit 4.5.2, neither the Company nor any of its Subsidiaries has (a) declared any dividend or other distribution on any shares of its capital stock, (b) made any payment (other than compensation of its directors, officers and employees at rates in effect prior to the Balance Sheet Date or for bonuses accrued in accordance with normal practice prior to the Balance Sheet Date) to any of its Affiliates, (c) increased the Compensation, including bonuses, payable or to be payable to any of its directors, officers, employees or Affiliates by more than 10%, or (d) entered into any Contractual Obligation, or entered into or performed any other transaction, not in the ordinary and usual course of business and consistent with past practice, other than as specifically contemplated by this Agreement. -13- 19 4.6. SOLVENCY. After giving effect to the financing contemplated hereby, the Company is solvent (within the meaning contemplated by section 548 of Title 11 of the United States Code and any similar state statutes which may be applicable). 4.7. CONTRACTUAL OBLIGATIONS, ETC. 4.7.1. CERTAIN CONTRACTS. Exhibit 4.7 contains, together with a reference to the subparagraph pursuant to which each item is being disclosed, a correct and complete list of all Contractual Obligations of the Company and its Subsidiaries of the types described below: (a) All collective bargaining agreements; all employment, profit sharing, profit participation, deferred compensation, bonus, stock option, stock purchase, pension, retainer, consulting, retirement, welfare or incentive plans or agreements; and all plans, agreements or practices which constitute "fringe benefits" to any of the employees of the Company or its Subsidiaries, including vacation programs, sick leave programs, group medical insurance, group life insurance, disability insurance and related benefits. (b) All Contractual Obligations under which the Company or its Subsidiaries are restricted from carrying on any business, venture or other activities anywhere in the world. (c) All Contractual Obligations (including options) to sell or lease (as lessor) any of the properties or assets of the Company or its Subsidiaries except in the ordinary course of business. (d) All Contractual Obligations pursuant to which the Company or its Subsidiaries guarantees any liability of any Person, or pursuant to which any Person guarantees any liability of the Company or its Subsidiaries. (e) All Contractual Obligations with any Affiliate of the Company or its Subsidiaries. (f) All Contractual Obligations constituting license agreements, consulting agreements and employment agreements. (g) All Contractual Obligations under which the Company or any of its Subsidiaries leases real property or is obligated to lease or purchase real property. (h) All Contractual Obligations of the Company or any of its Subsidiaries relating to the borrowing of money or to the mortgaging or pledging of, or otherwise placing a lien on, any asset of the Company or any -14- 20 of its Subsidiaries (except liens imposed by operation of law in favor of landlords, suppliers, mechanics or others who provide services to the Company). 4.7.2. NATURE OF CONTRACTS. All of the Contractual Obligations of the Company and its Subsidiaries at the Closing are enforceable against the Company and, to its knowledge, the other parties thereto in accordance with their terms, except for Contractual Obligations the failure of which to be so enforceable does not and will not result in a Material Adverse Effect. To the Company's knowledge, neither the Company nor any of its Subsidiaries is now in default under, nor are there any liabilities arising from any breach or default by any Person prior to the date of this Agreement of, any provision of any such Contractual Obligation. 4.7.3. CHARTER OR BY-LAWS. Neither the Company nor any of its Subsidiaries is in violation of, or in default under, any provision of its Charter or By-Laws and the Investors have been furnished with copies of such Charter and By-Laws. 4.7.4. INSURANCE. Each of the Company and its Subsidiaries has insurance policies in full force and effect, written by reputable insurers licensed to write insurance in the states in which the Company and its Subsidiaries conduct their business, which insurance contracts provide for coverages which are usual and customary in their respective businesses as to amount and scope. 4.7.5. TRANSACTIONS WITH AFFILIATES. Other than as set forth in Exhibit 4.7, no Affiliate of the Company or its Subsidiaries is a competitor, customer or supplier of, or is party to any Contractual Obligation with, the Company or any of its Subsidiaries. 4.8. OPERATIONS IN CONFORMITY WITH LAW, ETC. The operations of the Company and its Subsidiaries as now conducted are not in violation of, nor is the Company or its Subsidiaries in default under, any Legal Requirements presently in effect, except for such violations and defaults as do not and will not, in the aggregate, have a Material Adverse Effect. The Company has received no notice of any such violation or default and has no knowledge of any basis on which the operations of the Company or its Subsidiaries, when conducted as currently proposed to be conducted after the Closing Date, would be held so as to violate or to give rise to any such violation or default. The Company and its Subsidiaries have all franchises, licenses, permits or other authority presently necessary for the conduct of their business as now conducted. Based on the facts presently known to the Company, all future expenditures on the part of the Company or its Subsidiaries required to meet the provisions of any presently existing Legal Requirement (including Legal Requirements relating to employment practices or to occupational or health standards or to environmental considerations) will not, in the aggregate, have a Material Adverse Effect. -15- 21 4.9. ENVIRONMENTAL MATTERS. Except as set forth in Exhibit 4.9, to its knowledge, each of the Company and its Subsidiaries is in compliance in all material respects with all applicable published rules and regulations of the United States Environmental Protection Agency and similar agencies in states in which the Company or its Subsidiaries conducts its business. No suit, claim, action or proceeding is now pending before any court, governmental agency or board or other forum or threatened by any Person for, and the Company and its Subsidiaries have received no written correspondence from any federal, state or local governmental authority with respect to, (a) noncompliance by the Company or its Subsidiaries with any environmental law, rule or regulation, (b) personal injury, wrongful death or other tortious conduct relating to materials, commodities or products used, sold, transferred or manufactured by the Company or its Subsidiaries (including products containing or incorporating asbestos, lead or other hazardous materials) or (c) the release into the environment by the Company or its Subsidiaries of any pollutant, toxic or hazardous material or waste (including any "hazardous substance" or "pollutant" or "contaminant" as defined in section 101(14) of the Comprehensive Environmental Response, Compensation and Liability act, as amended) (collectively, "HAZARDOUS MATERIAL") generated by the Company or its Subsidiaries whether or not occurring at or on a site owned, leased or operated by the Company or its Subsidiaries. Exhibit 4.9 lists all waste disposal or dump sites, if any, at which any material amount of Hazardous Material generated by either the Company or its Subsidiaries have been disposed of or finally came to be located or lists the hauler who has taken such Hazardous Material from the Company for disposal, indicates all such sites which have been included (including as a potential or suspect site) in any published federal, state or local "superfund" or other list of hazardous or toxic waste sites and lists any material amount of Hazardous Material present at the Company's or any of its Subsidiaries' facilities. Except as set forth in Exhibit 4.9, to the Company's knowledge, but without having conducted special boring or drilling, no material amount of Hazardous Material is present in any real property currently or formerly owned or leased by it or its Subsidiaries. 4.10. EMPLOYEE BENEFIT PLANS. Exhibit 4.10 sets forth a complete list of all Employee Benefit Plans and all Welfare Plans applicable to the Company's and its Subsidiaries' employees. To the knowledge of the Company, each Employee Benefit Plan and Welfare Plan has been administered in substantial compliance with its terms and all applicable laws, including, the Code and ERISA, to the extent that failure to do so would have a Material Adverse Effect. The Company and its Subsidiaries have no obligation under any Welfare Plan to provide for the continuation of benefits (other than disability payments and medical benefits incurred for illness arising in the course of employment) for more than one year after retirement or other termination of employment. No "reportable events" within the meaning of section 4043 of ERISA have occurred with respect to any Employee Benefit Plan. No Pension Plan is a "multiemployer plan" as defined in ERISA. The present value of benefits liabilities as described in Title IV of ERISA of Employee Benefit Plans does not exceed the current value of such Employee Benefit Plans assets allocable to such benefits liabilities by more than $100,000. 4.11. LABOR RELATIONS. None of the employees of the Company or any of its Subsidiaries is presently represented by a labor union, and no petition has been filed or -16- 22 proceedings instituted by any employee or group of employees with any labor relations board seeing recognition of a bargaining representative. No controversies or disputes are pending between the Company or any of its Subsidiaries and any of its employees, except for such controversies and disputes as do not and will not, in the aggregate, have a Material Adverse Effect. 4.12. TAXES. Since January 1, 1993, each of the Company and its Subsidiaries has filed all material tax and information which are required to be filed by it with taxing authorities of the United States government and of the states of Rhode Island, New York and any other state in which the Company and its Subsidiaries owns or leases real property and has paid, or made adequate provision for the payment of, all taxes which have or may become due pursuant to such returns or to any assessment received by it. Except as set forth in Exhibit 4.12, neither the Company nor any of its Subsidiaries has knowledge of any material additional assessments from such taxing authorities or any basis therefor. The Company reasonably believes that the charges, accruals and reserves on the Financial Statements in respect of taxes or other governmental charges are adequate. 4.13. LITIGATION. No litigation or proceeding before, or investigation by, any foreign, federal, state or municipal board or other governmental or administrative agency or any arbitrator, is pending or to the knowledge of the Company threatened (or to the knowledge of the Company does any basis exist therefor), against the Company or its Subsidiaries or, to the Company's knowledge, any officer of the Company or its Subsidiaries, which in the aggregate could result in any material liability or which may otherwise result in a Material Adverse Effect, or which seeks rescission of, seeks to enjoin the consummation of, or which questions the validity of, this Agreement or any other Investor or Material Agreement or any of the transactions contemplated hereby or thereby. Neither the Company nor its Subsidiaries has been charged, nor to the Company's knowledge is it threatened to be charged, with infringement of any trademark, trade name, service mark, copyright, patent, patent right or other proprietary right of any Person. 4.14. VIOLATION OF OTHER INSTRUMENTS. Neither the execution and delivery of this Agreement or any other Investor Agreement by the Company or its Subsidiaries party thereto, nor the consummation of any of the transactions contemplated hereby or thereby, will (a) constitute a breach of or a default under any Contractual Obligation of the Company or its Subsidiaries or, to the Company's knowledge, any officer of the Company or its Subsidiaries, (b) result in acceleration in the time for performance of any obligation of the Company or its Subsidiaries under any such Contractual Obligation, (c) result in the creation of any Lien upon any asset of the Company or its Subsidiaries, (d) require any consent, waiver or amendment to any such Contractual Obligation that has not been obtained, (e) give rise to any severance payment, right of termination, securities repurchase right or other right under any such Contractual Obligation, or (f) violate or give rise to a default under any Legal Requirement, except for events or conditions described in clauses (a) through (f) above which will not in the aggregate have any Material Adverse Effect. -17- 23 4.15. FILINGS, BROKER'S FEES, ETC. No approval, consent, authorization or other order of, and no declaration, filing, registration, qualification or recording with, any governmental authority or any other Person is required to be made by or on behalf of the Company or its Subsidiaries in connection with the execution, delivery or performance of this Agreement or any other Investor Agreement, or any of the transactions contemplated hereby or thereby, other than filing the Certificate of Designation with the Rhode Island Secretary of State. Other than as provided on Exhibit 4.15, neither the Company nor any of its Subsidiaries is obligated to pay any broker's fee, finder's fee, investment banker's fee or other similar transaction fee in connection with any Investor Agreement or the transactions contemplated hereby or thereby. 4.16. SBA MATTERS. The Company is a "small business concern" within the meaning of the federal Small Business Investment Act of 1958 (the "SMALL BUSINESS INVESTMENT ACT"), and Part 121 of Title 13 of the United States Code of Federal Regulations ("CFR") by virtue of having net worth of less than $18,000,000 as of the end of its last fiscal year and average net income (after federal taxes) for its last two fiscal years of less than $6,000,000. The information set forth on SBA Forms 480, 652D and 1031 previously furnished by the Company to the Investors that are SBICs is complete and correct in all material respects. 4.17. GOVERNMENTAL REGULATION. Neither the Company nor its Subsidiaries is subject to regulation under the Investment Company Act of 1940, or subject to any statute or regulation which regulates the incurring of indebtedness by the Company for borrowed money. 4.18. MARGIN STOCK. Neither the Company nor its Subsidiaries owns any Margin Stock. 4.19. REAL PROPERTY HOLDING CORPORATION. Neither the Company nor its Subsidiaries is a "United States real property holding corporation," as defined in section 897(c)(2) of the Code and Treasury Regulation section 1.897-2(b). 4.20. DISCLOSURE. To the best knowledge of the Company, neither this Agreement, nor any agreement, certificate, statement or document furnished in writing by or on behalf of the Company to the Investors in connection herewith or therewith, contains any untrue statement of material fact or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading in any material respect (except that no representation or warranty is made as to the Projections). 5. GENERAL COVENANTS. The Company covenants that, until the earlier to occur of (a) the closing of a Qualified Public Offering or (b) such time as less than 25% of the shares of Preferred Stock outstanding on the Closing Date remain outstanding, it will comply, and will cause each of its Subsidiaries to comply, with the following provisions: -18- 24 5.1. COVENANTS RELATING TO THE COMPANY'S BOARD OF DIRECTORS. 5.1.1. BOARD OF DIRECTORS. Except to the extent provided to the contrary in the Certificate of Designation, the Board of Directors of the Company shall consist of seven members, including two representatives of the Investors who shall be elected by a majority of the holders of Preferred Stock (the "PREFERRED DIRECTORS"). The Board of Directors of the Company, (a) shall meet at least quarterly and each Principal Holder shall be notified at least 10 days in advance of such meetings of the Board of Directors and each Principal Holder shall have the right to have a representative attend all such meetings in a nonvoting observer capacity, and (b) shall establish and maintain an Audit Committee and a Compensation Committee, each of which committees shall include as a member a Preferred Director. The Company shall approve all replacements of the initial Preferred Directors who are not general partners of WPC, such approval not to be unreasonably withheld. 5.1.2. DIRECTORS EXPENSES. The Company will pay all direct out-of-pocket expenses reasonably incurred by any director of the Company who is nominated by the Investors in attending each meeting of the Board of Directors, or any committee thereof. All other Director fees and incentives shall be subject to the approval of a majority of the Board of Directors, which majority shall include the Preferred Directors. 5.1.3. INDEMNITY. The Company and each of its Subsidiaries will adopt and maintain in their respective Charter or Bylaws provisions indemnifying the directors of each such Person to the fullest extent permitted by applicable law and will also adopt the provisions of section 7-1.1 -- 4.1 of the Rhode Island Business Corporation Act] or any similar provisions of the laws of other states applicable to any such subsidiary. 5.2. INFORMATION AND REPORTS TO BE FURNISHED. The Company and its Subsidiaries will maintain a system of accounting, consistent with the Company's past practice, in which correct and complete entries will be made of all dealings and transactions in relation to their business and affairs in accordance with GAAP. The Company's internal financial control systems will at all times be reasonably satisfactory to the Required Holders. Until a Qualified Public Offering occurs, the Company will furnish the following information to each Principal Holder: 5.2.1. ANNUAL STATEMENTS. As soon as available, and in any event within 90 days after the end of each fiscal year of the Company, the audited consolidated balance sheet of the Company and its Subsidiaries as of the end of such fiscal year and the audited consolidated statements of income, stockholders' equity and cash flows for such year of the Company and its Subsidiaries, together with the consolidated figures for the preceding fiscal year, if any (all in reasonable detail), such statements being accompanied by the unqualified reports thereon of Arthur Andersen & Co. or other independent certified public accountants, reasonably satisfactory to the Required -19- 25 Holders, to the effect that such consolidated financial statements have been prepared in accordance with GAAP and present fairly in all material respects the financial position of the Company and its Subsidiaries as of the dates specified and the results of their operations and changes in financial position with respect to the periods specified. 5.2.2. QUARTERLY REPORTS. As soon as available, and in any event within 45 days after the end of each of the first three fiscal quarters in each fiscal year of the Company, the unaudited consolidated balance sheets of the Company and its Subsidiaries as of the end of such quarter and the consolidated statements of income, stockholders' equity and cash flows for such quarter and the portion of the fiscal year then ended of the Company and its Subsidiaries, together with comparative consolidated figures for the corresponding periods of the preceding fiscal year (all in reasonable detail). 5.2.3. MONTHLY REPORTS. As soon as practicable, and in any event within 30 days after the end of each calendar month, the financial statements of the Company and its Subsidiaries as of the end of such month in the form customarily prepared by management for internal use. 5.2.4. ANNUAL BUDGETS. Not later than the end of each fiscal year of the Company a proposed month by month operating and capital budget for the following fiscal year of the Company, including projected cash flows. 5.2.5. OFFICERS' CERTIFICATES. Together with delivery of financial statements of the Company and its Subsidiaries pursuant to Sections 5.2.1 and 5.2.2 above as of the end of each fiscal quarter of the Company, a certificate of the Chief Executive Officer or the Chief Financial Officer of the Company, that such statements have been prepared in accordance with GAAP and present fairly in all material respects the financial position of the Company and its Subsidiaries as of the dates specified and the results of their operations and cash flows with respect to the periods specified (subject in the case of interim financial statements only to normal year-end audit adjustments and the addition of footnotes). 5.2.6. NOTICE OF LITIGATION, DEFAULTS, ETC. The Company will promptly, and in any event within 30 days after the Company has knowledge of such event, give written notice to the Preferred Directors of (a) any litigation or any administrative proceeding to which it or any of its Subsidiaries may hereafter become a party which after giving effect to applicable insurance may result in a charge against income in excess of $100,000, (b) any resignation of or other change in senior management of the Company or any serious illness of any member of such senior management, and (c) any offers to purchase a majority (or greater) interest in the Company (whether by means of purchase of securities or assets or otherwise). The Company will promptly, and in any event within seven days after any officer of the Company or any of its Subsidiaries -20- 26 obtains knowledge of any material default by the Company under this Agreement, any other Investor Agreement or any other Contractual Obligation, furnish notice to each Principal Holder specifying the nature of the material default and stating the action the Company has taken or proposes to take with respect thereto. Promptly after the receipt thereof, the Company will furnish to each Principal Holder copies of any reports as to adequacies in accounting controls submitted by independent accountants. 5.2.7. NOTICES UNDER MATERIAL AGREEMENTS. The Company will furnish to its Board of Directors (including the Preferred Directors) copies of all amendments, modifications, notices of defaults, waivers and consents given to it or to any of its Subsidiaries pursuant to any Material Agreement. 5.2.8. INFORMATION PROVIDED TO STOCKHOLDERS. Within 10 days after its release to stockholders, the Company will furnish the holders of Investor Securities with copies of all information, proxy statements, notices, reports and other stockholder material mailed to stockholders. 5.2.9. INFORMATION PROVIDED TO BANKS. Within 10 days after its release to its senior bank lender, the Company will furnish the holders of Investor Securities with copies of all required information sent to its senior bank lender. 5.2.10. OTHER INFORMATION. From time to time upon the reasonable request of any authorized officer of any Principal Holder, the Company will furnish to any such authorized officer such information regarding the business, assets or financial condition of the Company and its Subsidiaries as such officer may reasonably request. Each such officer shall have the right during normal business hours at reasonable intervals and upon reasonable notice to examine the books and records of the Company and its Subsidiaries, to make copies and notes therefrom, and to make an independent examination of the books and records of the Company and its Subsidiaries at the expense of such Principal Holder and in a manner that does not interfere with the business operations of the Company and its Subsidiaries. 5.2.11. INTERVIEW RIGHTS. For the purpose of conducting independent investigations pursuant to Section 5.2.11, the Company shall make available to an authorized officer of any Principal Holder upon reasonable notice and at reasonable times (a) the Chief Financial Officer or the Chief Executive Officer, and (b) any officers, including accountants and internal control personnel. The Company shall use its best efforts to make available any directors of the Company who are not officers. 5.3. CONDUCT OF BUSINESS. 5.3.1. TYPE OF BUSINESS. The Company and its Subsidiaries will engage only in the business of developing, manufacturing, distributing and marketing ladies' and -21- 27 mens' soft line consumer products sold in retail stores, and in lines of business ancillary or related thereto. 5.3.2. MAINTENANCE OF PROPERTIES, ETC. Each of the Company and its Subsidiaries (a) will keep its properties and assets in such repair, working order and condition, and will from time to time make such repairs, renewals, replacements, additions and improvements thereto, as its management deems reasonably necessary and appropriate, and will comply at all times in all material respects with the provisions of all Contractual Obligations (including its Charter, Bylaws and Material Agreements) applicable to it so as to prevent any loss or forfeiture thereof or thereunder unless compliance therewith is being at the time contested in good faith by appropriate proceedings, and (b) will do all things necessary to preserve, renew and keep in full force and effect and in good standing its corporate existence and authority necessary to continue its business. 5.3.3. COMPLIANCE WITH LAWS. Each of the Company and its Subsidiaries will comply in all material respects with all Legal Requirements, as in effect from time to time, applicable to it, except where compliance therewith shall at the time be contested in good faith by appropriate proceedings. 5.3.4. INSURANCE. Each of the Company and its Subsidiaries will keep its assets which are of an insurable character insured against loss or damage by fire, explosion or other hazards which may be insured against by extended coverage in an amount sufficient to prevent it from becoming a co-insurer and in any event not less than 80% of the insurable value of the property insured, and will maintain insurance against liability to persons and property and other hazards and risks to the extent and in the manner customary for companies in similar businesses similarly situated. All such insurance shall be provided by reputable insurers licensed to write insurance in the jurisdiction where the insured entity is located; PROVIDED, HOWEVER, that the Company and its Subsidiaries may effect workers' compensation insurance or similar coverage with respect to operations in any particular state or other jurisdiction through an insurance fund operated by such state or jurisdiction. The Company will maintain in effect the key executive life insurance policy referred to in Section 3.7. 5.3.5. FOREIGN QUALIFICATION. Each of the Company and its Subsidiaries will be qualified as a foreign corporation in each jurisdiction in which it is required to qualify, except for such jurisdictions in which the failure to be so qualified could not have a Material Adverse Effect. 5.4. CHARTER AMENDMENT, ETC. The Charter and By-laws of the Company and its Subsidiaries shall not be amended without the express written consent of the Required Holders. -22- 28 5.5. MERGER, CONSOLIDATION AND SALE OF ASSETS. Neither the Company nor any of its Subsidiaries will become a party to or authorize any merger or consolidation, or sell, lease, sublease or otherwise transfer or dispose of any assets or enter into or authorize any such transaction or any liquidation or dissolution, except the following: 5.5.1. The Company and any of its Subsidiaries may sell or otherwise dispose of (a) inventory in the ordinary course of business, (b) tangible assets to be replaced in the ordinary course of business within 30 days by other tangible assets of equal or greater value and (c) tangible assets that are no longer used or useful in the ordinary course of business of the Company or such Subsidiary 5.5.2. Any wholly owned Subsidiary of the Company may merge or be liquidated into the Company or any other Wholly Owned Subsidiary of the Company so long as after giving effect to any such merger to which the Company is a party the Company shall be the surviving or resulting Person. 5.5.3. Mergers constituting Investments permitted by Section 5.9. 5.5.4. Sales or dispositions of assets made with the prior written consent of the Required Holders. 5.5.5. Assets having an aggregate fair market value of less than 25% of total assets of the Company and its Subsidiaries as of the Balance Sheet Date on an aggregate basis since the date hereof. 5.6. INDEBTEDNESS. Except with the prior written consent of the Required Holders, neither the Company nor any of its Subsidiaries shall incur or permit Indebtedness to exist or remain outstanding, except for: 5.6.1. Accounts payable for goods, services and taxes incurred in the ordinary course of business. 5.6.2. Redemption obligations with respect to Preferred Stock under the Certificate of Designation. 5.6.3. The Investor Notes and the Management Notes. 5.6.4. Other Indebtedness not in excess of 350% of Shareholders' Equity at any one time outstanding. 5.7. GUARANTEES. Neither the Company nor any of its Subsidiaries will make, have outstanding or otherwise become or remain liable with respect to any Guarantee except for: -23- 29 5.7.1. Endorsements for collection or deposit in the ordinary course of business. 5.7.2. Guarantees by the Company of any Indebtedness of its wholly owned Subsidiaries. 5.7.3. Guarantees by the Company consisting of inventory buyback credits and gross margin support arrangements with its customers consistent with past practices and in the ordinary course of business. 5.7.4. Guarantees described in Exhibit 5.7. 5.8. LIENS. Neither the Company nor any of its Subsidiaries will create or incur or suffer to be created or incurred or to exist any Lien; PROVIDED, HOWEVER, that the Company and its Subsidiaries may create or incur or suffer to be created or incurred or to exist: 5.8.1. Liens created by the Material Agreements. 5.8.2. Purchase money Liens (including mortgages, conditional sales, Capitalized Leases and any other title retention or deferred purchase devices or similar Contractual Obligations) on assets of the Company or any of its Subsidiaries existing or created at the time of acquisition thereof, and Liens securing the renewal, extension and refunding of Indebtedness secured by an assets subject to such a Lien in an amount not exceeding the amount thereof remaining unpaid; PROVIDED, HOWEVER, that the aggregate principal amount of Indebtedness (including Indebtedness in respect of Capitalized Lease Obligations) secured by Liens permitted by this Section 5.8.2 shall not exceed the amount permitted by Section 5.6.3, Indebtedness secured by each such Lien in each asset shall not exceed the cost of the asset subject thereto and such Lien shall attach solely to the particular asset so acquired and any additions or accessions thereto. 5.8.3. Liens to secure taxes, assessments and other governmental charges or claims for labor, material or supplies incurred in the ordinary course of business. 5.8.4. Deposits or pledges made in connection with, or to secure payment of, workers' compensation, unemployment insurance, old age pensions or other social security or in connection with bids or contexts to the extent incurred in the ordinary course of business. 5.8.5. Encumbrances in the nature of zoning restrictions, easements, rights or restrictions of record on the use of real property and landlord's and lessor's liens under leases on the premises rented, which do not materially detract from the value of such property or impair the use thereof in the business of the Company or any of its Subsidiaries. -24- 30 5.9. INVESTMENTS AND ACQUISITIONS. Neither the Company nor any of its Subsidiaries will have outstanding or acquire or commit itself to acquire or hold any Investment (including the acquisition of any other business) except: 5.9.1. Investments of the Company and its Subsidiaries in: (a) negotiable certificates of deposit, time deposits, money market accounts and bankers' acceptances issued by any United States bank or trust company, having a combined capital, surplus and undivided profits of not less than $100,000,000; (b) short-term corporate obligations rated Prime-1 by Moody's Investors Service Inc. or A-1 by Standard & Poor's Ratings Group; (c) any direct obligation of the United States of America or any agency or instrumentality thereof (i) which has a remaining maturity at the time of purchase of not more than one year or (ii) which is subject to a repurchase agreement with a bank described in clause (a) above exercisable within one year from the time of purchase; and (d) any registered investment company substantially all of the assets of which consist of Investments described in clauses (a), (b) and (c) above. 5.9.2. Investments of the Company to acquire Subsidiaries or make other acquisitions for an aggregate consideration not exceeding 125% of the amount shown in the Projections through the date of such Investment. 5.9.3. Loans and advances to employees not in excess of $100,000 in the aggregate at any one time outstanding. 5.9.4. Investments in any of the Company's wholly owned Subsidiaries. 5.9.5. Investments made with the prior written consent of the Required Holders. 5.10. DISTRIBUTIONS. Neither the Company nor any of its Subsidiaries shall make any Distribution except, so long as no Default shall exist immediately after giving effect to such Distribution: 5.10.1. Any Subsidiary may make Distributions to the Company or to any wholly owned Subsidiary which is its immediate parent. 5.10.2. The Company may repurchase shares of Common Stock in accordance with the Tag-Along and Stockholders Agreement. 5.10.3. The Company may pay dividends on the Preferred Stock in accordance with its terms. -25- 31 5.10.4. The Company may repurchase shares of Common Stock from its employees at cost or fair market value upon termination of employment. 5.10.5. On or prior to the Closing Date the Company may make a Distribution to its stockholders of up to $13,500,000, of which $3,000,000 shall be used to acquire the Management Notes on the Closing Date. 5.10.6. The Company may distribute to persons who were its stockholders prior to the date hereof 40% of the amount of additional deductions permitted to be taken by the Company after the Closing Date for expenditures made by it prior to the Closing Date on account of the resolution of the tax audit procedures described in Exhibit 4.12. 5.11. CAPITAL EXPENDITURES. The Company and its Subsidiaries will not make Capital Expenditures which exceed in any fiscal quarter 125% of Capital Expenditures provided in the Projections (or in the capital budget approved by the Board of Directors with the affirmative vote of the Preferred Directors) for such quarter. 5.12. LEASE OBLIGATIONS. Neither the Company nor any of its Subsidiaries shall be or become obligated as lessee under any lease except: 5.12.1. Capitalized Leases, if any, permitted by Section 5.6.2. 5.12.2. Leases expressly contemplated by the Projections, except for leases entered into with the prior written consent (or affirmative director votes) of the Preferred Directors. 5.13. COMPENSATION, ETC. The aggregate annual Compensation paid by the Company and its Subsidiaries to the five most highly compensated officers or employees of the Company and its Subsidiaries or their Affiliates shall not exceed the amounts set forth in Exhibit 5.13, adjusted annually to provide for cost of living increases corresponding to the Consumer Price Index, unless such compensation is increased with the approval of the Compensation Committee of the Board of Directors, which committee shall include a Preferred Director. At no time shall the annual Compensation paid to any officer or other employee of the Company or any of its Subsidiaries or to any of their Affiliates exceed arm's-length Compensation, except with the approval of the Compensation Committee, including the approval of the Preferred Director who is a member thereof. Any severance arrangements with respect to any employee shall in no event exceed one year salary except to the extent expressly approved by the Compensation Committee or as set forth in Exhibit 5.13 or the Material Agreements. The Company and its Subsidiaries shall not enter into written employment or management contracts except as set forth on Exhibit 5.13. The Company shall purchase disability insurance sufficient to cover its obligations to pay disability compensation under the employment agreements included in the Material Agreements. -26- 32 5.14. STOCK ISSUANCE, ETC. Except with the prior written consent of the Required Holders, neither the Company nor any Subsidiary will (a) issue, sell, give away, transfer, pledge, mortgage, assign or otherwise dispose of, (b) grant any rights (either preemptive or other) or options to subscribe for or purchase, or (c) enter into any agreements or issue any warrant providing for the issuance of any of the capital stock of the Company or any stock or securities convertible into or exchangeable for any of the capital stock of the Company, other than as expressly contemplated by the Investor Agreements (including Investments permitted by Section 5.9) or the Material Agreements. The Company shall issue options for, or shares of, Common Stock only upon direction of the Compensation Committee of the Company's Board of Directors, including the approval of the Preferred Director who is a member thereof. Except as contemplated by the Material Agreements, the Company shall not, or shall not subject itself to any obligation to, repurchase or otherwise acquire or retire any shares of the capital stock of the Company or any securities convertible into or exchangeable for any of the capital stock of the Company. 5.15. CLOSING COSTS. Closing Costs shall not exceed $540,000 as shown on the schedule previously furnished to the Investors. 5.16. AMENDMENT OF MATERIAL AGREEMENTS, ETC. Except with the prior written consent of the Board of Directors, including the affirmative vote of the Preferred Directors, the Company shall not agree to any amendment or modification of, or grant any waiver or fail to enforce any of its rights pursuant to, any of the Material Agreements if such amendment, modification, waiver or failure has or could have, directly or indirectly, any Material Adverse Effect or any adverse effect on any holder of any then outstanding Investor Securities or on the rights, remedies or interests of such holder hereunder or under any of the Material Agreements. Except to the extent prohibited by the Company's principal senior bank credit facility as from time to time in effect, neither the Company nor any of its Subsidiaries shall remain or become a party to or be bound by any agreement, deed, lease or other instrument which imposes any restriction or limitation on Distributions that are required to be made by the Company on or in respect of the Investor Securities or which restricts the ability of the Company's Subsidiaries to pay dividends or to make advances to the Company; PROVIDED, HOWEVER, that the Company and its Subsidiaries may become and remain party to the Material Agreements as in effect on the date hereof, with such changes therein as the Board of Directors, with the affirmative vote of the Preferred Directors may agree to in writing, and may perform their respective obligations thereunder to the extent not otherwise inconsistent with this Agreement. Except to the extent required by applicable law, neither the Company nor any of its Subsidiaries shall transfer any of its surplus to capital if as a result thereof the Company's ability to perform any of the terms of the Investor Agreements would be impaired. 5.17. REPLACEMENT OF CHIEF EXECUTIVE. Upon the death, resignation, retirement or removal of Gerald Cerce as Chief Executive Officer of the Company, a majority of the Investors shall have the right to participate in searching for, and to approve, his replacement. -27- 33 5.18. OWNERSHIP OF SUBSIDIARY STOCK. The Company shall not have any Subsidiary that is not a wholly owned Subsidiary other than Subsidiaries for which either (a) the Required Holders have provided their written consent, which may not be unreasonably withheld or (b) the Board of Directors, with the affirmative vote of the Preferred Directors, has provided its prior written consent. 5.19. TRANSACTIONS WITH AFFILIATES. Except for transactions expressly contemplated by the Investor Agreements, neither the Company nor any of its Subsidiaries shall effect or remain obligated with respect to any transaction with any Affiliate other than with the Company or any Wholly Owned Subsidiary of the Company except on terms no less favorable to the Company or any of its Subsidiaries than it could obtain in an arm's-length transaction with an unrelated party. 5.20. COMPLIANCE WITH ERISA, ETC. The Company and its Subsidiaries will meet all minimum funding requirements applicable to the Pension Plans imposed by ERISA or the Code (without giving effect to any waivers of such requirements or extensions of the related amortization periods which may be granted) and will at all times comply in all material respects with all other provisions of ERISA and the Code which are applicable to the Pension Plans and the Employee Benefit Plans. 5.21. SBA REQUIREMENTS. 5.21.1. INFORMATION. The Company will promptly furnish to the Investors that are SBICs upon request all forms that may be required to be filed with the SBA from time to time in connection with the transactions contemplated by this Agreement and such Investors' ownership of Investor Securities and shall provide such Investors and the SBA with such other information and forms (including all information necessary for the Investors to prepare SBA Form 468 and an accompanying assessment of economic impact under 13 CFR ss. 107.304(c)) as such Investors, in their reasonable discretion, or the SBA may from time to time request with respect to the transactions contemplated by this Agreement and such Investors' ownership of Investor Securities. The Company shall at all times permit any Investor that is an SBIC and, if necessary, a representative of the SBA, reasonable access to the Company's records during normal business hours upon prior notice and the Company shall provide such information as such Investor or the SBA may reasonably request in order to verify compliance with this Agreement, including an officer's certificate indicating such compliance. 5.21.2. COMPLIANCE; RESCISSION RIGHT. The Company will not engage in any discriminatory activities prohibited by 13 CFR parts 112, 113 and 117. The Company will not use directly or indirectly the proceeds of the issuance and sale of the Investor Securities for any purpose for which an SBIC is prohibited from providing funds under 13 CFR ss. 107.901. The Company shall not change its business activity in any manner which, by reason of such change in business activity, would render the Company -28- 34 ineligible as a "small business concern" under the Small Business Investment Act. The Company agrees that (a) any diversion of the proceeds from their intended use as specified in Section 2.5 or (b) the Company's becoming ineligible as a "small business concern" by reason of a change in the Company's business activity within one year from the Closing Date, shall entitle any Investor that constitutes an SBIC, upon demand, and in addition to any other remedies that may exist, to immediate rescission of this Agreement and repayment in full of the funds invested by it hereunder as contemplated by 13 CFR ss. 107.305 and 13 CFR ss. 107.706. 5.22. ANNUAL MEETING. Within 90 days after the Company's annual financial statements are required to be furnished in accordance with Section 5.2.1 and on not less than 10 days prior written notice, the Company will hold an annual meeting for the benefit of its stockholders, including the holders of Investor Securities. At such annual meeting the principal executive, financial and operations officers of the Company and its Subsidiaries will present a review of, and will discuss with those in attendance, in reasonable detail, the general affairs, management, financial condition, results of operations and business prospects of the Company and its Subsidiaries. 5.23. LISTING OF SHARES. If the shares of Common Stock issued to the Investors hereunder (including Common Stock issuable upon conversion of the Preferred Stock or upon exercise of the Warrants) require listing on any national securities exchange or quotation system, the Company will, at its expense and as expeditiously as possible, use its best efforts to cause such shares to be listed or duly approved for listing on such national securities exchange or quotation system, subject to official notice of issuance of such shares. 5.24. REAL PROPERTY HOLDING CORPORATION. Neither the Company nor any of its Subsidiaries shall become a "United States real property holding corporation" as defined in section 897(c)(2) of the Code and Treasury Regulation section 1.897-2(b). 5.25. REGULATORY COMPLIANCE COOPERATION. 5.25.1. EXCHANGE FOR NONVOTING SECURITIES. In the event that any Regulated Investor determines that it has a Regulatory Problem, the Company shall take such actions as are reasonably requested by such Regulated Investor in order (a) to facilitate any transfer by such Regulated Investor of any Investor Securities then held by it to any Person designated by such Regulated Investor, (b) to permit such Regulated Investor (or any of its Affiliates) to exchange all or any portion of the voting Investor Securities then held by it on a share-for-share basis for shares of a class of nonvoting securities of the Company, which nonvoting securities shall be identical in all respects to such voting Investor Securities, except that such new securities shall be nonvoting and shall be convertible into voting securities on such terms as are reasonably requested by each Regulated Investor in light of regulatory considerations then prevailing, and (c) to continue the respective allocation of the voting interests with respect to the Company -29- 35 and with respect to each Regulated Investor=s ownership of the voting Investor Securities. Such actions may include, but shall not necessarily be limited to: (i) entering into such additional agreements as are requested by each Regulated Investor to permit any Person designated by it to exercise any voting power which is relinquished by such Regulated Investor upon any exchange of voting Investor Securities for nonvoting securities of the Company; and (ii) entering into such additional agreements, adopting such amendments to the Certificate of Incorporation and bylaws of the Company and taking such additional actions as are reasonably requested by each Regulated Investor in order to effectuate the intent of the foregoing. 5.25.2. FUTURE SECURITIES ISSUANCES. In the Event a Regulated Investor has the right to acquire any securities of the Company (as the result of a preemptive offer, pro rata offer or otherwise), at such Regulated Investor=s request the Company will offer to sell to such Regulated Investor non-voting securities on the same terms as would have existed had such Regulated Investor acquired the securities so offered and immediately requested their exchange for non-voting securities pursuant to Section 5.25.1. The Company shall grant to any subsequent holder of Investor Securities originally acquired by any Investor, upon such Person's request, the same rights granted to the Regulated Investors pursuant to this Section 5.25. In the event that any Subsidiary of the Company ever offers to sell any of its securities, then the Company will cause such Subsidiary to enter into agreements with the Regulated Investors substantially similar to this Section 5.25. 6. INVESTOR SECURITIES; RESTRICTIONS ON TRANSFER 6.1. REPRESENTATIONS AND WARRANTIES OF THE INVESTORS. Each of the Investors severally represents and warrants to the Company that: (a) It is an "accredited investor" for purposes of Regulation D under the Securities Act and that it is acquiring the Investor Securities at the Closing for investment for its own account, and not with a view to selling or otherwise distributing the Investor Securities in violation of the Securities Act; PROVIDED, HOWEVER, that nothing shall prevent the Investors from transferring the Investor Securities in compliance with this Section 6; and PROVIDED, FURTHER, that the disposition of the Investors' property shall at all times remain in the Investors' control. (b) It has sufficient knowledge and experience in investing in companies similar to the Company in terms of the Company's stage of development so as to be -30- 36 able to evaluate the risks and merits of its investment in the Company and it is able financially to bear the risks thereof. (c) It has had an opportunity to discuss the Company, business, management and financial affairs with the Company's management and has received (or had made available to it) any financial and business documents requested by it. (d) It understands that (i) the shares of Investor Securities purchased by it have not been registered under the Securities Act by reason of their issuance in a transaction exempt from the registration requirements of the Securities Act pursuant to section 4(2) thereof or Rules 505 or 506 under the Securities Act, (ii) such shares must be held indefinitely unless a subsequent disposition thereof is registered under the Securities Act or is exempt from such registration, (iii) such shares will bear a legend to such effect and (iv) the Company will make a notation on its transfer books to such effect. (e) All offers to purchase the Investor Securities were made to it in The Commonwealth of Massachusetts or the State of Rhode Island. (f) It has no contract, arrangement or understanding with any broker, finder or similar agent with respect to the transactions contemplated by this Agreement. 6.2. HOME OFFICE PAYMENT. All payments made in respect of the Investor Securities held by the Investors shall be paid by Company check or wired to the address shown on Exhibit 1, accompanied by sufficient information to identify the source and application thereof or by such other method or at such other address as the Investors shall have from time to time given timely notice of to the Company. 6.3. REPLACEMENT OF LOST SECURITIES. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of a security and, in the case of any such loss, theft or destruction, upon delivery of an indemnity bond in such reasonable amount as the Company may determine (or, in the case of a security held by the Investors or any institutional holder or by the Investors or such institutional holder's nominee, of an unsecured indemnity agreement from the Investors or such other holder reasonably satisfactory to the Company), or, in the case of any such mutilation, upon the surrender of the security for cancellation to the Company at its principal office, the Company at its expense will execute and deliver in lieu thereof, a new security of like tenor. Any security in lieu of which any such new security has been so executed and delivered by the Company shall not be deemed to be an outstanding security for any purpose. 6.4. TRANSFER, EXCHANGE AND CONVERSION OF CAPITAL STOCK. The Company shall keep at its principal office a register in which shall be entered the names and addresses of the holders of the capital stock of the Company and particulars of the respective shares of Common -31- 37 Stock, Preferred Stock (including the classes thereof) and Warrants held by them and of all transfers, exchanges, conversions and redemptions of such capital stock. Upon surrender at such office or such other place as shall be duly specified by the Company of any certificate representing shares of capital stock for exchange or (subject to compliance with the applicable provisions of this Agreement, including the conditions set forth in Section 6.5) transfer or for exchange or conversion, the Company shall as appropriate issue, at its expense, one or more new certificates in such denomination or denominations as may be requested, and registered as such holder may request. Any certificate representing shares of capital stock surrendered for registration or transfer shall be duly endorsed, or accompanied by a written instrument of transfer duly executed by the holder of such certificate or his attorney duly authorized in writing. The Company will pay shipping and insurance charges, from and to each holder's principal office, upon any transfer, exchange or conversion provided for in this Section 6.4. 6.5. RESTRICTIONS ON TRANSFER. Investor Securities shall be transferable only upon satisfaction of the applicable conditions specified in this Section 6.5 or unless sold in an offering registered under the Securities Act or pursuant to an exemption from the registration requirements of the Securities Act. 6.5.1. RESTRICTIVE LEGEND. Except as otherwise permitted by Section 6.5.3, each certificate representing shares of Investor Securities shall bear a legend in substantially the following form: "The shares 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 transferred, in the absence of such registration or an exemption therefrom under such Act and under any such applicable state laws. In addition, the shares represented by this certificate are subject to restrictions on transfer contained in a Securities Purchase Agreement dated as of May 31, 1996, a copy of which is available at the issuer's office and will be furnished free of charge to the holder hereof" 6.5.2. TRANSFER RESTRICTIONS; NOTICE OF PROPOSED TRANSFER; OPINIONS OF COUNSEL. Except for transfers (a) in connection with the liquidation, termination, winding up or death of a holder of Investor Securities or (b) pursuant to an effective registration statement under the Securities Act or (c) to Affiliates of such holder or (d) to other Investors, a holder of Investor Securities may not transfer such securities to more than three Persons except with the consent of the Company, which consent may not be unreasonably withheld. Prior to any transfer of any Investor Securities other than pursuant to an effective registration statement under the Securities Act, the holder thereof will give written notice to the Company of such holder's intention to effect such transfer, describing in reasonable detail the manner of the proposed transfer. If any such holder delivers to the Company (a) an opinion of counsel in form and substance -32- 38 reasonably acceptable to the Company addressed to the Company to the effect that the proposed transfer may be effected without registration of such Investor Securities under the Securities Act or applicable state securities laws (or a certificate of an officer of such holder that the transfer is being made to a wholly owned Subsidiary of the holder's corporate parent) and (b) the written agreement of the proposed transferee to be bound by all of the terms and conditions of this Agreement (including this Section 6.5) and applicable to the Investors, such holder shall thereupon be entitled, within 10 days thereafter, to transfer such Investor Securities in accordance with the terms of this Agreement and the notice delivered by such holder to the Company. Each certificate representing such shares issued upon or in connection with such transfer shall bear the restrictive legend set forth in Section 6.5.1, in each case unless the restrictions on transfer provided for in Section 6.5 shall have ceased and terminated as to such Investor Securities pursuant to Section 6.5.3. 6.5.3. TERMINATION OF RESTRICTIONS. The restrictions imposed by Sections 6.5.1 and 6.5.2 upon the transferability of Investor Securities shall terminate as to any particular Investor Securities and any securities issued in exchange therefor or upon transfer thereof when, in the opinion of counsel reasonably acceptable to the Company, such restrictions are no longer required in order to assure compliance with the Securities Act. Whenever any of such restrictions shall terminate as to any Investor Securities, the holder thereof shall be entitled to receive from the Company, without expense, new certificates not bearing the legend set forth in Section 6.5.1. 7. EXPENSES, ETC. 7.1. EXPENSES. The Company hereby agrees to pay on demand all reasonable out-of-pocket expenses incurred by WPC in connection with the transactions contemplated by this Agreement and by any Investors in connection with any amendments or waivers (whether or not the same become effective) hereof and all expenses incurred by the Investors or any holder of any Investor Securities issued hereunder in connection with the enforcement in good faith of any rights hereunder or under any other Investor or Material Agreement, including (a) the reasonable fees, expenses and disbursements of WPC's special counsel in connection with the transactions contemplated by this Agreement and the other transactions consummated on or prior to the Closing Dates in an amount not exceeding $45,000 through the Closing Date; (b) reasonable expenses up to $16,000 in connection with the accountant's report as contemplated by Section 3.2; and (c) all taxes (other than taxes determined with respect to income), including any recording fees and filing fees and documentary stamp and similar taxes, at any time payable in respect of this Agreement, any other Investor Agreement or the issuance of any of the Investor Securities. 7.2. INDEMNIFICATION. The Company shall indemnify and hold the Investors and each of the Investors' partners, stockholders, officers, directors, employees and agents free and harmless from and against all actions, causes of action, suits, litigation, losses, liabilities and -33- 39 damages, investigations or proceedings instituted by any governmental agency or any other Person and expenses in connection therewith, including reasonable attorneys' fees and disbursements, incurred by the indemnitee or any of them as a result of, or arising out of, or relating to (a) any transaction financed or to be financed in whole or in part directly or indirectly with proceeds from the sale by the Company of any of the Investor Securities, or (b) the execution, delivery, performance or enforcement of this Agreement or any instrument contemplated hereby by any of the indemnities, except in each such case for any such indemnified liabilities arising on account of any indemnitee's gross negligence or willful misconduct. 7.3. SURVIVAL. The obligations of the Company to the Investors under this Section 7 shall survive the redemption, repurchase or transfer of any or all of the Investor Securities. 8. NOTICES. Any notice or other communication in connection with this Agreement or the Investor Securities shall be deemed to be delivered if in writing addressed as provided below and if either (a) actually delivered at said address, (b) in the case of a letter, seven business days shall have elapsed after the same shall have been deposited in the United States mails, postage prepaid and registered or certified, return receipt requested or (c) transmitted to any address outside of the United States, by telecopy and confirmed by overnight or two-day courier: If to the Company, to it at 500 George Washington Highway, Smithfield, RI 02197, telecopy: (401) 231-3212, telephone: (401) 231-3800 or at such other address as the Company shall have specified by notice actually received by the Principal Holders. If to the Investors, to the Investors' respective addresses set forth on Exhibit 1, or at such other address as the Investors shall have specified by notice actually received by the Company, in each case with a copy to WPC. If to any other holder of record of any Investor Security, to it at its address set forth in the registers of the Company. 9. CONFIDENTIALITY. Each Investor will maintain the confidential nature of information obtained from the Company concerning the Company and its Subsidiaries; PROVIDED, HOWEVER, that such Investor shall not be precluded from making disclosure regarding such information: (a) to counsel for WPC or any such Investor, accountants or other professional advisors on a need-to-know basis, (b) to any other Investor, (c) as required by law or applicable regulation, (d) to any participant in or assignee of any Investor Securities after notice to the Company so long as such participant or assignee has agreed to be bound by this Section 9 or (e) to the extent such information has become publicly available other than as a result of the violation of this Section 9. 10. AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular -34- 40 instance and either retroactively or prospectively) only with the written consent of the Required Holders. Any amendment or waiver effected in accordance with this Section 10 shall be binding upon each holder of any Investor Securities and the Company and each of its Subsidiaries. 11. SURVIVAL AND TERMINATION OF COVENANTS. All covenants, agreements, representations and warranties made herein or in any closing certificate or other certificate or written report delivered to the Investors pursuant to an express requirement hereof shall be deemed to have been material and relied on by the Investors, notwithstanding any investigation made by the Investors or on the Investors' behalf, shall survive the execution and delivery to the Investors hereof of the Investor Securities and shall terminate upon the closing of a Qualified Public Offering. 12. SERVICE OF PROCESS. Each of the Company and the Investors (a) irrevocably submits to the non-exclusive jurisdiction of the state courts of The Commonwealth of Massachusetts and to the non-exclusive jurisdiction of the United States District Court for the District of Massachusetts, for the purpose of any suit, action or other proceeding arising out of or based upon this Agreement or the subject matter hereof brought by any party hereto or such party's successors or assigns, and (b) waives to the extent not prohibited by law that cannot be waived, and agrees not to assert, by way of motion, as a defense, or otherwise, in any such proceeding, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment or execution, that any such proceeding brought in one of the above-named courts is improper, or that this Agreement or the Investor Securities, or the subject matter hereof or thereof, may not be enforced in or by such court. Each of the Company and the Investors consents to service of process in any such proceeding in any manner permitted by Chapter 223A of the General Laws of The Commonwealth of Massachusetts, and agrees that service of process registered or certified mail, return receipt requested, at its address specified in or pursuant to Section 8 is reasonably calculated to give actual notice. 13. WAIVER OF JURY TRIAL. TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW WHICH CANNOT BE WAIVED, THE INVESTORS AND THE COMPANY HEREBY WAIVE, AND COVENANT THAT NEITHER THE COMPANY NOR THE INVESTORS WILL ASSERT, ANY RIGHT TO TRIAL BY JURY ON ANY ISSUE IN ANY PROCEEDING, WHETHER AS PLAINTIFF, DEFENDANT OR OTHERWISE, IN RESPECT OF ANY ISSUE, CLAIM, DEMAND, ACTION OR CAUSE OF ACTION ARISING OUT OF OR BASED UPON THIS AGREEMENT OR THE SUBJECT MATTER HEREOF OR IN ANY WAY CONNECTED WITH, RELATED OR INCIDENTAL TO THE DEALINGS OF THE INVESTORS AND THE COMPANY HEREUNDER, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING AND WHETHER IN TORT OR CONTRACT OR OTHERWISE. The Company acknowledges that it has been informed by WPC that the provisions of this Section 13 constitute a material inducement upon which the Investors are relying and will rely in entering into this Agreement and purchasing the Investor Securities -35- 41 pursuant hereto. Any of Investors or the Company may file an original counterpart or a copy of this Section 13 with any court as written evidence of the consent of the Investors and the Company to the waiver of its right to trial by jury. 14. GENERAL. The invalidity or unenforceability of any term or provision hereof shall not affect the validity or enforceability of any other term or provision hereof. The headings in this Agreement are for convenience of reference only and shall not alter or otherwise affect the meaning hereof. This Agreement, the other Investor Agreements and the other items referred to herein or therein constitute the entire understanding of the parties hereto with respect to the subject matter hereof and thereof and supersede all present and prior agreements, whether written or oral. This Agreement is intended to take effect as a sealed instrument and may be executed in any number of counterparts which together shall constitute one instrument and shall be governed by and construed in accordance with the laws (other than the conflict of laws rules) of The Commonwealth of Massachusetts, and shall bind and inure to the benefit of the parties hereto and their respective successors and assigns. Whether or not any express assignment has been made of this Agreement, provisions of this Agreement that are for the Investors' benefit as the holder of any Investor Securities are also for the benefit of, and enforceable by, all subsequent holders of Investor Securities. -36- 42 The undersigned have executed this Agreement under seal as of the date first above written. ACCESSORIES ASSOCIATES, INC. By /s/ Gerald F. Cerce -------------------------------- Title: Chairman WESTON PRESIDIO CAPITAL II, L.P. By: WESTON PRESIDIO CAPITAL MANAGEMENT II, L.P. By /s/ Michael F. Cronin -------------------------- General Partner BANCBOSTON VENTURES, INC. By /s/ Charles Grant -------------------------------- Title: Vice President ST. PAUL FIRE AND MARINE INSURANCE COMPANY By /s/ Everett V. Cox -------------------------------- Title: Authorized Representative NATIONAL CITY CAPITAL CORPORATION By /s/ Carl E. Baldassarre -------------------------------- Title: Managing Director 43 EXHIBIT 1 TO SECURITIES PURCHASE AGREEMENT INVESTORS
Number Number Principal Aggregate of Preferred of Common Amount Purchase Shares Shares of Note Price ------------ --------- ---------- ----------- Name and Address - ---------------- Weston Presidio 17,100 19,000 $1,000,000 $10,050,000 Capital II, L.P. $ (9,000,000) 40 William Street - Suite 300 $ (50,000) Wellesley, MA 02181 Telephone: (617) 237-4700 Telecopy: (617) 237-6270 BancBoston Ventures, Inc. 6,840 7,600 400,000 $ 4,020,000 100 Federal Street - 31st Floor $ (3,600,000) Boston, Massachusetts 02110 $ (20,000) Telephone: (617) 434-2442 Telecopy: (617) 434-1153 St. Paul Fire and Marine Insurance 6,840 7,600 400,000 $ 4,020,000 Company $ (3,600,000) $ (20,000) c/o St. Paul Venture Capital, Inc. 8500 Normandale Lake Blvd. Suite 1940 Bloomington, Minnesota 55437 Telephone: (612) 830-7474 Telecopy: (612) 830-7475 National City Capital Corporation 3,420 3,800 200,000 $ 2,010,000 1965 E. 6th Street $ (1,800,000) Suite 1010 $ (10,000) Cleveland, OH 44114 Telephone: (216) 575-9482 Telecopy: (216) 575-9965 ------------ --------- ---------- ----------- Total: 34,200 38,000 $2,000,000 $20,100,000 $(18,000,000) $(100,000)
-38- EX-10.5 30 REGISTRATION RIGHTS AGRMT - 5/31/96 1 EXHIBIT 10.5 REGISTRATION RIGHTS AGREEMENT This Agreement, dated as of May 31, 1996 is among Accessories Associates, Inc., a Rhode Island corporation (the "COMPANY"), Weston Presidio Capital II, L.P. and the other Investors listed in SCHEDULE A (collectively, and together with their permitted successors and assigns, the "INVESTORS") and the other stockholders and stock optionholders of the Company listed in SCHEDULE B. The parties agree as follows: 1. DEFINITIONS. Except as the context otherwise explicitly requires, (a) the capitalized term "Section" refers to sections of this Agreement, (b) the capitalized term "Exhibit" refers to exhibits to this Agreement, (c) references to a particular Section include all subsections thereof and (d) the word "including" shall be construed as "including without limitation". Accounting terms used in this Agreement and not otherwise defined herein shall have the meanings provided in GAAP. Certain capitalized terms are used in this Agreement as specifically defined in this Section 1 as follows: 1.1. "COMMON STOCK" means the common stock, $0.01 par value, of the Company. 1.2. "COMPANY" is defined in the preamble. 1.3. "EXCHANGE ACT" means the federal Securities and Exchange Act of 1934. 1.4. "FORM S-2", "FORM S-3", "FORM S-4" and "FORM S-8" mean such respective forms under the Securities Act as in effect on the date hereof or any successor registration forms under the Securities Act subsequently adopted by the SEC. 1.5. "HOLDER" means any person owning or having the right to acquire Registrable Securities. 1.6. "INVESTORS" is defined in the preamble. 1.7. "MANAGEMENT STOCKHOLDERS" means the stockholders of the Company listed as Management Stockholders on Schedule B. 1.8. "PREFERRED STOCK" means the Series A Redeemable Convertible Preferred Stock, par value $0.01 per share, of the Company. 1.9. "PURCHASE AGREEMENT" means the Securities Purchase Agreement dated as of the date hereof among the Company and the Investors. 1.10. "REGISTER", "REGISTERED" and "REGISTRATION" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Securities Act. 1.11. "REGISTRABLE SECURITIES" means (a) the Common Stock issued or issuable upon conversion, exchange or exercise of the Preferred Stock and the Warrants, (b) any Common 2 Stock issued to the Investors pursuant to the Purchase Agreement, (c) any Common Stock issued (or issuable upon the conversion, exchange or exercise of any warrant, right or other security which is issued) as a dividend or other distribution with respect to, or in exchange for or in replacement of, such Preferred Stock and Warrants, or the Common Stock or Preferred Stock issued or issuable upon conversion, exchange or exercise of such Preferred Stock and Warrants, or the Common Stock described in clause (b) above, and (d) any Common Stock issued to the Management Stockholders, either directly or pursuant to options, warrants and other rights under employee plans permitted by the Purchase Agreement or hereafter issued or issuable as a dividend or other distribution with respect thereto or in exchange therefor or replacement thereof; PROVIDED, HOWEVER, that any shares previously sold to the public pursuant to a registered public offering or pursuant to Rule 144 under the Securities Act shall cease to be Registrable Securities. 1.12. "REGISTRABLE SECURITIES THEN OUTSTANDING" means the sum of (a) the number of shares of Common Stock outstanding which are Registrable Securities PLUS (b) the number of shares of Common Stock issuable pursuant to then exercisable, exchangeable or convertible securities which upon issuance would be Registrable Securities. 1.13. "REQUIRED INVESTORS" means those Investors who own at least two thirds of the Registrable Securities then outstanding owned by all Investors. 1.14. "SEC" means the Securities and Exchange Commission or any successor agency. 1.15. "SECURITIES ACT" means the federal Securities Act of 1933. 1.16. "VIOLATION" is defined in Section 8.1. 1.17. "WARRANTS" means the Warrants to purchase Common Stock issued pursuant to the Purchase Agreement. 2. REQUEST FOR REGISTRATION. 2.1. INVESTORS REQUEST RIGHTS. If the Company shall receive at any time after the earlier of (a) May 1, 2000 or (b) the date six months after the effective date of the first registration statement for a public offering of securities of the Company, a written request from the Investors owning at least 25% of the Registrable Securities then outstanding and owned by the Investors that the Company effect the registration under the Securities Act of at least 25% of the Registrable Securities then outstanding and owned by the Investors, then the Company shall, within five days after the receipt thereof, give written notice of such request to all Holders. Subject to the limitations of this Section 2, the Company shall use its best efforts to effect such a registration as soon as practicable, and in any event to file within 150 days after the receipt of such request or 90 days after approval of the selection of a managing underwriter pursuant to Section 2.2, whichever is later, a registration statement under the Securities Act covering all the Registrable Securities which the Holders shall request in writing within 20 days after receipt of such notice and any shares that the Company may wish to include, subject to any limitation imposed by the managing underwriters as set forth in Section 2.2. The Company shall use its best 2 3 efforts to cause such registration statement to become effective. The Company shall not be obligated to effect a registration under this Section 2 if the Registrable Securities requested to be registered have an expected aggregate public offering price of less than $10,000,000 as determined by the managing underwriter or by any other reasonable method. 2.2. UNDERWRITTEN OFFERING. The managing underwriter for the proposed offering to be registered under this Section 2 shall be selected by the Company's Board of Directors , with the approval of the Directors elected by the Investors pursuant to Section 5.2.1 of the Certificate of Designation for the Preferred Stock. In addition, approval by a disinterested majority of the Board of Directors is required if an affiliate of an Investor is selected as a managing underwriter. The right of any Holder to include its Registrable Securities in such registration shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting. All Holders proposing to sell Registrable Securities in such offering shall (together with the Company as provided in Section 4.5) enter into an underwriting agreement in customary form with the managing underwriter for such underwriting. Notwithstanding any other provision of this Section 2, if the managing underwriter for the offering advises the Company in writing that marketing factors require a limitation of the number of shares to be so underwritten, then the Company shall so advise all Holders of Registrable Securities which would otherwise be so underwritten, and the number of shares of Registrable Securities that may be included in the underwriting shall be allocated as follows: (a) for the initial public offering hereunder: (i) First, to the Company for the shares requested to be sold by it in such offering. (ii) Second, to the Investors requesting registration in such offering pro rata in accordance with the number of Registrable Securities requested by the Investors to be included in such offering. (iii) Third, to all other Holders pro rata in accordance with the number of Registrable Securities requested by such Holders to be included in such offering. (b) for any subsequent public offering hereunder: (i) First, to the Investors requesting registration in such offering pro rata in accordance with the number of Registrable Securities requested by the Investors to be included in such offering; (ii) Second, to all other Holders pro rata in accordance with the number of Registrable Securities requested by such Holders to be included in such offering; (iii) Third, to the Company for the shares requested to be sold by it in such offering. 2.3. NUMBER OF REQUESTS. Subject to the further provisions of this Section 2.3, the Company is obligated to effect only two registrations on Form S-1 pursuant to this Section 2, and only one such registration in any 12-month period. For purposes of this Section 2.3, a registered 3 4 offering on Form S-1 made pursuant to this Section 2 will not count as a registration described above in the event that (a) less than 25% of the stock sold in such offering are Registrable Securities owned by Investors after the Investors requested that such Registrable Securities constitute at least 25% of the stock to be included in such offering or (b) the Holders selling in such offering pay all the expenses of such offering otherwise payable by the Company under Section 7. 2.4. DEFERRAL OF REGISTRATION. Notwithstanding the foregoing provisions of this Section 2, the Company shall not be obligated to effect the filing of a registration statement pursuant to this Section 2 (a) during the period starting with the date 30 days prior to the Company's good faith estimate of the date of filing of, and ending on the date 180 days following the effective date of, a registration statement pertaining to the underwritten public offering of securities for the account of the Company, provided the Company is at all times during such period diligently pursuing such registration, or (b) if the Company shall furnish to Holders requesting a registration statement pursuant to this Section 2 a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would not be in the best interests of the Company and its stockholders generally for such registration statement to be filed. Under clause (b) the Company shall have the right to defer such filing for a period of not more than 180 days after receipt of the request for a registration under this Section 2; PROVIDED, HOWEVER, that the Company may not utilize the right set forth in clause (b) more than once in any 12-month period. 3. INCIDENTAL ("PIGGY-BACK") REGISTRATION. If the Company proposes to register any of its capital stock or other securities under the Securities Act in connection with the public offering of such securities solely for cash (other than a registration on Form S-8 relating solely to the sale of securities to participants in a Company stock plan or a registration on Form S-4 relating to an acquisition), the Company shall promptly give each Holder written notice of such registration. Upon the written request of any Holder given within 30 days after such notice, the Company shall use its best efforts to cause a registration statement covering all of the Registrable Securities that each such Holder has requested to be registered to become effective under the Securities Act. The Company shall be under no obligation to complete any offering of its securities it proposes to make under this Section 3 and shall incur no liability to any Holder for its failure to do so. Notwithstanding any other provisions of this Section 3, if the managing underwriter for the offering advises the Company in writing that marketing factors require a limitation of the number of shares to be underwritten, then the Company shall so advise all Holders of Registrable Securities which would otherwise be so underwritten, and the number of shares of Registrable Securities that may be included in the underwriting shall be allocated as follows: (a) First to the Company for shares requested to be sold by it in such offering. (b) Second to the Holders requesting registration in such offering pro rata in accordance with the number of Registrable Securities requested by the Holders to be included in such offering. 4 5 The Holders' rights under this Section 3 shall terminate on the second anniversary of the closing of an underwritten public offering of the Company's stock registered under the Securities Act that results in net proceeds of at least $20,000,000. 4. OBLIGATIONS OF THE COMPANY. Whenever required under Sections 2 or 3 to use its best efforts to effect the registration of any Registrable Securities, the Company shall take the following actions, as expeditiously as reasonably possible: 4.1. EFFECTIVENESS OF REGISTRATION. In cooperation with the selling Holders as contemplated by Section 5.2, the Company shall prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective. Upon the request of the Holders of a majority of the Registrable Securities registered thereunder, the Company shall keep such registration statement effective for up to nine months or until the Holders have informed the Company in writing that the distribution of their securities has been completed. 4.2. AMENDMENTS. The Company shall prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement, and use its best efforts to cause each such amendment to become effective, as may be necessary to comply with the Securities Act with respect to the disposition of all securities covered by such registration statement. 4.3. COPIES OF REGISTRATION STATEMENT. The Company shall furnish to each Holder such number of conformed copies of such registration statement and of each such 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 any summary prospectus), in conformity with the requirements of the Securities Act, such documents incorporated by reference in such registration statement or prospectus, and such other documents, as such Holder may reasonably request in order to facilitate the disposition of its Registrable Securities covered by such registration statement. 4.4. STATE QUALIFICATIONS. The Company shall use its best efforts to register or qualify such Registrable Securities under the securities or blue sky laws of such jurisdictions as each Holder shall reasonably request, and do all other acts which may be necessary or advisable to enable such Holder to consummate the disposition in such jurisdictions of its Registrable Securities covered by such registration statement; PROVIDED, HOWEVER, that the Company shall not be required to qualify as a foreign corporation in any state where it is not then required to qualify. 4.5. UNDERWRITING AGREEMENT. The Company shall enter into and perform its obligations under an underwriting agreement, in customary form not inconsistent with this Agreement, with the managing underwriter of such offering. 4.6. CHANGES IN PROSPECTUS. The Company shall notify each Holder of Registrable Securities covered by such registration statement, at any time when a prospectus relating thereto covered by such registration statement is required to be delivered under the Securities Act, of the 5 6 happening of any event as a result of which the prospectus included in such registration statement, as then in effect, 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 then existing. The Company shall promptly file such amendments and supplements which may be required pursuant to Section 4.2 on account of such event and use its best efforts to cause each such amendment and supplement to become effective. 4.7. OPINIONS AND COMFORT LETTERS. The Company shall furnish on the date that such Registrable Securities are delivered to the underwriters for sale in connection with a registration pursuant to this Agreement (a) an opinion, dated such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given by issuer's counsel to the underwriters in an underwritten public offering, addressed to the underwriters and to the Holders requesting registration of Registrable Securities and (b) a letter dated such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by the issuer's independent certified public accountants to underwriters in an underwritten public offering, addressed to the underwriters and to the Holders requesting registration of Registrable Securities. 4.8. TRANSFER AGENT. The Company shall provide a transfer agent and registrar for such Registrable Securities not later than the effective date of such registration statement. 4.9. LISTING SHARES. The Company shall apply for listing and use its best efforts to list the Registrable Securities being registered on any national securities exchange on which a class of the Company's equity securities are listed. If the Company does not have a class of equity securities listed on a national securities exchange, the Company shall apply for qualification and use its best efforts to qualify the Registrable Securities being registered for inclusion on the automated quotation system of the National Association of Securities Dealers, Inc. or an exchange. 5. PREPARATION OF REGISTRATION STATEMENT. 5.1. INFORMATION BY SELLING HOLDERS. The selling Holders shall furnish to the Company such information regarding themselves, the Registrable Securities held by them, and the intended method of disposition of such securities as shall be required to effect the registration of their Registrable Securities. 5.2. PARTICIPATION IN PREPARATION OF REGISTRATION STATEMENT. In connection with the preparation and filing of each registration statement registering Registrable Securities under the Securities Act, the Company will give the selling Holders, their underwriters and one counsel selected by the selling Holders and approved in writing by the Required Investors, the opportunity to participate in the preparation of such registration statement, each prospectus included therein or filed with the SEC, and each amendment thereof or supplement thereto, and will give each of them such access to its books and records and such opportunities to discuss the business of the Company with its officers and the independent public accountants who have certified its financial statements as shall be necessary, in the opinion of such selling Holder and such underwriters or 6 7 their respective counsel, to conduct a reasonable investigation within the meaning of the Securities Act to protect themselves from liability thereunder. 5.3. UNDERWRITING AGREEMENT. Each selling Holder shall enter into and perform its obligations under an underwriting agreement with the managing underwriter for such offering in customary form not inconsistent with this Agreement, including furnishing any opinion of counsel and agreeing to indemnification obligations reasonably requested by the managing underwriter, but in no event will any holder be liable for indemnification obligations in excess of the net offering proceeds received by such Holder. 6. FORM S-3 REGISTRATION. In case the Company shall receive from any Holder a written request that the Company effect a registration on Form S-3 and any related qualification or compliance with respect to all or a part of the Registrable Securities owned by such Holder or Holders, the Company will: 6.1. NOTICE TO HOLDERS. Promptly give written notice of the proposed registration, and any related qualification or compliance, to all other Holders. 6.2. SHORT-FORM REGISTRATION. Use its best efforts to effect, as soon as practicable, such registration, qualification or compliance as may be so requested and as would permit or facilitate the sale and distribution of all of such Holder's Registrable Securities as are specified in such request, together with all of the Registrable Securities of any other Holders joining in such request as are specified in a written request given within 30 days after mailing of such written notice by the Company; PROVIDED, HOWEVER, that the Company shall not be obligated to effect any such registration, qualification or compliance pursuant to this Section 6 if: (a) Form S-3 is not available for such offering by the Holders; (b) the aggregate offering price, minus underwriting discounts and commissions, of the Registrable Securities specified in such request is not at least $1,000,000; (c) the Company shall furnish to the Holders a certificate signed by the president of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would not be in the best interests of the Company and its stockholders for such Form S-3 registration to be effected at such time, in which event the Company shall have the right to defer the filing of the Form S-3 registration for a period of not more than 180 days after receipt of the request of the Holder or Holders under this Section 6; PROVIDED, HOWEVER, that the Company shall not utilize this right more than once in any 12-month period and (d) the Company shall not be required to keep such registration statement effective for more than 180 days. 7. EXPENSES OF REGISTRATION. All expenses other than underwriting discounts and commissions relating to Registrable Securities incurred in connection with each of the registrations, filings or qualifications pursuant to Sections 2, 3 or 6 including (without limitation) all registration, filing and qualification fees, all fees and expenses in connection with compliance with state securities or blue sky laws, printing and delivery expenses, fees and disbursements of counsel and independent public accountants for the Company, and the reasonable fees and disbursements of one law firm acting as counsel for the selling Holders shall be paid by the Company; PROVIDED, HOWEVER, that the Company shall not be required to pay for any expenses of any registration proceeding begun pursuant to Section 2 if the registration request is subsequently 7 8 withdrawn at any time at the request of the Investors (in which case all participating Holders shall bear such expenses), unless the Required Investors agree to forfeit their right to one demand registration pursuant to Section 2; PROVIDED FURTHER, however, that if at the time of such withdrawal, the Holders have learned of a material adverse change in the financial condition, business or prospects of the Company from that known to the Investors at the time of their request that makes the proposed offering unreasonable in the good faith judgment of the Investors, then the Holders shall not be required to pay any of such expenses. Underwriting discounts and commissions relating to Registrable Securities will be paid ratably by the Holders of such Registrable Securities. 8. INDEMNIFICATION. 8.1. COMPANY INDEMNIFICATION. To the extent permitted by law, the Company will indemnify and hold harmless each Holder, the officers, directors, partners, agents and employees of each Holder, any underwriter (as defined in the Securities Act) for such Holder, and each person, if any, who controls such Holder or underwriter within the meaning of the Securities Act or the Exchange Act, against any losses, claims, damages or liabilities (joint or several) to which any of them may become subject under the Securities Act, the Exchange Act, other federal or state law or otherwise, and to reimburse them for any legal or any other expenses reasonably incurred by them in connection with investigating any claim, or defending any action or proceeding, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (a "VIOLATION"): (a) any untrue statement or alleged untrue statement of a material fact contained or incorporated by reference in any registration statement under which Registrable Securities were registered, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (b) 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, or (c) any violation or alleged violation by the Company of the Securities Act, the Exchange Act, any state securities law or any rule or regulation under the Securities Act, the Exchange Act or any state securities law. The indemnity provisions in this Section 8.1 shall not apply to amounts paid in settlement of any loss, claim, damage, liability or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld), nor shall the Company be liable to a Holder in any such case for any such loss, claim, damage, liability or action (i) to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by or on behalf of such Holder, underwriter or controlling person or (ii) in the case of a sale directly by a Holder of Registrable Securities (including a sale of such Registrable Securities through any underwriter retained by such Holder to engage in a distribution solely on behalf of such Holder) such untrue statement or alleged untrue statement or omission or alleged omission was contained in a preliminary prospectus and corrected in a final or amended prospectus, and such Holder failed to deliver a copy of the final or amended prospectus at or prior to the confirmation of the sale of the Registrable Securities, as the case may be, to the person asserting any such loss, claim, damage or liability in any case where such delivery is required by the Securities Act. 8 9 8.2. HOLDER INDEMNIFICATION. To the extent permitted by law, each selling Holder will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed the registration statement, each person, if any, who controls the Company within the meaning of the Securities Act, each agent and any underwriter for the Company, and any other Holder selling securities in such registration statement or any of its directors, officers, partners, agents or employees or any person who controls such Holder or underwriter, against any losses, claims, damages or liabilities (joint or several) to which the Company or any such director, officer, controlling person, agent, or underwriter or controlling person, or other such Holder or director, officer or controlling person may become subject, under the Securities Act, the Exchange Act or other federal or state law or otherwise, and to reimburse them for any legal or any other expenses reasonably incurred by them in connection with investigating any claim, or defending any action or proceeding, insofar as such losses, claims, damages or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by or on behalf of such Holder expressly for use in connection with such registration; PROVIDED, HOWEVER, that the liability of any Holder hereunder shall be limited to the amount of proceeds received by such Holder in the offering giving rise to the Violation or if the offering is terminated, the amount such Holder would have received; and PROVIDED, FURTHER, that the indemnity provisions in this Section 8.2 shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder (which consent shall not be unreasonably withheld), nor shall the Holder be liable to the Company in any such case in which such untrue statement or alleged untrue statement or omission or alleged omission was contained in a preliminary prospectus and corrected in a final or amended prospectus, and the Company failed to deliver a copy of the final or amended prospectus at or prior to the confirmation of the sale of the securities to the person asserting any such loss, claim, damage or liability in any case where such delivery is required by the Securities Act. 8.3. NOTICE, DEFENSE AND COUNSEL. Promptly after receipt by an indemnified party under this Section 8 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 8, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume and control the defense thereof with counsel mutually reasonably satisfactory to the parties; provided, however, that an indemnified party shall have the right to retain its own counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action shall relieve such indemnifying party of any liability to the indemnified party under this Section 8 only to the extent the indemnifying party is actually prejudiced in its ability to defend such action, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 8. 9 10 8.4. CONTRIBUTION IN LIEU OF INDEMNIFICATION. If the indemnification provided for in Sections 8.1 or 8.2 is unavailable to a person that would have been an indemnified party in respect of any losses, claims, damages or liabilities (or actions in respect thereof) referred to therein, then each person that would have been an indemnifying party thereunder shall, in lieu of indemnifying such indemnified party, contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and such indemnified party on the other in connection with the untrue or alleged untrue statements of a material fact or omissions which resulted in such losses, claims, damages or liabilities (or actions in respect thereof). The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the indemnifying party or such indemnified party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this Section 8.4 shall include any such action or claim (which shall be limited as provided in Section 8.3 if the indemnifying party has assumed the defense of any such action in accordance with the provisions thereof). 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. 8.5. SURVIVAL OF RIGHTS AND OBLIGATIONS. The obligations of the Company, the Holders under this Section 8 shall survive the completion of any offering of Registrable Securities in a registration statement whether under this Agreement or otherwise. 9. REPORTS UNDER EXCHANGE ACT. In order to provide to the Holders the benefits of Rule 144 under the Securities Act and any other rule or regulation of the SEC that may at any time permit a Holder to sell securities of the Company to the public without registration, and in order to make it possible for Holders to register the Registrable Securities pursuant to a registration on Form S-3, the Company agrees to: 9.1. PUBLIC INFORMATION. Make and keep public information available, as those terms are understood and defined in Rule 144, at all times after 90 days after the effective date of the first registration statement filed by the Company for the offering of its securities to the general public. 9.2. EXCHANGE ACT REGISTRATION. Take such action, including the voluntary registration of its Common Stock under section 12 of the Exchange Act, as is necessary to enable the Holders to utilize Form S-3 for the sale of their Registrable Securities, such action to be taken as soon as practicable (but not later than 90 days) after the end of the fiscal year in which the first registration statement filed by the Company for the offering of its securities to the general public is declared effective. 9.3. TIMELY FILING. File with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act. 10 11 9.4. COMPLIANCE; INFORMATION. Furnish to any Holder, so long as the Holder owns any Registrable Securities, forthwith upon request (a) a written statement by the Company that it has complied with the reporting requirements of Rule 144 (at any time after 90 days after the effective date of the first registration statement filed by the Company), the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), or that it qualifies as a registrant whose securities may be resold in a secondary offering pursuant to Form S-3 (at any time after it so qualifies), (b) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (c) such other information as may be reasonably requested in availing any Holder of any rule or regulation of the SEC which permits the selling of any such securities without registration or pursuant to such form. 10. LOCK-UP AGREEMENTS. If requested by the managing underwriter in connection with an underwritten offering hereunder, the Holders shall enter into lock-up agreements pursuant to which they will not, for a period of seven days prior to, and 180 days (90 days for offerings subsequent to the initial public offering hereunder) following, the effective date of a registration statement for the offering of the Company's securities, or any other period reasonably requested by the managing underwriter, publicly offer or sell any of the Registrable Securities without the prior consent of the managing underwriter, provided that (a) the officers and directors of the Company enter into lock-up agreements with terms at least as restrictive and (b) the Holders shall be able to offer publicly and sell Registrable Securities free from the lock-up provisions contemplated by this Section 10 for at least 90 consecutive days in each period of 360 consecutive days. 11. LIMITATIONS ON OTHER REGISTRATION RIGHTS. The Company shall not, without the prior written consent of the Investors owning at least two thirds of the Registrable Securities then outstanding owned by all Investors, enter into any agreement with any holder or prospective holder of any securities of the Company which would allow such holder or prospective holder to (a) require the Company to effect a registration, or (b) include any securities in any registration filed under Sections 2 or 3 unless, under the terms of such agreement, such holder or prospective holder may include such securities in any such registration only to the extent that the inclusion of such securities will not reduce the amount of Registrable Securities to be included by the Holders or the Company. 12. TERMINATION OF REGISTRATION RIGHTS. In addition to the termination provisions set forth in Section 3, the registration rights contained in Section 2, 3 and 6 shall terminate on the date when (a) the Investors own less than 25% of the Registrable Securities owned by them on the date hereof AND (b) the Investors may sell all their then Registrable Securities under Rule 144. 13. GENERAL. 13.1. NOTICES. All notices or other communications required or permitted to be delivered hereunder shall be in writing and shall be delivered to each of the parties at their respective addresses as set forth in Schedules A or B. Any party to this Agreement may at any time change the address to which notice to such party shall be delivered by giving notice of such change to the other parties to this Agreement and such notice shall be deemed given when received by the other 11 12 parties hereto. Notices shall be deemed effectively given when personally delivered or sent to the recipient at the address set forth above by telex or a facsimile transmission, one business day after having been delivered to a receipted, nationally recognized courier, properly addressed or five business days after having been deposited into the United States mail, postage prepaid, PROVIDED, that any notice to any party outside of the United States shall be sent by telecopy and confirmed by overnight or two-day courier. 13.2. AMENDMENTS, WAIVERS AND CONSENTS. Any provision in this Agreement to the contrary notwithstanding, changes in or additions to this Agreement may be made, and compliance with any covenant or provision herein set forth may be omitted or waived, if the Company (a) shall obtain consent thereto in writing from Investors holding an aggregate of at least two thirds of the Registrable Securities then outstanding owned by the Investors and (b) shall, in each such case, deliver copies of such consent in writing to any Holders who did not execute the same; PROVIDED, HOWEVER, that any such amendment or waiver adversely affecting the Management Stockholders in a manner distinct from the effect of such amendment or waiver on the other Holders shall require the written consent of the Management Stockholders holding a majority of the Registrable Securities then outstanding owned by all Management Stockholders. 13.3. BINDING EFFECT; ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the personal representatives, successors and assigns of the respective parties hereto. The Company shall not have the right to assign its rights or obligations hereunder or any interest herein without obtaining the prior written consent of the Investors holding a majority of the Registrable Securities then outstanding owned by the Investors. The Holders may assign or transfer their rights under this Agreement to the extent (a) permitted by the other agreements between the respective Holders and the Company and (b) to the extent that such assignee or transferee owns or obtains Registrable Securities having a fair value of at least $100,000. 13.4. SEVERABILITY. If any provision of this Agreement shall be found by any court of competent jurisdiction to be invalid or unenforceable, the parties waive such provision to the extent that it is found to be invalid or unenforceable. Such provision shall, to the maximum extent allowable by law, be modified by such court so that it becomes enforceable and, as modified, shall be enforced as any other provision hereof, all the other provisions hereof continuing in full force and effect. 13.5. HEADINGS. The headings contained in this Agreement are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. 13.6. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof and supersedes all prior and contemporaneous understandings, whether written or oral. 13.7. COUNTERPARTS. This Agreement may be executed in counterparts, all of which together shall constitute one and the same instrument. 12 13 13.8. CHOICE OF LAW. This Agreement shall be governed by and construed in accordance with the laws (other than the conflict of laws rules) of The Commonwealth of Massachusetts. The parties have caused this Agreement to be duly executed under seal as of the date first above written. ACCESSORIES ASSOCIATES, INC. By /s/ Gerald F. Cerce ------------------------------------ Title: Chairman INVESTORS: WESTON PRESIDIO CAPITAL II, L.P. By: WESTON PRESIDIO CAPITAL MANAGEMENT II, L.P. By /s/ Michael F. Cronin ------------------------------------ General Partner BANCBOSTON VENTURES, INC. By /s/ Charles Grant ------------------------------------ Title: Vice President ST. PAUL FIRE AND MARINE INSURANCE COMPANY By /s/ Everett V. Cox ------------------------------------ Title: Authorized Representative NATIONAL CITY CAPITAL CORPORATION By /s/ Carl E. Baldassarre ------------------------------------ Title: Managing Director 13 14 MANAGEMENT STOCKHOLDERS ----------------------------------- Name: ----------------------------------- Name: ----------------------------------- Name: 14 15 SCHEDULE A TO REGISTRATION RIGHTS AGREEMENT INVESTORS
Number Number Name and Address Preferred Shares of Common Shares - ---------------- ---------------- ---------------- Weston Presidio Capital II, L.P. 17,100 19,000 40 William Street - Suite 300 Wellesley, MA 02181 Telephone: (617) 237-4700 Telecopy: (617) 237-6270 BancBoston Ventures, Inc. 100 Federal Street - 31st Floor 6,840 7,600 Boston, Massachusetts 02110 Telephone: (617) 434-2442 Telecopy: (617) 434-1153 St. Paul Fire and Marine Insurance 6,840 7,600 Company c/o St. Paul Venture Capital, Inc. 8500 Normandale Lake Blvd. Suite 1940 Bloomington, Minnesota 55437 Telephone: (612) 830-7474 Telecopy: (612) 830-7475 National City Capital Corporation 3,420 3,800 1965 E. 6th Street Suite 1010 Cleveland, OH 44114 Telephone: (216)575-9482 Telecopy: (216)575-9965 ------ ------ Total: 34,200 38,000
16 SCHEDULE B TO REGISTRATION RIGHTS AGREEMENT Management Stockholders
Number of Common Stock Stockholders and Address Shares Held at Closing - ------------------------ ---------------------- John H. Flynn, Jr. 28,500 shares 52 Second Street Newport, RI 02840 Felix A. Porcaro, Jr. 171,000 shares 5 Lori Ellen Drive Lincoln, RI 02865 Robert V. Lallo 28,500 shares 132 Division Street East Greenwich, RI 02818 Gerald F. Cerce 342,000 shares 143 Meeting Street Providence, RI 02906
17 EXHIBIT 10.5 FIRST AMENDMENT TO REGISTRATION RIGHTS AGREEMENT This First Amendment to Registration Rights Agreement made and entered into as of this 11th day of December, 1996 by and between Accessories Associates, Inc., a Rhode Island corporation (the "Company"), Weston Presidio Capital II, L.P. and the other Investors executing this First Amendment (collectively, and together with their permitted successors and assigns the "Investors") and the other Stockholders and Stock Optionholders of the Company listed in Schedule B. RECITALS On May 31, 1996, the Company and Weston Presidio Capital Management II L.P., BancBoston Ventures, Inc., St. Paul Fire and Marine Insurance Company and National City Corporation (the "Initial Investors")together with the persons listed in Schedule B attached hereto entered into a Registration Rights Agreement (the "Agreement") granting to the Initial Investors certain registration and other rights. The Initial Investors have authorized the issuance of ninety-five hundred (9,500) additional shares of the Company's Series A Redeemable Convertible Preferred Stock, par value $0.01 per share (the "Shares"). The Company proposes to issue the ninety-five hundred (9,500) Shares in the amounts indicated to the persons listed hereto on Schedule C hereto (collectively referred to as the "Subsequent Investors"). As consideration in part for their purchase of the Shares, the Subsequent Investors have requested to become parties to the Registration Rights Agreement. The Company, the Initial Investors and the persons listed on Schedule B are willing to do so. NOW THEREFORE, in consideration of the promises and agreements herein contained and for other good and valuable consideration, the receipt and sufficiency whereof is hereby acknowledged, it is agreed as follows: 1. Effective upon the execution of this Agreement, each Subsequent Investor shall become, and shall be, a party to the Agreement and the term "Investors" wherever set forth in the Agreement shall be deemed to include each of the Initial Investors and the Subsequent Investors. 2. Except as modified herein, the Agreement is hereby ratified, confirmed and approved. IN WITNESS WHEREOF, the parties have executed this agreement as of the day and date first above written. ACCESSORIES ASSOCIATES, INC. By: /s/ Gerald F. Cerce ----------------------------------- Chairman 18 INITIAL INVESTORS: WESTON PRESIDIO CAPITAL II, L.P. By: WESTON PRESIDIO CAPITAL MANAGEMENT II, L.P. General Partner By: /s/ Michael F. Cronin ------------------------------- BANCBOSTON VENTURES, INC. By: /s/ Charles Grant ----------------------------------- ST. PAUL FIRE AND MARINE INSURANCE COMPANY By: /s/ Everett V. Cox ----------------------------------- NATIONAL CITY CAPITAL CORPORATION By: /s/ Carl E. Baldassarre ----------------------------------- SUBSEQUENT INVESTORS: MARLIN CAPITAL, L.P. By: MARLIN HOLDINGS, INC., General Partner By: /s/ Martin E. Franklin ------------------------------- 2 19 FIRST GLOBAL INVESTMENTS LIMITED By: /s/ Elizabeth LePoidevin ----------------------------------- IONIC HOLDINGS L.D.C. By: /s/ Elizabeth LePoidevin ----------------------------------- NEW HENLEY OVERSEAS INVESTMENTS, INC. By: /s/ Elias S. Zilkha ----------------------------------- ORACLE INVESTMENTS AND HOLDINGS, LIMITED By: /s/ Elizabeth LePoidevin ----------------------------------- BRAHMAN PARTNERS II, L.P. By: /s/ Peter A. Hochfelder ----------------------------------- B.Y. PARTNERS, L.P. By: /s/ Peter A. Hochfelder ----------------------------------- QUASAR INTERNATIONAL PARTNERS CV By: /s/ Peter A. Hochfelder ----------------------------------- 3 20 BRAHMAN PARTNERS II OVERSHORE LTD. By: /s/ Peter A. Hochfelder ----------------------------------- SCHEDULE B PERSONS /s/ Gerald F. Cerce --------------------------------------- Gerald F. Cerce /s/ John H. Flynn, Jr. --------------------------------------- John H. Flynn, Jr. /s/ Robert V. Lallo --------------------------------------- Robert V. Lallo /s/ Felix A. Poccaro --------------------------------------- Felix A. Poccaro /s/ Michael Aviles --------------------------------------- Michael Aviles /s/ Duane M. DeSisto --------------------------------------- Duane M. DeSisto /s/ Thomas E. McCarthy --------------------------------------- Thomas E. McCarthy /s/ Daniel A. Triangolo --------------------------------------- Daniel A. Triangolo 4 EX-10.6 31 MEMBER AGREEMENT ROGER D. DREYER 1 EXHIBIT 10.6 MEMBER AGREEMENT ROGER D. DREYER INTRODUCTION THIS AGREEMENT, is by and among AAi.FOSTERGRANT, Inc., a Rhode Island corporation, ("AAi"), and Roger D. Dreyer, a resident of the State of New York, ("Dreyer") and Houdini Capital LTD, a New York corporation ("Capital"). RECITALS AAi purchased a 67.0% membership interest in Fantasma, LLC, a Delaware limited liability company, (the "Company") from Overdrive Capital Corp. pursuant to an AGREEMENT (Purchase and Sale of Percentage Interest), dated the date hereof, by and between Overdrive Capital Corp., as seller, and AAi, as buyer, and AAi purchased a 13.0% membership interest from Dreyer pursuant to an AGREEMENT (Purchase and Sale of Percentage interest), dated the date hereof, by and between Roger D. Dreyer, as seller, and AAi, as buyer. Simultaneously, Roger D. Dreyer assigned his remaining 20% Percentage Interest in Capital in exchange for 100% of the authorized and issued shares of stock of Capital. Consequent to the above-described transactions, AAi is the owner of a majority of the membership interests of Fantasma. Dreyer is an officer and employee of the Company and owns 100% of the authorized and issued shares of capital stock of Capital. AAi is prepared to offer additional membership interests to Capital upon the terms and subject to the conditions set forth below. AGREEMENT A. OPTION TO PURCHASE BY CAPITAL. 1. Provided the Company's EBIT meets or exceeds the following Target EBIT for the applicable Year set forth below, Capital shall have the following options to purchase from AAi up to eight percent (8%) of total membership interests of the Company (the "Percentage") for the Purchase Prices set forth below with the respective exercise dates ("Exercise Date") set forth below:
Option Year Exercise Date Percentage Target EBIT Purchase Price - ------ ---- ------------- ---------- ----------- -------------- #1. 1998 30 days after the date the 2 2/3% $2,549,812 $92,422 EBIT calculations are provided to Dreyer #2. 1999 30 days after the date the 2 2/3% * $92,422 EBIT calculations are provided to Dreyer
- -------- * To be based on sales consistent with EXHIBIT A-1, and expenses consistent, on a percentage of net sales basis, with EXHIBIT A-2. 2
Option Year Exercise Date Percentage Target EBIT Purchase Price - ------ ---- ------------- ---------- ----------- -------------- #3. 2000 30 days after the date the 2 2/3% * $92,422 EBIT calculations are provided to Dreyer
2. Notwithstanding the foregoing, in the event that Dreyer's employment with the Company is terminated by the Company pursuant to SECTION 5.b of the Employment Agreement between Dreyer and the Company dated this date, then Capital shall have the option to purchase the balance of the 8% Percentage that it has not theretofore purchased, with an Exercise Date of twenty (20) days after the said termination of employment. Upon the earlier of the expiration of the Exercise Date without its exercise of such option or the purchase of membership interests after such exercise, all of its rights to the options set forth above shall terminate. The Purchase Price per one percent (1%) membership interest pursuant to this paragraph shall be the greater of (a) $34,615 or (b) four times EBIT divided by 100. 3. Notwithstanding the foregoing, at any time, whether or not the Target EBIT have been met, Capital shall have the option to purchase the entire balance of the 8% Percentage that he has not theretofore purchased, provided that if it does not exercise such option by the Exercise Date or purchase the membership interests after such exercise, the options with respect thereto shall terminate, and upon such purchase all of its rights to the options set forth in SECTION 1 shall terminate. The Purchase Price per one percent (1%) membership interest pursuant to this SECTION 3 shall be the greater of (a) $34,615 or (b) four times the Company's EBIT divided by 100. 4. If Paul Michaels has not elected to purchase all of the 5% of membership interests under the options granted to him by AAi under the Membership Agreement between him and AAi , dated this date, Capital shall be entitled to purchase the excess of 5% over what Paul Michaels previously purchased, by Capital electing to do so with an Exercise Date of sixty (60) days after Paul Michael's Exercise Date. The purchase price per 1% membership interest shall be four times the Company's EBIT divided by 100. 5. Except as set forth in SECTIONS A.2 AND 3, the Company's EBIT meeting or exceeding the Target EBIT set forth above for the applicable Year shall be an absolute precondition to the option for that Year, and there shall be no option for any Year for which the Company's EBIT did not meet or exceed the Target EBIT for such Year. Each Option shall be a separate option, and shall not be transferable or assignable. Each Option shall be exercisable in a writing delivered by Capital to AAi no earlier than 30 days before the Exercise Date set forth above and no later than the Exercise Date set forth above. The exercise of the option granted hereby shall not be valid unless accompanied by a certified or bank check payable to AAi in the amount to the Purchase Price set forth above. If an option is not validly exercised by the Exercise Date set forth above, the option shall expire and may not be later exercised. The options are personal to Capital and no Transfer shall be effective without the prior written consent of AAi, which consent may be withheld in its sole and absolute discretion. All of Capital's rights to the options, and all rights to receive membership interests from AAi pursuant to any 2 3 exercise of the options, shall automatically and irrevocably expire immediately at the earlier of the following: (a) any Transfer or attempted Transfer of an option, a membership interest in the Company or the capital stock of Capital, without AAi's consent; (b) Dreyer's death; (c) the termination (for any reason) of Dreyer's employment with the Company, its affiliates and any respective successors in interest; (d) at any time AAi holds more than 81% of all membership interests in the Company; or (e) the Company's tangible net worth as calculated by the Company's independent auditors in accordance with generally accepted accounting principles consistently applied becomes less than $400,000 at the end of any fiscal year. For purposes of this SECTION A, calculation of EBIT shall not include amortization of goodwill or expenses associated with AAi's acquisition of its membership interests in the Company, but include expenses of affiliated companies allocated to the Company; provided, however, for specific categories of expenses set forth on EXHIBIT A, attached hereto, such expenses shall not exceed the percentages represented by the amounts set forth in such expense categories set forth on EXHIBIT A. 6. Notwithstanding the foregoing, at and after an initial public offering of AAi's common stock, all options outstanding thereunder, including but not limited to any that have been exercised, but membership interests not purchased or transferred, shall be satisfied through the issuance of shares of AAi's common stock with the amount of stock to be issued hereunder to be determined by taking the aggregate purchase price payable pursuant to the option and dividing it by the average selling price of a share of AAi common stock during the ten (10) trading days immediately prior to the exercise (or, if the exercise is after the filing of AAi's registration statement with the United States Securities and Exchange Commission in connection with AAi's initial public offering, such exercise to be effective at or before the initial public offering, then at the initial public offering price). B. TRANSFER OF MEMBERSHIP INTERESTS. 1. Upon the death or disability of Dreyer (as defined in Dreyer's employment agreement with the Company, its affiliates or their respective successors then currently in effect or, if there is no such employment agreement then currently in effect, defined as Dreyer's inability to perform major functions of his job description for a period of six (6) consecutive months, as determined by the Chairman of his employer), or the termination of Dreyer's employment with the Company, its affiliates and their respective successors or any reason, Capital shall transfer and assign to AAi all, and not less than all, of its membership interests in the Company and any rights to additional interests in the Company, for a purchase price equal to the following, and AAi shall purchase and pay such purchase price: a. Death or disability - the Purchase Price shall be an amount equal to the Valuation, calculated as of the date of death or disability, and shall be payable in twenty-four (24) equal monthly installments commencing sixty (60) days from the date of disability, with interest equal to the prevailing prime rate as published in the Wall Street Journal. b. If Dreyer resigns or otherwise terminates his employment, or his employment is terminated by employer for Cause or his Employment Agreement, dated this date, expires and AAi's offer of continued employment is not accepted, unless AAi elects to convert pursuant to SECTION C.1.d. (ii), below - the Purchase Price shall be an amount equal to the Valuation, calculated as of the 3 4 date of termination of employment, and shall be paid in thirty-six (36) equal monthly installments without interest, commencing on the second anniversary of his termination. c. If Dreyer's employment is terminated by employer for other than Cause or his Employment Agreement, dated this date, expires and AAi does not offer continued employment, unless Dreyer elects to convert pursuant to SECTION C.1.c. (ii), below - the Purchase Price shall be an amount equal to the Valuation, calculated as of the date of termination of employment, and shall be paid in twenty-four (24) equal monthly installments commencing sixty (60) days after his termination, with interest at an annual rate equal to the prevailing prime rate published in the Wall Street Journal. 2. For purposes of this SECTION B, "Cause" shall mean the events or circumstances referred to as cause for employer's termination of Dreyer's employment in the then current employment agreement or, if there is not such a then current employment agreement, then it shall mean the events or circumstances referred to as cause for employer's termination of his employment in the last effective employment agreement between Dreyer and the Company, its affiliates or their respective successors. 3. For purposes of SECTION B and SECTION C, the "Determination Date" shall mean the date of death or disability under SECTION B.1. a. and the date of termination under SECTIONS 1. b. AND 1.c. C. AAI INITIAL PUBLIC OFFERING. 1. In the event that there is an initial public offering of AAi's common stock ("IPO"), Dreyer and AAi shall each have the option to exchange all, but not less than all, of the capital stock of Capital for AAi common stock, as set forth below: a. The option shall be exercised in writing; b. The option shall be exercisable only with respect to the conversion of all, and not less than all, of the capital stock of Capital; c. The option may be exercised by Capital only (i) upon the filing of a registration statement by AAi with the United States Securities and Exchange Commission, (ii) during the six (6) month period commencing with the effective date of AAi's IPO or (iii) during the six (6) month period after (x) Dreyer's termination of employment by employer for other than Cause or (y) expiration of Dreyer's employment agreement and the Company not offering continued employment at terms reasonably equivalent to the then expiring agreement; d. The option may be exercisable by AAi (i) upon the filing of a registration statement by AAi with the United States Securities and Exchange Commission (ii) during the (i) six (6) month period commencing with the effective date of AAi's IPO or (iii) during the six (6) month period after (x) Dreyer resigns or otherwise terminates his employment or his employment is terminated by employer for Cause or (y) expiration of Dreyer's 4 5 employment agreement and Company's offer of continued employment at terms reasonably equivalent to the then expiring agreement is not accepted by Dreyer; e. The conversion shall take place on the basis of Dreyer's receiving a number of common shares of AAi equal to the product of (i) the Valuation divided by (ii) the average selling price of a share of AAi's common stock during the ten (10) trading days immediately prior to the exercise of the option or, if after the filing of AAi's registration statement with the United States Security Exchange Commission to be effective at or before the IPO, at the IPO price; f. The AAi common stock shall not be registered and may not be readily transferable or tradable, and shall be subject to such restrictions on transfer as may be imposed by AAi's underwriters or as may be required under state or federal securities laws. g. The option to convert at the IPO will be exercisable within twenty (20) days after the earlier of (i) AAi's notice to Capital of its intent to file a registration statement or (ii) the date of filing of the registration statement. AAi shall provide financial information to Capital. 2. For purposes of this SECTION C, the "Determination Date" shall mean the date of the exercise of the option. 3. Capital's registration rights with respect to AAi common stock are the subject of a Piggyback Registration Agreement dated this date. D. RESTRICTIONS ON TRANSFERS. No Transfer of an option set forth at SECTION A, a membership interest in the Company or any capital stock of Capital shall be effective without the prior written consent of AAi, which consent may be withheld in its sole and absolute discretion. Any Transfer or attempted Transfer without AAi's prior written consent shall be null and void and of no effect. E. DEFINITIONS. For purposes of SECTIONS A, B, C AND D: 1. "Valuation" shall mean the product of (a) the percentage of all membership interests of the Company held by Capital MULTIPLIED BY (b) four (4) times EBIT. 2. "EBIT" shall mean earnings of the Company before interest and taxes for the twelve (12) month period ending at the end of the last complete calendar quarter immediately preceding the applicable Determination Date. 3. The Valuation and EBIT shall be determined by AAi using generally accepted accounting principles applied on a consistent basis and, in the event of any dispute, shall be determined by AAi's regularly retained independent accounting firm, whose determination shall be final and binding upon the parties. 5 6 4. "Transfer" shall mean any sale, pledge, assignment, gift, bequest or other Transfer, in whole or in part, directly or indirectly, including but not limited to a transfer by operation of law or otherwise to the estate of Dreyer in a Transfer by a personal representative or creditor representative. Notwithstanding the generality of the foregoing, any one or more of the following events or conditions shall be deemed to constitute a Transfer: (a) Bankruptcy as defined at EXHIBIT B and (b) any other event which, were it not for the provisions of this Agreement, would cause or result in a sale, assignment, pledge, encumbrance, award, confirmation or other transfer, for consideration or otherwise, to any person, whether voluntarily, involuntarily or by operation of law under circumstances not constituting an approved means of Transfer under this Agreement. F. PLEDGE AGREEMENT; REPRESENTATIONS AND WARRANTIES. 1. As collateral for Capital's and Dreyer's obligations under this Agreement, including without limitation Capital's obligation to transfer its membership interests in the Company to AAi in certain circumstances as described in SECTION B and Dreyer's obligation to exchange the capital stock of Capital under SECTION C.1 Dreyer does hereby pledge, assign, transfer and grant a security interest in and general collateral security for the performance of such obligations, or any amendment or modification thereof in 100% of the issued and outstanding capital stock in Capital (the "Capital Stock"), which outstanding equity interest is issued and represented by a stock certificate which Dreyer shall deliver to AAi upon the execution hereof accompanied by all necessary or desirable instruments of transfer or assignment, duly executed in blank and any required UCC financing statements. and (2) Capital does hereby pledge, sign, transfer and grant a security in and as collateral security for the performance of such obligations, or any amendment or modification thereof, in 100% of the membership interest in the Company held by Capital, which outstanding membership interest are not certificated and for which Capital shall deliver to AAi upon execution hereof all necessary or desirable instruments of transfer or assignment and any required UCC financing statements. 2. Dreyer and Capital, jointly and severally, represent and warrant to AAi as follows, which representations and warranties shall continue to be true and correct in all respects during the term of this Agreement: (i) the authorized capital stock of Capital consists of 200 shares authorized of which 100 shares are issued and outstanding and fully paid and non-assessable; (ii) Dreyer is the owner of 100% of the issued and outstanding capital stock of Capital free and clear of all liens and encumbrances or other interests of third parties; (iii) Dreyer has the full power and lawful rights to pledge, assign and grant a security interest in the Capital Stock to AAi hereunder; (iv) Dreyer will warrant and defend the title to the Capital stock against the claims and demands of any person, firm, corporation, trust, partnership or other entity; (v) there are no restrictions on the transfer, assignment or pledge of such Capital stock; (vi) the pledge agreement specified above will be duly noted in the books and records of Capital; and (vii) Capital is a holding company, and shall no conduct any business other than to hold membership interests in the Company and to engage in activities directly related thereto, and shall not incur any liabilities other than those associated with the previously-described activities. In addition to its other remedies available to AAi at law or in equity for a breach of this Agreement by either Capital or Dreyer, AAi's obligations hereunder are specifically contingent on the above-noted representations and warranties being true and correct. In the event that any of these representations or warranties are not true, or the Capital stock when delivered to AAi pursuant to this Agreement is not free and clear of 6 7 all liens, claims and encumbrances and is not fully paid and non-assessable, or the membership interests in the Company held by Capital are not free and clear of all liens, claims and encumbrances or Capital shall have total liabilities in excess of $100 or Dreyer or Capital are the subject of a Bankruptcy as defined at EXHIBIT B, all of the rights of Capital to exercise the options set forth in this Agreement shall terminate and all rights of Dreyer and/or Capital hereunder shall terminate, or AAi may elect, instead of purchasing the capital stock of Capital from Dreyer, to instead purchase all of the membership interests in the Company held by Capital, free and clear of all liens, claims and encumbrances. 3. AAi agrees to provide, or cause to be provided, services and loans for working capital to meet the projections agreed upon by AAi and Dreyer. G. MISCELLANEOUS. 1. NOTICES. Any notice or other communication required or permitted to be given hereunder shall be given in writing and shall be delivered by registered mail, postage prepaid, return receipt requested, or by telefacsimile, addressed as follows: TO AAi: AAi.FOSTERGRANT, Inc. 500 George Washington Highway Smithfield, Rhode Island 02917 Telefacsimile: 401-231-3212 Attn: Mr. Gerald Cerce WITH COPY TO: Hinckley, Allen & Snyder 1500 Fleet Center Providence, Rhode Island 02903 Telefacsimile: 401-277-9600 Attn: Pasco Gasbarro Jr., Esq. To Dreyer: Roger D. Dreyer 345 E. 69th Street, Apt. 14H New York, N.Y. 10021 TO CAPITAL: Houdini Capital LTD c/o Roger D. Dreyer 345 East 69th Street, Apt. 14H New York, NY 10021 7 8 WITH COPY TO: ` Feltman, Karesh, Major & Farbman, LLP 152 West 57th Street New York, NY 10019 Fax: 212-586-0951 Attention: Jerome Kowalski or to such other address as the parties shall designate by written notice as provided in this PARAGRAPH. Any such notice, proposal or communication shall be deemed delivered and given on, or when so delivered by telefacsimile with a copy to follow by mail or on, the fifth (5th) business day after deposit thereof, postage prepaid by registered mail, return receipt requested. 2. GOVERNING LAW. This Agreement has been made in and its validity, interpretation, construction and performance shall be governed by and be in accordance with the laws of the State of Rhode Island, without reference to its laws governing conflicts of law. Each party irrevocably agrees that any legal action or proceedings against with respect to this Agreement may be brought in the courts of the State of Rhode Island, or in any United States District Court of Rhode Island, and, by its execution and delivery of this Agreement, each party hereby irrevocably submits to each such jurisdiction and hereby irrevocably waives any and all objections which it may have as to venue in any of the above courts. Each party further consents and agrees that any process or notice of motion or other application to either of said courts or any judge thereof, or any notice in connection with any proceedings hereunder, may be served inside or outside the State of Rhode Island or the District of Rhode Island by [Signatures Appear On Next Page] 8 9 registered or certified mail, return receipt requested, postage prepaid, and be effective as of the receipt thereof, or in such other manner as may be permissible under the rules of said courts. Each party hereby waives trial by jury in any action or proceeding in connection with this Agreement. 3. INTEGRATION. This Agreement and the other agreements executed between the parties dated this date constitute the entire agreement between the parties with respect to the subject matter hereof, and any and all agreements, oral or written, in relation thereto are hereby expressly superseded and canceled. Any amendment hereto shall be evidenced by a writing signed by a duly authorized representative of the party affected. 4. SEVERABILITY. If any term of provision of this Agreement, or the application thereof to any person or under any circumstance, shall to any extent be invalid or unenforceable, the remainder of this Agreement, or the application of such terms to the persons or under circumstances other than those as to which it is invalid or unenforceable, shall be considered severable and shall not be affected thereby, and each term of this Agreement shall be valid and enforceable to the fullest permitted by law. The invalid or unenforceable provisions shall, to the extent permitted by law, be deemed amended and given such interpretation as to achieve the economic intent of this Agreement. 5. THIRD PARTY BENEFICIARIES. Each party hereto intends that this Agreement shall not benefit or create any right or cause of action in or on behalf of any person other than the parties hereto. 6. HEADINGS. Any headings in this Agreement are inserted for convenience and shall not control or affect the meaning or construction of any provision of this Agreement. 7. SEVERAL COUNTERPARTS. This Agreement may be executed in one or more counterparts and by different parties on different counterparts, all of which shall constitute a single agreement. In enforcing this Agreement, it shall be necessary to produce and account for only one counterpart hereof executed by the party against which enforcement is sought. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the 23rd day of June, 1998. AAi.FOSTERGRANT, Inc. By /s/ Duane DeSisto ------------------------------------ Title: Chief Financial Officer and Treasurer 9 10 /s/ Roger D. Dreyer --------------------------------------- Roger D. Dreyer HOUDINI CAPITAL LTD. By /s/ Roger D. Dreyer ------------------------------------ Roger D. Dreyer, President 10 11 EXHIBIT B BANKRUPTCY "BANKRUPTCY" means, with reference to Dreyer: (a) the entry of an order for relief (or similar court order) against Dreyer which authorizes a case brought under Chapter 7, 11 or 13 of Title 11 of the United States Code to proceed; (b) the commencement of a federal, state or foreign bankruptcy, insolvency, reorganization, arrangement or liquidation proceeding by such Member; (c) the commencement of a federal, state or foreign bankruptcy, insolvency, reorganization, arrangement or liquidation proceeding against Dreyer if such proceeding is not dismissed within 60 days after the commencement thereof; (d) the entry of a court decree or court order which remains unstayed and in effect for a period of 30 consecutive days: (i) adjudging Dreyer insolvent under any federal, state or foreign law relating to bankruptcy, insolvency, reorganization, arrangement, liquidation, receivership or the like; (ii) approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of, or in respect of, Dreyer or Dreyer's properties under any federal, state or foreign law relating to insolvency, reorganization, arrangement, liquidation, receivership or the like; (iii) appointing a receiver, liquidator, assignee, trustee, conservator, or sequester (or other similar official) of Dreyer, or of all, or of a substantial part, of Dreyer's properties; or (iv) ordering the winding up, dissolution or liquidation of the affairs of Dreyer; (e) the written consent by Dreyer to the institution against it of any proceeding of the type described in the preceding CLAUSE (a), (b), (c) or (d); (f) the written consent by Dreyer to the appointment of a receiver, liquidator, assignee, trustee, conservator or sequester (or other similar official) of Dreyer, or of all, or of a substantial part, of its properties; (g) the making by Dreyer of an assignment for the benefit of creditors; (h) the admission in writing by Dreyer of its inability to pay its debts generally as they come due; (i) the taking of any corporate or other action by Dreyer in furtherance of any of the foregoing; or (j) if Dreyer becomes insolvent by the taking of any act or the making of any Transfer, or otherwise, as "insolvency" is or may be defined pursuant to the Federal Bankruptcy Code, the Federal Bankruptcy Act, the Uniform Fraudulent Conveyances Act, any state or federal act, or the ruling of any court. 11 EX-10.7 32 FANTASMA, LLC MEMBER AGMT 6/23/98 1 EXHIBIT 10.7 MEMBER AGREEMENT INTRODUCTION THIS AGREEMENT is by and between AAi.FOSTERGRANT, Inc. a Rhode Island corporation, ("AAi"), and Paul Michaels, a resident of Shoreview, Minnesota, ("Michaels"). RECITALS AAi purchased a 67.0% membership interest in Fantasma, LLC, a Delaware limited liability company, (the "Company") from Overdrive Capital Corp. pursuant to an AGREEMENT (Purchase and Sale of Percentage Interest), dated the date hereof, by and between Overdrive Capital Corp., as seller, and AAi, as buyer, and AAi purchased a 13.0% membership interest from Roger D. Dreyer pursuant to an AGREEMENT (Purchase and Sale of Percentage interest), dated the date hereof, by and between Roger D. Dreyer, as seller, and AAi, as buyer. Consequent to the above-described transactions, AAi is the owner of a majority of the membership interests of the Company. Michaels is an officer and employee of the Company. AAi is prepared to offer membership interests to Michaels upon the terms and subject to the conditions set forth below. AGREEMENTS IT IS MUTUALLY agreed by and between the parties hereto as follows: A. OPTIONS TO PURCHASE BY MICHAELS. 1. AAi shall make available to Michaels for purchase the following percentage membership interests of the Company, for the prices set forth below upon the terms and conditions set forth below. For the period commencing on the date hereof, and ending ninety (90) days thereafter ("First Exercise Date"), Michaels shall have the option to purchase two percent (2%) of the membership interests of the Company ("2% Option"). Michaels shall additionally have the following options to purchase additional membership interests, provided the following Target EBIT are met, ("Performance Options"): 2
Pertinent Options Year Exercise Date Percentage Target Ebit ------- ---- ------------- ---------- ----------- 1 1998 30 days after the 1% $2,549,812 date the EBIT calculations are provided to Michaels * 2 1999 30 days after the 1% date the EBIT calculations are provided to Michaels 3 2000 30 days after the 1% * date the EBIT calculations are provided to Michaels
(Hereinafter, the First Exercise Date and the Pertinent Exercise Date are referred to as the "Exercise Date".) 2. The Purchase Price shall be $34,615 per 1% membership interest. All options shall be exercised by written notice by Michaels to AAi by the applicable Exercise Date. With respect to the 2% Option, AAi or the Company shall assist in a loan to Michaels to fund the Purchase Price, or shall loan funds to Michaels, subject to receiving a promissory note and pledge of the membership interests to secure such loan in form and substance satisfactory to the lender. 3. Upon the exercise of any option to purchase a membership interest in the Company, Michaels shall become a party to the Amended and Restated Operating Agreement of the Company then in effect by executing the Agreement in the form attached hereto as EXHIBIT C. 4. Notwithstanding the foregoing, in the event that Michaels' employment with the Company is terminated by the Company pursuant to SECTION 5.B of the Employment Agreement between Michaels and the Company dated this date, then Michaels shall have the option to purchase all or a portion of the balance of the 3% Percentage that it has not theretofore purchased, with an Exercise Date of twenty (20) days after the said termination of employment. Upon the earlier of the expiration of the Exercise Date without his exercise of such option or the purchase of membership interests after such exercise, all of his rights to the options set forth above shall terminate. The Purchase Price per one percent (1%) membership interest pursuant to this paragraph shall be the greater of (a) $34,615 or (b) four times EBIT divided by 100; PROVIDED HOWEVER, if his employment is so terminated within one (1) year from the date hereof the Purchase - --------------- * TO BE BASED ON SALES CONSISTENT WITH EXHIBIT A-1, AND EXPENSES CONSISTENT, ON A PERCENTAGE OF NET SALES BASIS, WITH EXHIBIT A-2. 2 3 the expiration of the Exercise Date without his exercise of such option or the purchase of membership interests after such exercise, all of his rights to the options set forth above shall terminate. The Purchase Price per one percent (1%) membership interest pursuant to this paragraph shall be the greater of (a) $34,615 or (b) four times EBIT divided by 100; PROVIDED HOWEVER, if his employment is so terminated within one (1) year from the date hereof the Purchase Price for the first 1% Percentage shall be $34,615 and for the balance shall be as set forth earlier in this sentence. 6. Each option shall be a separate option, and shall be not be transferable or assignable. The Company's EBIT meeting or exceeding the Target EBIT set forth above for the applicable Year shall be an absolute precondition to each Performance Option for that Year, and there shall be no Performance Option for any Year for which the Company's EBIT did not meet or exceed the Target EBIT for such Year. Each Option shall be exercisable in a writing by Michaels to AAi no earlier than 30 days before the Exercise Date set forth above and no later than the Exercise Date set forth above. The exercise shall not be valid unless accompanied by a certified or bank check payable to AAi in the amount to the Purchase Price set forth above. If an option is not validly exercised by the Exercise Date set forth above, the option shall expire and may not be later exercised. The options are personal to Michaels and no Transfer shall be effective without the prior written consent of AAi, which consent may be withheld in its sole and absolute discretion. All of Michaels' rights to the options, and all rights to receive membership interests from AAi pursuant to any exercise of the options, shall automatically and irrevocably expire immediately at the earlier of the following: (a) any Transfer or attempted Transfer of an option or a membership interest in the Company without AAi's consent; (b) Michaels' death; (c) subject to the provisions of SECTION A.5, the termination (for any reason) of Michaels' employment with the Company, its affiliates and any respective successors in interest; or (d) the Company's tangible net worth as calculated by the Company's independent auditors in accordance with generally accepted accounting principles consistently applied becomes less than $400,000 at the end of any fiscal year. For purposes of this SECTION A, calculation of EBIT shall include expenses of affiliated companies allocated to the Company; PROVIDED, HOWEVER, for specific categories of expenses set forth on EXHIBIT A, attached hereto, such expenses shall not exceed the percentages represented by the amounts set forth in such expense categories set forth on EXHIBIT A. Notwithstanding the foregoing, at and after an initial public offering of AAi's common stock, all options outstanding thereunder, including but not limited to any that have been exercised, but membership interests not purchased or transferred, shall be satisfied through the issuance of shares of AAi's common stock determined by taking the aggregate purchase price payable pursuant to the option and dividing it by the average selling price of a share of AAi common stock during the ten (10) trading days immediately prior to the exercise (or, if the exercise is at the date of the initial public offering, then at the initial public offering price). B. TRANSFER OF MICHAELS' MEMBERSHIP INTERESTS. 1. Upon the death, disability (as defined in Michaels' employment agreement with the Company, its affiliates or their respective successors then currently in effect or, if there is no such employment agreement then currently in effect, defined as Michaels' inability to perform major 3 4 functions of his job description for a period of six (6) consecutive months, as determined by the President or Chairman of his employer), or the termination of Michaels' employment with the Company, its affiliates and their respective successors or any reason, Michaels shall transfer and assign to AAi all, and not less than all, of his membership interests in the Company and any rights to additional interests in the Company, and AAi shall purchase, for a purchase price equal to the following: a. Death or disability - the Purchase Price shall be an amount equal the Valuation, calculated as of the date of death or disability, and shall be payable, in twenty-four (24) equal monthly installments commencing sixty (60) days from the date of disability, with interest equal to the prime rate as published in the Wall Street Journal. b. Michaels resigns or otherwise terminates his employment, or his employment is terminated by employer for Cause - the Purchase Price shall be amount equal to the Valuation, calculated as of the date of termination of employment, and shall be paid in thirty-six (36) equal monthly installments without interest, commencing on the second anniversary of his termination. c. Michaels' employment is terminated by employer for other than Cause or his Employment Agreement, dated this date, - the Purchase Price shall be an amount equal to the Valuation, calculated as of the date of termination of employment, and shall be paid in twenty-four (24) equal monthly installments commencing sixty (60) days after his termination, with interest at an annual rate equal to the prime rate published in the Wall Street Journal. 2. For purposes of this SECTION B, "Cause" shall mean the events or circumstances referred to as cause for employer's termination of Michaels' employment in the then current employment agreement or, if there is not such a then current employment agreement, then it shall mean the events or circumstances referred to as cause for employer's termination of his employment in the last effective employment agreement between Michaels and the Company, its affiliates or their respective successors. 3. For purposes of this SECTION B, the "Date" shall mean the date of death or disability under SECTION B.1.A. and the date of termination under SECTIONS 1.B. AND 1.C. C. AAI INITIAL PUBLIC OFFERING. 1. In the event that there is an initial public offering of AAi's common stock ("IPO"), AAi and Michaels each shall have the options to convert all, but not less than all, of Michaels' membership interests in the Company into AAi common stock, as set forth below: a. The option shall be exercised in writing; 4 5 b. The option shall be exercisable only with respect to the conversion of all, and not less than all, of Michaels' membership interests in the Company; c. The option may be exercised by Michaels only (i) at the IPO and (ii) during the six (6) month period commencing at the date of the IPO"; d. The option may be exercisable by AAi (i) at the IPO or (ii) during the (i) six (6) month period commencing at the date of the IPO"; e. The conversion shall take place on the basis of Michaels' receiving a number of common shares of AAi equal to the resultant of (i) the Valuation divided by (ii) the average selling price of a share of AAi's common stock during the ten (10) trading days immediately prior to the exercise of the option; f. The AAi common stock shall not be registered and may not be readily transferable or tradable, and shall be subject to such restrictions on transfer as may be imposed by AAi's underwriters of as may be required under state or federal securities laws. g. The option to convert at the IPO will be exercisable within ten (10) days after the earlier of (i) AAi's notice to Michael of its intent to file a registration statement or (ii) the date of filing of the registration statement. 2. For purposes of this SECTION C, the "Determination Date" shall mean the date of the IPO the exercise of the option. D. RESTRICTIONS ON TRANSFER. No Transfer of an option set forth in SECTION A or a membership interest in the Company shall be effective without the prior written consent of AAi, which consent may be withheld in its sole and absolute discretion. Any Transfer or attempted Transfer without AAi's prior written consent shall be null and void and of no effect. E. DEFINITIONS. For purposes of SECTIONS A, B, C AND D: 1. "Valuation" shall mean the resultant of (a) the percentage of all membership interests of the Company held by Michaels MULTIPLIED BY (b) four (4) times EBIT. 2. "EBIT" shall mean earnings of the Company before interest and taxes for the twelve (12) month period ending at the end of the last complete calendar month immediately preceding the applicable Determination Date. 3. The Valuation and EBIT shall be determined by AAi using generally accepted accounting principles applied on a consistent basis and, in the event of any dispute, shall be determined in such manner by AAi's regularly retained independent accounting firm, whose determination shall be final and binding upon the parties. 5 6 4. "Transfer" shall mean any sale, pledge, assignment, gift, bequest or other Transfer, in whole or in part, directly or indirectly, including but not limited to a transfer by operation of law or otherwise to the estate of Michaels in a Transfer by a personal representative or creditor representative. Notwithstanding the generality of the foregoing, any one or more of the following events or conditions shall be deemed to constitute a Transfer: (a) the filing of a petition in bankruptcy by or against Michaels or any assignment by Michaels for the benefit of his creditors; (b) any transfer, award, or confirmation to Michaels' spouse pursuant to a decree of divorce, dissolution, or separate maintenance or pursuant to a property settlement or separation agreement; (c) a determination that Michaels is incompetent, and for this purpose an individual shall be deemed to be incompetent if (i) a conservator of the person or estate has been appointed for the individual, (ii) a court with jurisdiction has determined that the individual is incompetent or lacks capacity or (iii) two licensed physicians have certified in writing that in their opinion the individual is substantially unable to manage his financial resources or resist fraud or undue influence; (d) any testamentary or other similar disposition upon Michaels' death to a person other than his estate; and (e) any other event which, were it not for the provisions of this Agreement, would cause or result in a sale, assignment, pledge, encumbrance, award, confirmation or other transfer, for consideration or otherwise, to any person, whether voluntarily, involuntarily or by operation of law under circumstances not constituting an approved means of Transfer under this Agreement. F. PLEDGE AGREEMENT. 1. As collateral for Michaels' obligations under this Agreement, including without limitation Michael's obligation to transfer his membership interests in the Company to AAi in certain circumstances as described in SECTIONS B AND C. Michael does hereby pledge, assign, transfer and grant a security in and as collateral security for the performance of such obligations, or any amendment or modification thereof, in 100% of his membership interest in the Company, which outstanding membership interest are not certificated and for which Michael shall deliver to AAi upon execution hereof and from time to time hereafter all necessary or desirable instruments of transfer or assignment and any required UCC financing statements. 2. Michaels represents and warrants to AAi as follows, which representations and warranties shall continue to be true and correct in all respects during the term of this Agreement: (i) Michaels has the full power and lawful rights to pledge, assign and grant a security interest as specified above; (ii) Michaels will warrant and defend the title to such membership interests against the claims and demands of any person, firm, corporation, trust, partnership or other entity; and (iii) the pledge agreement specified above will be duly noted in the books and records of the Company. In addition to its other remedies available to AAi at law or in equity for a breach of this Agreement by Michaels, AAi's obligations hereunder are specifically contingent on the above-noted representations and warranties being true and correct. In the event that any of these representations or warranties are not true, or the membership interests in the Company held by Michaels are not free and clear of all liens, claims and encumbrances or Michaels is the subject of a Bankruptcy as defined at EXHIBIT B, all of the rights of Michaels to exercise the options set forth in this Agreement shall terminate and all rights of Michaels hereunder shall terminate, or AAi may 6 7 elect, to purchase all of the membership interests in the Company held by Michaels, free and clear of all liens, claims and encumbrances. G. MISCELLANEOUS. 1. Notices. Any notice or other communication required or permitted to be given hereunder shall be given in writing and shall be delivered by registered mail, postage prepaid, return receipt requested, or by telefacsimile, addressed as follows: TO AAi: AAi.FOSTERGRANT, Inc. 500 George Washington Highway Smithfield, Rhode Island 02917 Telefacsimile: 401-231-3212 Attn: Mr. Gerald Cerce WITH COPY TO: Hinckley, Allen & Snyder 1500 Fleet Center Providence, Rhode Island 02903 Telefacsimile: 401-277-9600 Attn: Pasco Gasbarro Jr., Esq. TO MICHAELS: Paul Michaels 5983 Highview Place Shoreview, Minnesota 55126 Telefacsimile: 612-481-0561 or to such other address as the parties shall designate by written notice as provided in this PARAGRAPH. Any such notice, proposal or communication shall be deemed delivered and given on, or when so delivered by telefacsimile with a copy to follow by mail or on, the fifth (5th) business day after deposit thereof, postage prepaid by registered mail, return receipt requested. 2. GOVERNING LAW. This Agreement has been made in and its validity, interpretation, construction and performance shall be governed by and be in accordance with the laws of the State of Rhode Island, without reference to its laws governing conflicts of law. Each party irrevocably agrees that any legal action or proceedings against with respect to this Agreement may be brought in the courts of the State of Rhode Island, or in any United States District Court of Rhode Island, and, by its execution and delivery of this Agreement, each party hereby irrevocably submits to each such jurisdiction and hereby irrevocably waives any and all objections which it may have as to venue in any of the above courts. Each party further consents and agrees that any process or notice of motion or other application to either of said courts or any judge thereof, or any notice in connection with any proceedings hereunder, may be served inside or 7 8 outside the State of Rhode Island or the District of Rhode Island by registered or certified mail, return receipt requested, postage prepaid, and be effective as of the receipt thereof, or in such other manner as may be permissible under the rules of said courts. Each party hereby waives trial by jury in any action or proceeding in connection with this Agreement. 3. INTEGRATION. This Agreement, and other agreements executed between the parties and dated this date, constitute the entire agreement between the parties with respect to the subject matter hereof, and any and all agreements, oral or written, in relation thereto are hereby expressly superseded and canceled. Any amendment hereto shall be evidenced by a writing signed by a duly authorized representative of the party affected. [Signatures Appear on Next Page] 8 9 4. SEVERABILITY. If any term of provision of this Agreement, or the application thereof to any person or under any circumstance, shall to any extent be invalid or unenforceable, the remainder of this Agreement, or the application of such terms to the persons or under circumstances other than those as to which it is invalid or unenforceable, shall be considered severable and shall not be affected thereby, and each term of this Agreement shall be valid and enforceable to the fullest permitted by law. The invalid or unenforceable provisions shall, to the extent permitted by law, be deemed amended and given such interpretation as to achieve the economic intent of this Agreement. 5. THIRD PARTY BENEFICIARIES. Each party hereto intends that this Agreement shall not benefit or create any right or cause of action in or on behalf of any person other than the parties hereto. 6. HEADINGS. Any headings in this Agreement are inserted for convenience and shall not control or affect the meaning or construction of any provision of this Agreement. 7. SEVERAL COUNTERPARTS. This Agreement may be executed in one or more counterparts and by different parties on different counterparts, all of which shall constitute a single agreement. In enforcing this Agreement, it shall be necessary to produce and account for only one counterpart hereof executed by the party against which enforcement is sought. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the 23rd day of June, 1998. AAi.FOSTERGRANT, Inc. By /s/ Duane M. DeSisto ----------------------------------- Title: Chief Financial Officer and Treasurer /s/ Paul Michaels -------------------------------------- Paul Michaels 9 EX-10.8 33 INCENTIVE STOCK PLAN OF AAI 1 Exhibit 10.8 ACCESSORIES ASSOCIATES, INC. 1996 INCENTIVE STOCK OPTION PLAN Effective May 31, 1996 2 ACCESSORIES ASSOCIATES, INC. 1996 INCENTIVE STOCK OPTION PLAN 1. Purpose Accessories Associates, Inc. (the "Company") desires to attract and retain the best available talent and encourage the highest level of performance by employees and other persons who perform services for the Company in order to serve the best interests of the Company and stockholders. By affording eligible persons the opportunity to acquire proprietary interests in the Company and by providing them incentives to put forth maximum efforts for the success of the Company's business, the Accessories Associates, Inc. 1996 Incentive Stock Option Plan (the "1996 Plan") is expected to contribute to the attainment of those objectives. 2. Scope and Duration Awards under the 1996 Plan may be granted in the form of incentive stock options ("incentive stock options") as provided in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), in the form of non-qualified stock options ("non-qualified options") (unless otherwise indicated, references in the 1996 Plan to "options" include incentive stock options and non-qualified options), in the form of shares of the common stock, par value, of the Company (the "Common Stock") that are restricted as provided in paragraph 11 ("restricted shares"), in the form of units to acquire shares of Common Stock that are restricted as provided in paragraph 11 ("restricted units") or in the form of stock appreciation rights ("rights") or limited stock appreciation rights ("limited rights"). The maximum aggregate number of shares of Common Stock as to which awards may be granted from time to time under the 1996 Plan is 50,000 shares. The shares available may be in whole or in part, as the Board of Directors of the Company (the "Board of Directors") shall from time to time determine, authorized but unissued shares or issued shares reacquired by the Company. Unless otherwise provided by the Compensation Committee, shares covered by expired or terminated options and forfeited restricted shares or restricted units will be available for subsequent awards under the 1996 Plan, except to the extent prohibited by Rule 16b-3, as amended, or any successor provision thereto ("Rule 16b-3"), or other applicable rules under Section 16(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Any shares issued by the Company in respect of the assumption or substitution of outstanding awards from a corporation or other business entity by the Company shall not reduce the number of shares available for awards under the 1996 Plan. No incentive stock option shall be granted more than 10 years after May 31, 1996. 3. Administration The 1996 Plan shall be administered by the Compensation Committee of the Board of Directors, consisting of not less than two members who shall qualify to administer the 1996 Plan as contemplated by Rule 16b-3 (unless Rule 16b-3 shall permit fewer than two members to so qualify); PROVIDED, HOWEVER, that, with respect to individual participants who are not subject to Section 16(b) of the Exchange Act, the Compensation Committee of the Board of Directors may delegate authority to administer the 1996 Plan to another committee of directors (the "Employee 3 Committee") which committee may include directors who do not meet the standards set forth immediately above. Unless the context otherwise requires, the term "Committee" shall refer to both the Compensation Committee and the [Employee] Committee. The Committee shall have plenary authority in its discretion, subject to and not inconsistent with the express provisions of the 1996 Plan to grant options, to determine the purchase price of the shares of Common Stock covered by each option, the term of each option, the persons to whom, and the time or times at which options shall be granted, and the number of shares to be covered by each option; to designate options as incentive stock options or non-qualified options and to determine which options shall be accompanied by rights and limited rights; to grant rights and to determine the terms and conditions applicable to such rights; to grant restricted shares and restricted units and to determine the term of the restricted period and other conditions applicable to such shares or units, the persons to whom, and the time or times at which, restricted shares or restricted units shall be granted and the number of shares or units to be covered by each grant; to interpret the 1996 Plan; to prescribe, amend and rescind rules and regulations relating to the 1996 Plan; to determine the terms and provisions of the option and rights agreements (which need not be identical) and the restricted share and restricted units agreements (which need not be identical) entered into in connection with awards under the 1996 Plan; and to make all other determinations deemed necessary or advisable for the administration of the 1996 Plan. The Committee may delegate to one or more of its members or to one or more agents such administrative duties as it may deem advisable, and the Committee or any person to whom it has delegated duties as aforesaid may employ one or more persons to render advice with respect to any responsibility the Committee or such person may have under the 1996 Plan. The Committee may employ attorneys, consultants, accountants or other persons and the Committee, the Company and its officers and directors shall be entitled to rely upon the advice, opinions or valuations of any such persons. All actions taken and all interpretations and determinations made by the Committee in good faith shall be final and binding upon all persons who have received awards, the Company and all other interested persons. No member or agent of the Committee shall be personally liable for any action, determination or interpretation taken or made in good faith with respect to the 1996 Plan or awards made thereunder, and all members and agents of the Committee shall be fully indemnified and protected by the Company in respect of any such action, determination or interpretation. 4. Eligibility; Factors to be Considered in Granting Awards Awards will be limited to officers and other key employees of the Company and its subsidiaries, and except in the case of incentive stock options, any other non-employees who may provide services to the Company or its subsidiaries (all such persons being hereinafter referred to as "employees"). In determining the employees to whom awards shall be granted and the number of shares or units to be covered by each award, the Committee shall take into account the nature of the employees' duties, their present and potential contributions to the success of the Company and such other factors as it shall deem relevant in connection with accomplishing the purposes of the 1996 Plan. 2 4 Awards may be granted singly, in combination or in tandem and may be made in combination or in tandem with, in replacement of, or as alternatives to, awards or grants under any other employee plan maintained by the Company, its present and future subsidiaries. An employee who has been granted an award or awards under the 1996 Plan may be granted an additional award or awards, subject to such limitations as may be imposed by the Code on the grant of incentive stock options. No award of incentive stock options shall result in the aggregate fair market value of Common Stock with respect to which incentive stock options are exercisable for the first time by any employee during any calendar year (determined at the time the incentive stock option is granted) exceeding $100,000. The Committee, in its sole discretion, may grant to an employee who has been granted an award under the 1996 Plan or any other employee plan maintained by the Company or its subsidiaries, or any predecessors or successors thereto, in exchange for the surrender and cancellation of such award, a new award in the same or a different form and containing such terms, including without limitation a price which is different (either higher or lower) than any price provided in the award so surrendered and cancelled, as the Committee may deem appropriate. 5. Option Price The purchase price of the Common Stock covered by each option shall be determined by the Committee, but in the case of an incentive stock option shall not be less than 100% of the fair market value (110% in the case of a 10% shareholder of the Company) of the Common Stock on the date the option is granted, as determined in good faith by the Board or, should the Company complete an initial public offering of Common Stock, which shall be deemed to equal the closing price of the Common Stock as quoted by NASDAQ or any registered securities exchange on which the Common Stock is admitted for trading (the "Mean Value") for the date on which the option is granted, or if there are no sales on such date, on the next preceding day on which there were sales. The Committee shall determine the date on which an option is granted, PROVIDED that such date is consistent with the Code and any applicable rules or regulations thereunder. In the absence of such determination, the date on which the Committee adopts a resolution granting an option shall be considered the date on which such option is granted, PROVIDED the employee to whom the option is granted is promptly notified of the grant and an option agreement is duly executed as of the date of the resolution. The purchase price of the Common Stock covered by each option shall also be applicable in connection with the exercise of any related right or limited right. The purchase price shall be subject to adjustment as provided in paragraph 14. 6. Terms of Options The term of each incentive stock option granted under the 1996 Plan shall not be more than 10 years (5 years in the case of a 10% shareholder of the Company) from the date of grant, as the Committee shall determine, subject to earlier termination as provided in paragraphs 12 and 13. The term of each non-qualified stock option granted under the 1996 Plan shall be such period of time as the Committee shall determine, subject to earlier termination as provided in paragraphs 12 and 13. 3 5 7. Exercise of Options; Loans (a) Subject to the provisions of the 1996 Plan, an option granted under the 1996 Plan shall become vested as determined by the Committee. The Committee may, in its discretion, determine as a condition of any option, that all or a stated percentage of the options shall become exercisable, in installments or otherwise, only after completion of a specified service requirement. The Committee may also, in its discretion, accelerate the exercisability of any option at any time and provide, in any option agreement, that the option shall become immediately exercisable as to all shares of Common Stock remaining subject to the option on or following either (i) the first purchase of shares of Common Stock pursuant to a tender offer or exchange offer (other than an offer by the Company or any of its subsidiaries) for all, or any part of, the Common Stock ("Offer"), (ii) a change in control of the Company (as defined in this paragraph), (iii) approval by the Company's stockholders of a merger in which the Company does not survive as an independent, publicly owned corporation, a consolidation, or a sale, exchange or other disposition of all or substantially all the Company's assets (other than a merger of the Company for purposes of reincorporating under Delaware law), or (iv) a change in the composition of the Board of Directors (other than that resulting from a Remedy Event as that term is defined in the rights, preference and privileges of the Company's Series A Redeemable Convertible Preferred Stock) during any period of two consecutive years such that individuals who at the beginning of such period were members of the Board of Directors cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election by the Company's stockholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period (the date upon which an event described in clause (i), (ii), (iii) or (iv) of this paragraph 7(a) occurs shall be referred to herein as an "acceleration date"). A "change in control" is deemed to occur at the time of any acquisition of voting securities of the Company by any person or group (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), but excluding (i) the Company or any of its subsidiaries, (ii) any person who was a stockholder, officer or director of the Company on May 31, 1996, or (iii) any savings, pension or other benefits plan for the benefit of employees of the Company or any of its subsidiaries, which theretofore did not beneficially own voting securities representing more than 30% of the voting power of all outstanding voting securities of the Company, if such acquisition results in such entity, person or group owning beneficially securities representing more than 30% of the voting power of all outstanding voting securities of the Company. As used herein, "voting power" means ordinary voting power for the election of directors of the Company. (b) An option may be exercised at any time or from time to time (subject, in the case of an incentive stock option, to such restrictions as may be imposed by the Code), as to any or all full shares as to which the option has become exercisable. Notwithstanding the foregoing provision, no option may be exercised without the prior consent of the Committee by an employee who is subject to Section 16(b) of the Exchange Act until the expiration of six months from the date of the grant of the option. (c) The purchase price of the shares as to which an option is exercised shall be paid in full at the time of exercise; payment may be made in cash, which may be paid by check, or other instrument acceptable to the Company, or, with the consent of the Committee, in shares of 4 6 the Common Stock, valued at the Mean Value on the date of exercise, or if there were no sales on such date, on the next preceding day on which there were sales or (if permitted by the Committee and subject to such terms and conditions as it may determine) by surrender of outstanding awards under the 1996 Plan. In addition, any amount necessary to satisfy applicable federal, state or local tax requirements shall be paid promptly upon notification of the amount due. The Committee may permit such amount to be paid in shares of Common Stock previously owned by the employee, or a portion of the shares of Common Stock that otherwise would be distributed to such employee upon exercise of the option, or a combination of cash and shares of such Common Stock. (d) Except as provided in paragraphs 12 and 13, no option may be exercised at any time unless the holder thereof is then an employee of or performing services for the Company or one of its subsidiaries. For this purpose, "subsidiary" shall include, as under Treasury Regulations Section 1.421-7(h)(3) and (4), Example (3), any corporation that is a subsidiary of the Company during the entire portion of the requisite period of employment during which it is the employer of the holder. (e) The Committee, in its sole discretion, may elect, in lieu of delivering all or a portion of the shares of Common Stock as to which an option has been exercised, if the fair market value of the Common Stock exceeds the exercise price of the option (i) to pay the employee in cash or in shares of Common Stock, or a combination of cash and Common Stock, an amount equal to the excess of (A) the Mean Value on the exercise date of the shares of Common Stock as to which such option has been exercised, or if there were no sales on such date, on the next preceding day on which there were sales over (B) the option price, or (ii) in the case of an option which is a non-qualified option, to defer payment and to credit the amount of such excess on the Company's books for the account of the optionee and either (a) to treat the amount in such account as if it had been invested in the manner from time to time determined by the Committee, with dividends or other income therein being deemed to have been so reinvested or (b) for the Company's convenience, to contribute the amount credited to such account to a trust, which may be revocable by the Company, for investment in the manner from time to time determined by the Committee and set forth in the instrument creating such trust; PROVIDED, HOWEVER, that, to the extent required by Rule 16b-3 or other applicable rules under Section 16(b) of the Exchange Act, in order to perfect the exemption provided thereunder for cash settlements of stock appreciation rights, the Committee shall not exercise its discretion to grant cash to any employee who is subject to the provisions of Section 16(b) of the Exchange Act unless the exercise occurs during any period commencing on the third business day following the date of release for publication of any annual or quarterly summary statements of the Company's sales and earnings and ending on the twelfth business day following such date (a "Window Period"). The Committee's election pursuant to this subparagraph shall be made by giving written notice of such election to the employee (or other person exercising the option). Shares of Common Stock paid pursuant to this subparagraph will be valued at the Mean Value on the exercise date, or if there were no sales on such date, on the next preceding day on which there were sales. (f) Subject to any terms and conditions that the Committee may determine in respect of the exercise of options involving the surrender of outstanding awards, upon, but not 5 7 until, the exercise of an option or portion thereof in accordance with the 1996 Plan, the option agreement and such rules and regulations as may be established by the Committee, the holder thereof shall have the rights of a stockholder with respect to the shares issued as a result of such exercise. (g) The Company may make loans to such option holders as the Committee, in its discretion, may determine (including a holder who is a director or officer of the Company) in connection with the exercise of options granted under the 1996 Plan; PROVIDED, HOWEVER, that the Committee shall not authorize the making of any loan where the possession of such discretion or the making of such loan would result in a "modification" (as defined in Section 424 of the Code) of any incentive stock option. Such loans shall be subject to the following terms and conditions and such other terms and conditions as the Committee shall determine not inconsistent with the 1996 Plan. Such loans shall bear interest at such rates as the Committee shall determine from time to time, which rates may be below then current market rates (except in the case of incentive stock options). In no event may any such loan exceed the fair market value, at the date of exercise, of the shares covered by the option, or portion thereof, exercised by the holder. No loan shall have an initial term exceeding five years, but any such loan may be renewable at the discretion of the Committee. When a loan shall have been made, shares of Common Stock having a fair market value at least equal to the principal amount of the loan shall be pledged by the holder to the Company as security for payment of the unpaid balance of the loan. Every loan shall comply with all applicable laws, regulations and rules of the Board of Governors of the Federal Reserve System and any other governmental agency having jurisdiction. 8. Award and Exercise of Rights (a) A right may be awarded by the Committee in connection with any option granted under the 1996 Plan (a "tandem right"), either at the time the option is granted or thereafter at any time prior to the exercise, termination or expiration of the option. A right may also be awarded separately (a "free- standing right"). Each tandem right shall be subject to the same terms and conditions as the related option and shall be exercisable only to the extent the option is exercisable. The term of each freestanding right granted under the 1996 Plan shall be such period of time as the Committee shall determine. Subject to the provisions of the 1996 Plan, such right shall become vested as determined by the Committee. Prior to becoming 100% vested, each freestanding right shall become exercisable, in installments or otherwise, as the Committee shall determine. The Committee may also, in its discretion, accelerate the exercisability of any freestanding right at any time and provide, in the agreement covering a freestanding right, that the right shall become immediately exercisable on or following an acceleration date (as defined in paragraph 7(a)). No right shall be exercisable by an employee who is subject to the provisions of Section 16(b) of the Exchange Act without the prior consent of the Committee prior to the expiration of six months from the date the right is awarded (and then, as to a tandem right, only to the extent the related option is exercisable). Notwithstanding the foregoing, no right shall be 6 8 exercisable by an employee who is subject to the provisions of Section 16(b) of the Exchange Act without the prior consent of the Committee prior to the expiration of one year from the date of the initial sale of shares of Common Stock of the Company to the public. (b) A right shall entitle the employee upon exercise in accordance with its terms (subject, in the case of a tandem right, to the surrender unexercised of the related option or any portion or portions thereof which the employee from time to time determines to surrender for this purpose) to receive, subject to the provisions of the 1996 Plan and such rules and regulations as from time to time may be established by the Committee, a payment having an aggregate value equal to (A) the excess of (I) the fair market value on the exercise date of one share over (II) the option price per share, in the case of a tandem right, or the price per share specified in the terms of the right, in the case of a freestanding right, times (B) the number of shares with respect to which the right shall have been exercised. The payment shall be made in the form of all cash, all shares of Common Stock, or a combination thereof, as elected by the employee, PROVIDED that, unless otherwise approved by the Committee, the election by an employee who is subject to the provisions of Section 16(b) of the Exchange Act to receive all or a part of a payment in cash, as well as the exercise by the employee of the right for cash, shall be made only during a Window Period (as defined in paragraph 7(e) hereof); and PROVIDED FURTHER, that the Committee shall have sole discretion to consent to or disapprove the election of an officer or director to receive all or part of a payment in cash (which consent or disapproval may be given at any time after the election to which it relates). The price per share specified in a freestanding right shall be determined by the Committee but in no event shall be less than an amount determined in good faith by the Board of Directors, or if the Company completes a public offering of its Common Stock the average of the daily closing prices for the Common Stock as reported by NASDAQ or such other registered securities exchange to which the Common Stock is admitted for trading during a period determined by the Committee in its sole discretion that shall consist of any Trading Day or any number of consecutive Trading Days, not exceeding 30, during the period of 30 Trading Days ending on the Trading Day immediately preceding the date the right is granted, PROVIDED that, in the absence of a different determination by the Committee, the price per share shall be determined on the basis of a period consisting of 30 Trading Days. Such price shall be subject to adjustment as provided in paragraph 14. The Committee shall determine the date on which a freestanding right is granted. In the absence of such determination, the date on which the Committee adopts a resolution granting such right shall be considered the date of grant, provided the employee is promptly notified of the grant and an agreement is duly executed as of the date of the resolution. If upon exercise of a right the employee is to receive a portion of the payment in shares of Common Stock, the number of shares received shall be determined by dividing such portion by the fair market value of a share on the exercise date. The number of shares received may not exceed the number of shares covered by any option or portion thereof surrendered. Cash will be paid in lieu of any fractional share. No payment will be required from the employee upon exercise of a right, except that any amount necessary to satisfy applicable federal, state or local tax requirements shall be withheld or paid promptly upon notification of the amount due and prior to or concurrently with 7 9 delivery of cash or a certificate representing shares. The Committee may permit such amount to be paid in shares of Common Stock previously owned by the employee, or a portion of the shares of Common Stock that otherwise would be distributed to such employee upon exercise of the right, or a combination of cash and shares of such Common Stock. (c) For purposes of this paragraph 8, the fair market value of a share on any particular date shall mean the Mean Value of such share on such date, or if there are no sales on such date, on the next preceding day on which there were sales; PROVIDED, HOWEVER, that with respect to exercises of rights by an employee who is subject to the provisions of Section 16(b) of the Exchange Act during any Window Period, the Committee may prescribe, by rule of general application, such other measure of fair market value per share as the Committee may, in its discretion, determine but not in excess of the highest sale price of the Common Stock during such Window Period and, in the case of rights that relate to an incentive stock option, not in excess of the maximum amount that would be permissible under Section 422 of the Code and the Treasury Regulations thereunder without disqualifying such option as an incentive stock option under Section 422. (d) Upon exercise of a tandem right, the number of shares subject to exercise under the related option shall automatically be reduced by the number of shares represented by the option or portion thereof surrendered. (e) A right related to an incentive stock option may only be exercised if the fair market value of a share of Common Stock on the exercise date exceeds the option price. (f) Whether payments to employees upon exercise of tandem rights related to non-qualified options or of freestanding rights are made in cash, shares of Common Stock or a combination thereof, the Committee shall have sole discretion as to timing of the payments, whether in one lump sum or in annual installments or otherwise deferred, which deferred payments may in the Committee's sole discretion (i) bear amounts equivalent to interest or cash dividends, (ii) be treated as invested in the manner from time to time determined by the Committee, with dividends or other income thereon being deemed to have been so reinvested, or (iii) for the convenience of the Company, contributed to a trust, which may be revocable by the Company or subject to the claims of its creditors, for investment in the manner from time to time determined by the Committee and set forth in the instrument creating such trust, all as the Committee shall determine. (g) If a freestanding right is not exercised, or neither a tandem right nor the related option is exercised, before the end of the day on which the right ceases to be exercisable and the fair market value of a share on such date exceeds (i) the option price per share in the case of a tandem right or (ii) the price per share specified in the terms of the right in the case of a freestanding right, such right shall be deemed exercised and a payment in the amount prescribed by subparagraph 8(b), less any applicable taxes, shall be paid to the employee in cash. 8 10 9. Award and Exercise of Limited Rights (a) A limited right may be awarded by the Committee in connection with any option granted under the 1996 Plan with respect to all or some of the shares of Common Stock covered by such related option. A limited right may be granted either at the time the option is granted or thereafter at any time prior to the exercise, termination or expiration of the option. A limited right may be granted to an employee irrespective of whether such employee is being granted or has been granted a right under paragraph 8 hereof. A limited right may be exercised only during the ninety-day period beginning on an acceleration date (as defined in paragraph 7(a)). In addition, each limited right shall be exercisable only if, and to the extent that, the related option is exercisable and, in the case of a limited right granted in respect of an incentive stock option, only when the fair market value per share of the Common Stock exceeds the option price per share. Upon exercise of a limited right, such related option shall cease to be exercisable to the extent of the shares of Common Stock with respect to which such limited right is exercised. Upon the exercise or termination of a related option, the limited right with respect to such related option shall terminate to the extent of the shares of Common Stock with respect to which the related option was exercised or terminated. (b) Upon the exercise of limited rights, the holder thereof shall receive in cash whichever of the following amounts is applicable: (i) in the case of an exercise of limited rights by reason of the occurrence of an Offer (as defined in paragraph 7(a)(i)), an amount equal to the Offer Spread (as defined in paragraph 9(d)); (ii) in the case of an exercise of limited rights by reason of an acquisition of Common Stock described in paragraph 7(a)(ii), an amount equal to the Acquisition Spread (as defined in paragraph 9(h) hereof); (iii) in the case of an exercise of limited rights by reason of an event described in paragraph 7(a)(iii), an amount equal to the Merger Spread (as defined in paragraph 9(f) hereof); or (iv) in the case of an exercise of limited rights by reason of a change in the composition of the Board of Directors as described in paragraph 7(a)(iv), an amount equal to the Spread (as defined in paragraph 9(i) hereof). Notwithstanding the foregoing, in the case of a limited right granted in respect of an incentive stock option, the holder may not receive an amount in excess of such amount as will enable such option to qualify as an incentive stock option. (c) The term "Offer Price per Share" as used in this paragraph 9 shall mean, with respect to the exercise of any limited right by reason of the occurrence of an Offer, the greater of (i) the highest price per share of Common Stock paid in any Offer, which Offer is in effect at any time during the ninety-day period ending on the date on which such limited right is exercised, or 9 11 (ii) the highest fair market value per share of Common Stock during such ninety-day period. Any securities or property which are part or all of the consideration paid for shares of Common Stock in the Offer shall be valued in determining the Offer Price per Share at the higher of (A) the valuation placed on such securities or property by the corporation, person or other entity making such Offer or (B) the valuation placed on such securities or property by the Committee. (d) The term "Offer Spread" as used in this paragraph 9 shall mean an amount equal to the product computed by multiplying (i) the excess of (A) the Offer Price per Share over (B) the option price per share of Common Stock at which the related option is exercisable, by (ii) the number of shares of Common Stock with respect to which such limited right is being exercised. (e) The term "Merger Price per Share" as used in this paragraph 9 shall mean, with respect to the exercise of any limited right by reason of an event described in paragraph 7(a) (iii), the greater of (i) the fixed or formula price for the acquisition of shares of Common Stock occurring pursuant to such event if such fixed or formula price is determinable on the date on which such limited right is exercised, and (ii) the highest fair market value per share of Common Stock during the ninety-day period ending on the date on which such limited right is exercised. Any securities or property which are part or all of the consideration paid for shares of Common Stock pursuant to such event shall be valued in determining the Merger Price per Share at the higher of (A) the valuation placed on such securities or property by the corporation, person or other entity which is a party with the Company to such event or (B) the valuation placed on such securities or property by the Committee. (f) The term "Merger Spread" as used in this paragraph 9 shall mean an amount equal to the product computed by multiplying (i) the excess of (A) the Merger Price per Share over (B) the option price per share of Common Stock at which the related option is exercisable, by (ii) the number of shares of Common Stock with respect to which such limited right is being exercised. (g) The term "Acquisition Price per Share" as used in this paragraph 9 shall mean, with respect to the exercise of any limited right by reason of an acquisition of Common Stock described in paragraph 7(a)(ii), the greater of (i) the highest price per share stated on the Schedule 13D or any amendment thereto filed by the holder of 30% or more of the Company's voting power which gives rise to the exercise of such limited right, and (ii) the highest fair market value per share of Common Stock during the ninety-day period ending on the date the limited right is exercised. (h) The term "Acquisition Spread" as used in this paragraph 9 shall mean an amount equal to the product computed by multiplying (i) the excess of (A) the Acquisition Price per Share over (B) the option price per share of Common Stock at which the related option is exercisable, by (ii) the number of shares of Common Stock with respect to which such limited right is being exercised. 10 12 (i) The term "Spread" as used in this paragraph 9 shall mean, with respect to the exercise of any limited right by reason of a change in the composition of the Board described in paragraph 7(a) (iv), an amount equal to the product computed by multiplying (i) the excess of (A) the highest fair market value per share of Common Stock during the ninety-day period ending on the date the limited right is exercised over (B) the option price per share of Common Stock at which the related option is exercisable, by (ii) the number of shares of Common Stock with respect to which the limited right is being exercised. (j) Notwithstanding any other provision of the 1996 Plan, rights granted pursuant to paragraph 8 may not be exercised to the extent that any limited rights granted with respect to the same option are then exercisable. (k) For purposes of this paragraph 9, "fair market value per share of Common Stock" for any day shall mean the Mean Value for such day (or if there were no sales on such day, on the next preceding day on which there were sales). 10. Non-Transferability of Options and Rights Options, rights and limited rights granted under the 1996 Plan shall not be transferable otherwise than by will or the laws of descent and distribution, or pursuant to a qualified domestic relations order as defined by Section 414(p) of the Code. Options, rights and limited rights may be exercised during the lifetime of the employee only by the employee or by the employee's guardian or legal representative (unless such exercise would disqualify an option as an incentive stock option). 11. Award and Delivery of Restricted Shares or Restricted Units (a) At the time an award of restricted shares or restricted units is made, the Committee shall establish a period of time (the "Restricted Period") applicable to such award. Each award of restricted shares or restricted units may have a different Restricted Period. The Committee may, in its sole discretion, at the time an award is made, prescribe conditions for the incremental lapse of restrictions during the Restricted Period, for the lapse or termination of restrictions upon the satisfaction of other conditions in addition to or other than the expiration of the Restricted Period with respect to all or any portion of the restricted shares or restricted units and provide for the lapse of all restrictions with respect to all restricted shares or restricted units covered by the award upon the occurrence of an acceleration date as defined in paragraph 7(a). The Committee may also, in its sole discretion, shorten or terminate the Restricted Period or waive any conditions for the lapse or termination of restrictions with respect to all or any portion of the restricted shares or restricted units. Notwithstanding the foregoing, all restrictions shall lapse or terminate with respect to all restricted shares or restricted units upon death or total disability (as defined in paragraph 13). (b) Upon the grant of an award of restricted shares, a stock certificate representing a number of shares of Common Stock equal to the number of restricted shares granted to an employee shall be registered in the employee's name but shall be held in custody by the Company 11 13 for the employee's account. The employee shall generally have the rights and privileges of a stockholder as to such restricted shares, including the right to vote such restricted shares, except that, subject to the provisions of paragraph 12, the following restrictions shall apply: (i) the employee shall not be entitled to delivery of the certificate until the expiration or termination of the Restricted Period and the satisfaction of any other conditions prescribed by the Committee; (ii) none of the restricted shares may be sold, transferred, assigned, pledged, or otherwise encumbered or disposed of during the Restricted Period and until the satisfaction of any other conditions prescribed by the Committee; and (iii) all of the restricted shares shall be forfeited and all rights of the employee to such restricted shares shall terminate without further obligation on the part of the Company unless the employee has remained an employee of the Company or any of its subsidiaries or any combination thereof until the expiration or termination of the Restricted Period and the satisfaction of any other conditions prescribed by the Committee applicable to such restricted shares. At the discretion of the Committee, cash and stock dividends with respect to the restricted shares may be either currently paid or withheld by the Company for the employee's account, and interest may be paid on the amount of cash dividends withheld at a rate and subject to such terms as determined by the Committee. Upon the forfeiture of any restricted shares, such forfeited restricted shares shall be transferred to the Company without further action by the employee. The employee shall have the same rights and privileges, and be subject to the same restrictions, with respect to any shares received pursuant to paragraph 14. (c) Upon the expiration or termination of the Restricted Period and the satisfaction of any other conditions prescribed by the Committee or at such earlier time as provided for in paragraph 12, the restrictions applicable to the restricted shares shall lapse and a stock certificate for the number of shares of Common Stock with respect to which the restrictions have lapsed shall be delivered, free of all such restrictions, except any that may be imposed by law, to the employee or the employee's beneficiary or estate, as the case may be. The Company shall not be required to deliver any fractional share of Common Stock but will pay, in lieu thereof, the fair market value (determined as of the date the restrictions lapse) of such fractional share to the employee or the employee's beneficiary or estate, as the case may be. No payment will be required from the employee upon the issuance or delivery of any restricted shares, except that any amount necessary to satisfy applicable federal, state or local tax requirements shall be withheld or paid promptly upon notification of the amount due and prior to or concurrently with the issuance or delivery of a certificate representing such shares. The Committee may permit such amount to be paid in (i) shares of Common Stock previously owned by the employee, (ii) a portion of the shares of Common Stock that otherwise would be distributed to such employee upon the lapse of the restrictions applicable to the restricted shares, or (iii) a combination of cash and shares of such Common Stock; PROVIDED, HOWEVER, unless otherwise approved by the Committee, that an election by an employee subject to Section 16(b) of the Exchange Act to use shares of Common Stock described in clause (ii) above to satisfy any federal, state or local tax requirement shall be made only during a Window Period (as defined in paragraph 7(e) hereof), and PROVIDED FURTHER that the Committee shall have sole discretion to consent to or disapprove of any such election (which consent or disapproval may be given at any time after the election to which it relates). (d) In the case of an award of restricted units, no shares of Common Stock shall be issued at the time the award is made, and the Company shall not be required to set aside a fund 12 14 for the payment of any such award. At the discretion of the Committee, cash and stock dividends with respect to the Common Stock ("Dividend Equivalents") may be currently paid or withheld by the Company for the employee's account, and interest may be paid on the amount of cash dividends withheld at a rate and subject to such terms as determined by the Committee. Upon the expiration or termination of the Restricted Period and the satisfaction of any other conditions prescribed by the Committee or at such earlier time as provided for in paragraph 12, the Company shall deliver to the employee or the employee's beneficiary or estate, as the case may be, one share of Common Stock for each restricted unit with respect to which the restrictions have lapsed ("vested unit"), and cash equal to any Dividend Equivalents credited with respect to each such vested unit and any interest thereon; PROVIDED, HOWEVER, that the Committee may, in its sole discretion, elect to pay cash or part cash and part Common Stock in lieu of delivering only Common Stock for vested units. If a cash payment is made in lieu of delivering Common Stock, the amount of such cash payment shall be equal to the Mean Value for the date on which the Restricted Period lapsed with respect to such vested unit, or if there are no sales on such date, on the next preceding day on which there were sales. No payment will be required from the employee upon the award of any restricted units, the crediting or payment of any Dividend Equivalents, or the delivery of Common Stock or the payment of cash in respect of vested units, except that any amount necessary to satisfy applicable federal, state or local tax requirements shall be withheld or paid promptly upon notification of the amount due. The Committee may permit such amount to be paid in (i) shares of Common Stock previously owned by the employee, (ii) a portion of the shares of Common Stock that otherwise would be distributed to such employee in respect of vested units, or (iii) a combination of cash and shares of such Common Stock; PROVIDED, HOWEVER, unless otherwise approved by the Committee, that an election by an employee subject to Section 16(b) of the Exchange Act to use the shares of Common Stock described in clause (ii) above to satisfy any federal, state or local tax requirement shall be made only during a Window Period (as defined in paragraph 7(e) hereof); and PROVIDED FURTHER that the Committee shall have sole discretion to consent to or disapprove of any such election (which consent or disapproval may be given at any time after the election to which it relates). Upon the occurrence of an acceleration date (as defined in paragraph 7(a)), all outstanding vested units (including any restricted units whose restrictions have lapsed as a result of the occurrence of such acceleration date) and credited Dividend Equivalents shall be payable as soon as practicable but in no event later than 90 days after such acceleration date in cash, in shares of Common Stock, or part in cash and part in Common Stock, as the Committee, in its sole discretion, shall determine. To the extent that an employee receives cash in payment for his vested units, such employee shall receive an amount equal to the product of (i) the number of vested units credited to such employee's account for which such employee is receiving payment in cash times (ii) the Multiplication Factor (as defined below). To the extent that an employee receives Common Stock in payment for his vested units, such employee shall receive the number of shares of Common Stock determined by dividing (i) the product of (x) the number of vested units credited to such employee's account for which such employee is receiving payment in Common Stock times (z) the Multiplication Factor, by (ii) the fair market value per share of the Common Stock as of the day preceding the payment date. "Multiplication Factor" shall mean (i) in 13 15 the event of the occurrence of an Offer as defined in paragraph 7(a)(i), the Offer Price per Share as modified below, (ii) in the case of an acquisition of Common Stock described in paragraph 7(a) (ii), the Acquisition Price per Share as modified below, (iii) in the case of an event described in paragraph 7(a)(iii), the Merger Price per Share as modified below, or (iv) in the case of a change in the composition of the Board of Directors as described in paragraph 7(a)(iv), the highest fair market value per share of the Common Stock for any day during the applicable ninety-day period described below. For purposes of the preceding sentence, (i) the applicable ninety-day period described in paragraphs 9(c), (e) and (g) and in clause (iv) above shall mean the ninety-day period ending on or within 89 days following an acceleration date which the Committee, in its sole discretion, shall select and (ii) fair market value per share of the Common Stock shall mean the Mean Value. (e) The restricted unit award agreement may permit an employee to request that the payment of vested units (and Dividend Equivalents and the interest thereon with respect to such vested units) be deferred beyond the payment date specified in the agreement. The Committee shall, in its sole discretion, determine whether to permit such deferment and to specify the terms and conditions, which are not inconsistent with the 1996 Plan, to be contained in the agreement. In the event of such deferment, the Committee may determine that interest shall be credited annually on the Dividend Equivalents, at a rate to be determined by the Committee. The Committee may also determine to compound such interest. 12. Termination of Employment Unless otherwise determined by the Committee, and subject to such restrictions as may be imposed by the Code in the case of any incentive stock options, in the event that the employment of an employee to whom an option, right or limited right has been granted under the 1996 Plan shall be terminated (except as set forth in paragraph 13), such option, right or limited right may, subject to the provisions of the 1996 Plan, be exercised (to the extent that the employee was entitled to do so at the termination of his employment) at any time within three months after such termination, or, in the case of an employee whose termination results from retirement from active employment at or after the earliest permissible retirement date specified in the qualified retirement plan of the Company or one of its subsidiaries covering such employee, within one year after such termination, but in no case later than the date on which the option, right or limited right terminates; PROVIDED, HOWEVER, that any option, right or limited right held by an employee whose employment is terminated for cause shall forthwith terminate, to the extent not theretofore exercised. Unless otherwise determined by the Committee, if an employee to whom restricted shares or restricted units have been granted ceases to be an employee of the Company or of a subsidiary prior to the end of the Restricted Period and the satisfaction of any other conditions prescribed by the Committee for any reason other than death or total disability (as defined in paragraph 13), the employee shall immediately forfeit all restricted shares and restricted units. Awards granted under the 1996 Plan shall not be affected by any change of duties or position so long as the holder continues to be an employee of the Company or any of its subsidiaries. Any option, right, limited right, restricted share or restricted unit agreement, or any rules and 14 16 regulations relating to the 1996 Plan, may contain such provisions as the Committee shall approve with reference to the determination of the date employment terminates and the effect of leaves of absence. Any such rules and regulations with reference to any option agreement shall be consistent with the provisions of the Code and any applicable rules and regulations thereunder. Nothing in the 1996 Plan or in any award granted pursuant to the 1996 Plan shall confer upon any employee any right to continue in the employ of the Company or any of its subsidiaries or interfere in any way with the right of the Company or any such subsidiary to terminate such employment at any time. Notwithstanding anything else in the 1996 Plan to the contrary, if the corporation employing an individual to whom an option, right, limited right, restricted unit or restricted share has been granted under the 1996 Plan ceases to be a subsidiary of the Company, then the Committee may provide that service with such employer or its direct or indirect or subsidiaries in any capacity shall be considered employment with the Company for purposes of the 1996 Plan. 13. Death or Total Disability of Employee If an employee to whom an option, right or limited right has been granted under the 1996 Plan shall die or suffer a "total disability" while employed by the Company or its subsidiaries or within three months (or, in the case of an employee whose termination results from retirement from active employment at or after the earliest permissible retirement date specified in the qualified retirement plan of the Company or its subsidiaries covering such employee, or age 55 for non-employees of the Company, within one year) after the termination of such employment (other than termination for cause), such option, right or limited right may be exercised, to the extent that the employee was entitled to do so at the termination of employment (including by reason of death or total disability), as set forth herein (subject to the restrictions set forth in paragraphs 8 and 9 with respect to persons subject to Section 16(b) of the Exchange Act) by the employee, the legal guardian of the employee (unless such exercise would disqualify an option as an incentive stock option), a legatee or legatees of the employee under the employee's last will, or by the employee's personal representatives or distributees, whichever is applicable, at any time within one year after the date of the employee's death or total disability, but in no case later than the date on which the option, right or limited right terminates. For purposes hereof, "total disability" is defined as the permanent inability of an employee, as a result of accident or sickness, to perform any and every duty pertaining to such employee's occupation or employment for which the employee is suited by reason of the employee's previous training, education and experience. 14. Adjustment upon Changes in Capitalization, etc. Notwithstanding any other provision of the 1996 Plan, the Committee may at any time make or provide for such adjustments to the 1996 Plan, to the number and class of shares available thereunder or to any outstanding options, rights, restricted shares or restricted units as it shall deem appropriate to prevent dilution or enlargement of rights, including adjustments in the event of distributions to holders of Common Stock other than a normal cash dividend, changes in the outstanding Common Stock by reason of stock dividends, split-ups, recapitalizations, mergers, consolidations, combinations or exchanges of shares, separations, reorganizations, liquidations 15 17 and the like. In the event of any offer to holders of Common Stock generally relating to the acquisition of their shares, the Committee may make such adjustment as it deems equitable in respect of outstanding options, rights, limited rights and restricted units, including in the Committee's discretion revision of outstanding options, rights, limited rights and restricted units so that they may be exercisable for or payable in the consideration payable in the acquisition transaction. Any such determination by the Committee shall be conclusive. No adjustment shall be made in respect of an incentive stock option if such adjustment would disqualify such option as an incentive stock option under Section 422 of the Code and the Treasury Regulations thereunder. No adjustment shall be made in the minimum number of shares with respect to which an option may be exercised at any time. Any fractional shares resulting from such adjustments to options, rights, limited rights or restricted units shall be eliminated. 15. Effective Date The 1996 Plan shall be effective as of May 28, 1996, provided that the adoption of the 1996 Plan shall have been approved by the stockholders of the Company. The Committee thereafter may, in its discretion, grant awards under the 1996 Plan, the grant, exercise or payment of which shall be expressly subject to the conditions that, to the extent required at the time of grant, exercise or payment, (i) if the Company deems it necessary or desirable, a Registration Statement under the Securities Act of 1933 with respect to such shares shall be effective, and (ii) any requisite approval or consent of any governmental authority of any kind having jurisdiction over awards granted under the 1996 Plan shall be obtained. 16. Termination and Amendment The Board of Directors of the Company may suspend, terminate, modify or amend the 1996 Plan, provided that any amendment that would increase the aggregate number of shares that may be issued under the 1996 Plan, materially increase the benefits accruing to participants under the 1996 Plan, or materially modify the requirements as to eligibility for participation in the 1996 Plan shall be subject to the approval of the Company's stockholders to the extent required by Rule 16b-3, applicable law or any other governing rules or regulations, except that any such increase or modification that may result from adjustments authorized by paragraph 14 does not require such approval. If the 1996 Plan is terminated, the terms of the 1996 Plan shall, notwithstanding such termination, continue to apply to awards granted prior to such termination. In addition, no suspension, termination, modification or amendment of the 1996 Plan may, without the consent of the employee to whom an award shall theretofore have been granted, adversely affect the rights of such employee under such award. 17. Written Agreements Each award of options, rights, limited rights, restricted shares or restricted units shall be evidenced by a written agreement, executed by the employee and the Company, which shall contain such restrictions, terms and conditions as the Committee may require. 16 18 18. Effect on Other Stock Plans The adoption of the 1996 Plan shall have no effect on awards made or to be made pursuant to other stock plans covering employees of the Company or its subsidiaries, or any predecessors or successors thereto. IN WITNESS WHEREOF, the Company has caused its duly authorized officer to execute this Plan as of the 28th day of May, 1996. ACCESSORIES ASSOCIATES, INC. By: /s/ Gerald F. Cerce ------------------------------ Title: Chairman 17 EX-10.9 34 EMPLOYMENT AGREEMENT - GF CERCE 1 EXHIBIT 10.9 EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") is entered into as of the 31st day of May, 1996, by and between ACCESSORIES ASSOCIATES, INC., a Rhode Island corporation with a mailing address of 500 George Washington Highway, Smithfield, Rhode Island 02917 (the "Company"), and GERALD R. CERCE, an individual with a residence address of 143 Meeting Street, Providence, Rhode Island 02906 ("Executive"). INTRODUCTION 1. The Company is in the business of developing, manufacturing, distributing and marketing ladies' and men's consumer soft lines sold in retail stores (the "Accessories Business"). Executive conceived and developed the concepts currently used in the Company's operations and possesses other skills and knowledge advantageous to the Company. 2. The Company desires to employ Executive and Executive desires to accept such employment on the terms and conditions set forth herein. AGREEMENT In consideration of the premises and mutual promises hereinbelow set forth, the parties hereby agree as follows: 1. EMPLOYMENT PERIOD. The term of this Agreement (the "Employment Period") shall commence on the date hereof and, subject to earlier termination as hereinafter provided, shall terminate ten (10) years from the date hereof. Thereafter, Executive's employment will continue automatically on a year to year basis terminable by either party consistent with the terms of this Agreement. 2. EMPLOYMENT; DUTIES. Subject to the terms and conditions set forth herein, the Company hereby employs Executive to act as Chairman and Chief Executive Officer of the Company during the Employment Period, and Executive hereby accepts such employment. The duties assigned and authority granted to Executive shall be as set forth in the By-laws of the Company and as determined by its Board of Directors from time to time. Executive agrees to perform his duties for the Company diligently, competently, and in a good faith manner. The Executive may also engage in civic and charitable activities to the extent they are not inconsistent with Executive's duties hereunder. 3. SALARY AND BONUS. (a) BASE SALARY. During the first year of the Employment Period, the Company agrees to pay Executive $625,000 per year, payable weekly in arrears. Executive's base -1- 2 salary shall not be decreased, and shall be increased on each anniversary date of this Agreement (the "Anniversary Date"), based upon the increase in the Consumer Price Index for all Urban Consumers (CPI-U), Boston, Massachusetts, published by the Bureau of Labor Statistics of the United States Department of Labor (1982-1984=100) (the "Index"). If, on an Anniversary Date, the Index shows an increase from the base date of May 31, 1996 (the "Base Date"), then Executive's annual base salary for the ensuing 12 months shall be the product of (a) $601,000 and (b) one plus a percentage equal to the percentage increase in the Index on each such Anniversary Date over the Index on the Base Date. In the event the Bureau of Labor Statistics no longer publishes the Index the Company shall use that index then available which most closely replicates the Index. In addition, after the first year of the Employment Period, the Board of Directors of the Company (or any appropriate committee thereof) shall review and may increase the Executive's annual base salary in its discretion, based upon the Company's performance and the Executive's particular contributions. (b) BONUS. Executive shall be eligible for and shall receive an annual cash bonus under the Company's Executive Incentive Compensation Plan, subject to the discretion of the Company's Board of Directors. 4. OTHER BENEFITS. (a) INSURANCE AND OTHER BENEFITS. The Executive shall be entitled to participate in, and shall receive the maximum benefits available under, the Company's insurance programs (including health and life insurance) and any ERISA benefit plans, as the same may be adopted and/or amended from time to time, and shall receive all other fringe benefits that are provided by the Company to other senior executives. The Company shall purchase a disability insurance policy which shall provide Executive with the maximum monthly benefit available to Executive, based upon Executive's monthly base salary, after a six-month period of disability. The Company shall contribute the maximum amount permitted under current law to the Executive's 401(k) Plan, and any other Company pension or retirement plan during the Employment Period. (b) VACATION. Executive shall be entitled to an annual vacation of such duration as may be determined by the Board of Directors, but not less than that generally established for other executives of Company and in no event less than four (4) weeks, without interruption of salary. (c) AUTOMOBILE ALLOWANCE. The Company shall provide Executive with an automobile consistent with past practice. (d) REIMBURSEMENT OF EXPENSES. The Company shall reimburse Executive for all reasonable travel, entertainment and other expenses incurred or paid by the Executive in connection with, or related to, the performance of his duties or responsibilities under this Agreement, provided that Executive submits to the Company substantiation of such expenses sufficient to satisfy the record keeping guidelines promulgated from time to time by the Internal Revenue Service. All domestic and international airline travel may be in first class accommodations at the Executive's sole discretion. -2- 3 (e) MEMBERSHIP AND SERVICE FEES. The Company shall pay the professional and other fees reasonably incurred by Executive in connection with (i) an annual medical examination of Executive, (ii) the annual planning for and preparation of Executive's personal income tax returns, (iii) annual review of and planning Executive's financial situation by a financial planner, (iv) annual membership in an airline travel club, (v) annual membership in a social or health club of Executive's choice, and (vi) annual membership in a golf or country club of Executive's choice. (f) LODGING IN NEW YORK. Executive currently owns an apartment unit located at 415 East 54th Street, New York, New York. The Company shall reimburse Executive for all reasonable lodging, entertainment and other expenses incurred or paid by the Executive in connection with, or related to, the performance of his duties or responsibilities in New York City. The Company shall reimburse Executive for actual lodging at the apartment on a per diem basis at a rate equal to the daily rate charged in Manhattan to business travellers by first-class hotels in a premium location. (g) SUPPLEMENTAL EMPLOYEE RETIREMENT PLAN. The Company shall pay all annual payments for the Executive's Supplemental Employee Retirement Plan ("SERP"). Notwithstanding any other provisions in this Agreement to the contrary, the Company shall continue to make all payments on behalf of the Executive to the SERP during and after the Employment Period. Upon termination of the SERP, the Company shall deliver the proceeds of such SERP to Executive or the Executive's beneficiaries in accordance with the SERP. 5. TERMINATION BY THE COMPANY WITH CAUSE. Upon prior written notice to Executive, the Company may terminate this Agreement if any of the following events shall occur: (a) the conviction of Executive for a crime involving fraud or moral turpitude; (b) deliberate dishonesty of the Executive with respect to the Company or any of its subsidiaries; or (c) the refusal of the Executive to follow the reasonable and lawful written instructions of the Board of Directors of the Company with respect to the services to be rendered and the manner of rendering such services by Executive, provided such refusal is material and repetitive and is not justified or excused either by the terms of this Agreement or by actions taken by the Company in violation of this Agreement, and with respect to the first two refusals Executive has been given reasonable written notice and explanation thereof and reasonable opportunity to cure and no cure has been effected within a reasonable time after such notice. 6. TERMINATION BY THE EXECUTIVE; TERMINATION BY THE COMPANY WITHOUT CAUSE. 6.1 NOTICE/EVENTS/DEFINED TERMS. -3- 4 (a) Executive may terminate this Agreement at any time by providing written notice to the Company. (b) The Company may terminate this Agreement at any time, WITHOUT CAUSE, as defined below, upon six (6) months prior written notice to Executive. (c) As used in this Agreement, the term "WITHOUT CAUSE" shall mean termination for any reason not specified in Section 5 hereof, and shall include, without limitation: (i) the Company's materially reducing Executive's duties or authority as Chief Executive Officer; and (ii) the disability of Executive; or (iii) the Executive's death. 6.2 SEVERANCE. (a) If the Company terminates this Agreement, WITHOUT CAUSE, the Company shall provide Executive with a severance package which shall consist of the following: (i) payment on the first business day of each month of an amount equal to one-twelfth of the Executive's then current annual base salary under Section 3(a) hereof; (ii) payment on the first business day of each month of an amount equal to one-twelfth of Executive's most recent bonus under Section 3(b) hereof; and (iii) continuation of all benefits under Section 4. (b) The Company's obligation to make the payments and provide the benefits required by this Section 6.2 shall commence on the date of termination of this Agreement by the Company, WITHOUT CAUSE, and continue for a period equal to the greater of: (i) two (2) years, or (ii) the duration of the Non-compete Period under Section 8 hereof. 7. DEATH OR DISABILITY. In the event of the Executive's death or disability, employment will automatically terminate effective as of the date of such death or disability. As used in this Agreement, the term "disability" shall mean inability on the part of Executive for a period of more than six (6) months in the aggregate during any twelve (12) month period to perform the services contemplated under this Agreement. A determination of disability shall be made by a physician satisfactory to both the Executive and the Company, provided that if the Executive and the Company do not agree on a physician, the Executive and the Company shall each select a physician and these two physicians together shall select a third physician, whose determination as to disability shall be binding on all parties. 8. NON-COMPETITION. During the Employment Period and after termination of this Agreement by the Executive under Section 6.1(a), or by the Company under Section 5 or Section 6.1(b), the Company may restrict the Executive's subsequent involvement in the Restricted Business Activities, as defined below, for the period ending two (2) years after the date of termination of this Agreement (the "Non-compete Period"). As used in this Agreement, the term "Restricted Business Activities" shall mean the marketing and sale of ladies' and men's consumer soft lines to retail stores, which the Company sold and marketed during Executive's employment with the Company. During the Non-compete Period, Executive shall not, without the written approval of the Company, directly or indirectly, either as an individual, partner, joint venturer, employee or agent for any person, company, corporation or association, or as an officer, director -4- 5 or stockholder of a corporation or otherwise, enter into or engage in or have a proprietary interest in the Restricted Business Activities other than the ownership of (a) the stock of the Company then held by Executive, and (b) no more than five percent (5%) of the securities of any other publicly-held company. The minimum period for which Executive shall be provided the severance package set forth in Section 6.2 hereof shall be two (2) years. The Non-compete period may be extended for up to an additional three (3) years, at the option of the Company, provided that the Company continues to make the monthly payments and provides the benefits required under Section 6.2 hereof, for such additional period. The Executive recognizes and agrees that because a violation by him of his obligations under this Section 8 will cause irreparable harm to the Company that would be difficult to quantify and for which money damages would be inadequate, the Company shall have the right to injunctive relief to prevent or restrain any such violation, without the necessity of posting a bond. Executive expressly agrees that the character, duration and scope of this covenant not to compete are reasonable in light of the circumstances as they exist at the date upon which this Agreement has been executed. However, should a determination nonetheless be made by a court of competent jurisdiction at a later date that the character, duration or geographical scope of this covenant not to compete is unreasonable in light of the circumstances as they then exist, then it is the intention of both Executive and the Company that this covenant not to compete shall be construed by the court in such a manner as to impose only those restrictions on the conduct of Executive which are reasonable in light of the circumstances as they then exist and necessary to assure the Company of the intended benefit of this covenant to compete. 9. CONFIDENTIALITY COVENANTS. Executive understands that Company may impart to him confidential business information including, without limitation, designs, financial information, personnel information, real estate information, and the like (collectively "Confidential Information"). Executive hereby acknowledges Company's exclusive ownership of such Confidential Information. Executive agrees as follows: (1) only to use the Confidential Information to provide services to Company; (2) only to communicate the Confidential Information to fellow employees, agents and representatives on a need-to-know basis; and (3) not to otherwise disclose or use any Confidential Information. Upon demand by Company or upon termination of Executive's employment, Executive will deliver to Company all manuals, photographs, recordings, and any other instrument or device by which, through which, or on which Confidential Information has been recorded and/or preserved, which are in my Executive's possession, custody or control. 10. GOVERNING LAW/JURISDICTION. This Agreement shall be governed by and interpreted and governed in accordance with the laws of the State of Rhode Island. The parties agree that this Agreement was made and entered into in Rhode Island and each party hereby consents to the jurisdiction of a competent court in Rhode Island to hear any dispute arising out of this Agreement. -5- 6 11. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and thereof and supercedes any and all previous agreements, written and oral, regarding the subject matter hereof between the parties hereto. This Agreement shall not be changed, altered, modified or amended, except by a written agreement signed by both parties hereto. 12. NOTICES. All notices, requests, demands and other communications required or permitted to be given or made under this Agreement shall be in writing and shall be deemed to have been given if delivered by hand, sent by generally recognized overnight courier service, telex or telecopy, or certified mail, return receipt requested. (a) to the Company at: 500 George Washington Highway Smithfield, Rhode Island 02917 (b) to the Executive at: 143 Meeting Street Providence, Rhode Island 02906 Any such notice or other communication will be considered to have been given (i) on the date of delivery in person, (ii) on the third day after mailing by certified mail, provided that receipt of delivery is confirmed in writing, (iii) on the first business day following delivery to a commercial overnight courier or (iv) on the date of facsimile transmission (telecopy) provided that the giver of the notice obtains telephone confirmation of receipt. Either party may, by notice given to the other party in accordance with this Section, designate another address or person for receipt of notices hereunder. 13. SEVERABILITY. If any term or provision of this Agreement, or the application thereof to any person or under any circumstance, shall to any extent be invalid or unenforceable, the remainder of this Agreement, or the application of such terms to the persons or under circumstances other than those as to which it is invalid or unenforceable, shall be considered severable and shall not be affected thereby, and each term of this Agreement shall be valid and enforceable to the fullest extent permitted by law. The invalid or unenforceable provisions shall, to the extent permitted by law, be deemed amended and given such interpretation as to achieve the economic intent of this Agreement. 14. WAIVER. The failure of any party to insist in any one instance or more upon strict performance of any of the terms and conditions hereof, or to exercise any right or privilege herein conferred, shall not be construed as a waiver of such terms, conditions, rights or privileges, but same shall continue to remain in full force and effect. Any waiver by any party of any violation of, breach of or default under any provision of this Agreement by the other party shall not be construed as, or constitute, a continuing waiver of such provision, or waiver of any other violation of, breach of or default under any other provision of this Agreement. -6- 7 15. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the Company and any successors and assigns of the Company. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. ACCESSORIES ASSOCIATES, INC. By: /s/ Gerald F. Cerce ------------------------------------ Title: Chairman EXECUTIVE: /s/ Gerald F. Cerce ---------------------------------------- Gerald F. Cerce -7- EX-10.10 35 EMPLOYMENT AGREEMENT - DM DESISTO 1 EXHIBIT 10.10 EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") is entered into as of the 31st day of May, 1996, by and between ACCESSORIES ASSOCIATES, INC., a Rhode Island corporation with a mailing address of 500 George Washington Highway, Smithfield, Rhode Island 02917 (the "Company"), and DUANE DeSISTO, an individual with a residence address of 93 Betty Pond Road, Scituate, Rhode Island 02831 ("Executive"). INTRODUCTION 1. The Company is in the business of developing, manufacturing, distributing and marketing ladies' and men's consumer soft lines sold in retail stores (the "Accessories Business"). Executive is familiar with the Company's operations and possesses other skills and knowledge advantageous to the Company. 2. The Company desires to employ Executive and Executive desires to accept such employment on the terms and conditions set forth herein. AGREEMENT In consideration of the premises and mutual promises hereinbelow set forth, the parties hereby agree as follows: 1. EMPLOYMENT PERIOD. The term of this Agreement (the "Employment Period") shall commence on the date hereof and, subject to earlier termination as hereinafter provided, shall terminate three (3) years from the date hereof. Thereafter, Executive's employment will continue automatically on a year to year basis terminable by either party consistent with the terms of this Agreement. 2. EMPLOYMENT; DUTIES. Subject to the terms and conditions set forth herein, the Company hereby employs Executive to act as Vice President and Chief Financial Officer of the Company during the Employment Period, and Executive hereby accepts such employment. The duties assigned and authority granted to Executive shall be as set forth in the By-laws of the Company and as determined by its Board of Directors from time to time. Executive agrees to perform his duties for the Company diligently, competently, and in a good faith manner. The Executive may also engage in civic and charitable activities to the extent they are not inconsistent with Executive's duties hereunder. 3. SALARY AND BONUS. -1- 2 (a) BASE SALARY. During the first year of the Employment Period, the Company agrees to pay Executive $156,000 per year, payable weekly in arrears. Executive's base salary shall not be decreased, and shall be increased on each anniversary date of this Agreement (the "Anniversary Date"), based upon the increase in the Consumer Price Index for all Urban Consumers (CPI-U), Boston, Massachusetts, published by the Bureau of Labor Statistics of the United States Department of Labor (1982-1984=100) (the "Index"). If, on an Anniversary Date, the Index shows an increase from the base date of May 31, 1996 (the "Base Date"), then Executive's annual base salary for the ensuing 12 months shall be equal to the product of (a) $156,000 and (b) one plus a percentage equal to the percentage increase in the Index on each such Anniversary Date over the Index on the Base Date. In the event the Bureau of Labor Statistics no longer publishes the Index the Company shall use that index then available which most closely replicates the Index. In addition, after the first year of the Employment Period, the Board of Directors of the the Company (or any appropriate committee thereof) shall review and may increase the Executive's annual base salary in its discretion, based upon the Company's performance and the Executive's particular contributions. (b) BONUS. Executive shall be eligible for and shall receive an annual cash bonus under the Company's Executive Incentive Compensation Plan, subject to the discretion of the Company's Board of Directors. 4. OTHER BENEFITS. (a) INSURANCE AND OTHER BENEFITS. The Executive shall be entitled to participate in, and shall receive the maximum benefits available under, the Company's insurance programs (including health and life insurance) and any ERISA benefit plans, as the same may be adopted and/or amended from time to time, and shall receive all other fringe benefits that are provided by the Company to other senior executives. The Company shall purchase a disability insurance policy which shall provide Executive with a minimum monthly benefit equal to sixty percent (60%) of Executive's monthly base salary, subject to a maximum monthly benefit of $15,000 after a six-month period of disability. The Company shall contribute the maximum amount permitted under current law to the Executive's 401(k) Plan, and any other Company pension or retirement plan during the Employment Period. (b) VACATION. Executive shall be entitled to an annual vacation of such duration as may be determined by the Board of Directors, but not less than that generally established for other executives of Company and in no event less than four (4) weeks, without interruption of salary. (c) AUTOMOBILE ALLOWANCE. The Company shall provide Executive with an automobile consistent with past practice. (d) REIMBURSEMENT OF EXPENSES. The Company shall reimburse Executive for all reasonable travel, entertainment and other expenses incurred or paid by the Executive in connection with, or related to, the performance of his duties or responsibilities under this Agreement, provided that Executive submits to the Company substantiation of such expenses -2- 3 sufficient to satisfy the record keeping guidelines promulgated from time to time by the Internal Revenue Service. All domestic and international airline travel may be in first class accommodations at the Executive's sole discretion. 5. TERMINATION BY THE COMPANY WITH CAUSE. Upon prior written notice to Executive, the Company may terminate this Agreement if any of the following events shall occur: (a) the conviction of Executive for a crime involving fraud or moral turpitude; (b) deliberate dishonesty of the Executive with respect to the Company or any of its subsidiaries; or (c) the refusal of the Executive to follow the reasonable and lawful written instructions of the Board of Directors of the Company with respect to the services to be rendered and the manner of rendering such services by Executive, provided such refusal is material and repetitive and is not justified or excused either by the terms of this Agreement or by actions taken by the Company in violation of this Agreement, and with respect to the first two refusals Executive has been given reasonable written notice and explanation thereof and reasonable opportunity to cure and no cure has been effected within a reasonable time after such notice. 6. TERMINATION BY THE EXECUTIVE; TERMINATION BY THE COMPANY WITHOUT CAUSE. 6.1 NOTICE/EVENTS/DEFINED TERMS. (a) Executive may terminate this Agreement at any time by providing written notice to the Company. (b) The Company may terminate this Agreement at any time, WITHOUT CAUSE, by providing written notice to Executive. As used in this Agreement, the term "WITHOUT CAUSE" shall mean termination for any reason not specified in Section 5 hereof, and shall include, without limitation: (i) the Company's materially reducing Executive's duties or authority as Chief Operating Officer of the Company; or (ii) disability of Executive; or (iii) the Executive's death. 6.2 SEVERANCE. (a) If the Company terminates this Agreement, WITHOUT CAUSE, the Company shall provide Executive with a severance package which shall consist of the following: (i) payment on the first business day of each month of an amount equal to one-twelfth of the Executive's then current annual base salary under Section 3(a) hereof; (ii) payment on the first business day of each month of an amount equal to one-twelfth of Executive's most recent bonus under Section 3(b) hereof; and (iii) continuation of all benefits under Section 4. (b) The Company's obligation to make the payments and provide the benefits required by this Section 6.2 shall commence on the date of termination of this Agreement -3- 4 by the Company, WITHOUT CAUSE, and continue for a period equal to the greater of: (i) two (2) years, or (ii) the duration of the Executive's obligations under Section 8 hereof. 7. DEATH OR DISABILITY. In the event of the Executive's death or disability, employment will automatically terminate effective as of the date of such death or disability. As used in this Agreement, the term "disability" shall mean inability on the part of Executive for a period of more than six (6) months in the aggregate during any twelve (12) month period to perform the services contemplated under this Agreement. A determination of disability shall be made by a physician satisfactory to both the Executive and the Company, provided that if the Executive and the Company do not agree on a physician, the Executive and the Company shall each select a physician and these two physicians together shall select a third physician, whose determination as to disability shall be binding on all parties. 8. NON-COMPETITION. During the Employment Period and after termination of this Agreement by Executive under Section 6.1(a), or the Company under Section 5 or 6.1(b), the Company may restrict the Executive's subsequent involvement in the Restricted Business Activities, as defined below, for the period ending one (1) year after the date of termination of this Agreement (the "Non-compete Period"). As used in this Agreement, the term "Restricted Business Activities" shall mean the marketing and sale of ladies' and men's consumer soft lines to retail stores, which the Company sold and marketed during Executive's employment with the Company. During the Non-compete Period, Executive shall not, without the written approval of the Company, directly or indirectly, either as an individual, partner, joint venturer, employee or agent for any person, company, corporation or association, or as an officer, director or stockholder of a corporation or otherwise, enter into or engage in or have a proprietary interest in the Restricted Business Activities other than the ownership of (a) the stock of the Company then held by Executive, and (b) no more than five percent (5%) of the securities of any other publicly-held company. The Non-compete period may be extended for up to an additional two (2) years, at the option of the Company, provided that the Company continues to make the monthly payments and provides the benefits required under Section 6.2 hereof, for such additional period. The Executive recognizes and agrees that because a violation by him of his obligations under this Section 8 will cause irreparable harm to the Company that would be difficult to quantify and for which money damages would be inadequate, the Company shall have the right to injunctive relief to prevent or restrain any such violation, without the necessity of posting a bond. Executive expressly agrees that the character, duration and scope of this covenant not to compete are reasonable in light of the circumstances as they exist at the date upon which this Agreement has been executed. However, should a determination nonetheless be made by a court of competent jurisdiction at a later date that the character, duration or geographical scope of this covenant not to compete is unreasonable in light of the circumstances as they then exist, then it is the intention of both Executive and the Company that this covenant not to compete shall be construed by the court in such a manner as to impose only those restrictions on the conduct of Executive which are reasonable in light of the circumstances as they then exist and necessary to assure the Company of the intended benefit of this covenant to compete. -4- 5 9. CONFIDENTIALITY COVENANTS. Executive understands that Company may impart to him confidential business information including, without limitation, designs, financial information, personnel information, real estate information, and the like (collectively "Confidential Information"). Executive hereby acknowledges Company's exclusive ownership of such Confidential Information. Executive agrees as follows: (1) only to use the Confidential Information to provide services to Company; (2) only to communicate the Confidential Information to fellow employees, agents and representatives on a need-to-know basis; and (3) not to otherwise disclose or use any Confidential Information. Upon demand by Company or upon termination of Executive's employment, Executive will deliver to Company all manuals, photographs, recordings, and any other instrument or device by which, through which, or on which Confidential Information has been recorded and/or preserved, which are in my Executive's possession, custody or control. 10. GOVERNING LAW/JURISDICTION. This Agreement shall be governed by and interpreted and governed in accordance with the laws of the State of Rhode Island. The parties agree that this Agreement was made and entered into in Rhode Island and each party hereby consents to the jurisdiction of a competent court in Rhode Island to hear any dispute arising out of this Agreement. 11. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and thereof and supercedes any and all previous agreements, written and oral, regarding the subject matter hereof between the parties hereto. This Agreement shall not be changed, altered, modified or amended, except by a written agreement signed by both parties hereto. 12. NOTICES. All notices, requests, demands and other communications required or permitted to be given or made under this Agreement shall be in writing and shall be deemed to have been given if delivered by hand, sent by generally recognized overnight courier service, telex or telecopy, or certified mail, return receipt requested. (a) to the Company at: 500 George Washington Highway Smithfield, Rhode Island 02917 (b) to the Executive at: 93 Betty Pond Road Scituate, Rhode Island 02831 Any such notice or other communication will be considered to have been given (i) on the date of delivery in person, (ii) on the third day after mailing by certified mail, provided that receipt of delivery is confirmed in writing, (iii) on the first business day following delivery to a -5- 6 commercial overnight courier or (iv) on the date of facsimile transmission (telecopy) provided that the giver of the notice obtains telephone confirmation of receipt. Either party may, by notice given to the other party in accordance with this Section, designate another address or person for receipt of notices hereunder. 13. SEVERABILITY. If any term or provision of this Agreement, or the application thereof to any person or under any circumstance, shall to any extent be invalid or unenforceable, the remainder of this Agreement, or the application of such terms to the persons or under circumstances other than those as to which it is invalid or unenforceable, shall be considered severable and shall not be affected thereby, and each term of this Agreement shall be valid and enforceable to the fullest extent permitted by law. The invalid or unenforceable provisions shall, to the extent permitted by law, be deemed amended and given such interpretation as to achieve the economic intent of this Agreement. 14. WAIVER. The failure of any party to insist in any one instance or more upon strict performance of any of the terms and conditions hereof, or to exercise any right or privilege herein conferred, shall not be construed as a waiver of such terms, conditions, rights or privileges, but same shall continue to remain in full force and effect. Any waiver by any party of any violation of, breach of or default under any provision of this Agreement by the other party shall not be construed as, or constitute, a continuing waiver of such provision, or waiver of any other violation of, breach of or default under any other provision of this Agreement. 15. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the Company and any successors and assigns of the Company. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. ACCESSORIES ASSOCIATES, INC. By: /s/ Gerald F. Cerce --------------------------------------- Title: Chairman EXECUTIVE: /s/ Duane DeSisto --------------------------------------- DUANE DeSISTO -6- EX-10.11 36 EMPLOYMENT AGREEMENT - JH FLYNN, JR. 1 EXHIBIT 10.11 EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") is entered into as of the 31st day of May, 1996, by and between ACCESSORIES ASSOCIATES, INC., a Rhode Island corporation with a mailing address of 500 George Washington Highway, Smithfield, Rhode Island 02917 (the "Company"), and JOHN H. FLYNN, JR. an individual with a residence address of 52 Second Street, Newport, Rhode Island 02840 ("Executive"). INTRODUCTION 1. The Company is in the business of developing, manufacturing, distributing and marketing ladies' and men's consumer soft lines sold in retail stores (the "Accessories Business"). Executive assisted in the conception and development of the concepts currently used in the Company's operations and possesses other skills and knowledge advantageous to the Company. 2. The Company desires to employ Executive and Executive desires to accept such employment on the terms and conditions set forth herein. AGREEMENT In consideration of the premises and mutual promises hereinbelow set forth, the parties hereby agree as follows: 1. EMPLOYMENT PERIOD. The term of this Agreement (the "Employment Period") shall commence on the date hereof and, subject to earlier termination as hereinafter provided, shall terminate three (3) years from the date hereof. Thereafter, Executive's employment will continue automatically on a year to year basis terminable by either party consistent with the terms of this Agreement. 2. EMPLOYMENT; DUTIES. Subject to the terms and conditions set forth herein, the Company hereby employs Executive to act as President and Chief Executive Officer of the Company during the Employment Period, and Executive hereby accepts such employment. The duties assigned and authority granted to Executive shall be as set forth in the By-laws of the Company and as determined by its Board of Directors from time to time. Executive agrees to perform his duties for the Company diligently, competently, and in a good faith manner. The Executive may also engage in civic and charitable activities to the extent they are not inconsistent with Executive's duties hereunder. 3. SALARY AND BONUS. (a) BASE SALARY. During the first year of the Employment Period, the Company agrees to pay Executive $295,277 per year, payable weekly in arrears. Executive's base -1- 2 salary shall not be decreased, and shall be increased on each anniversary date of this Agreement (the "Anniversary Date"), based upon the increase in the Consumer Price Index for all Urban Consumers (CPI-U), Boston, Massachusetts, published by the Bureau of Labor Statistics of the United States Department of Labor (1982-1984=100) (the "Index"). If, on an Anniversary Date, the Index shows an increase from the base date of May 31, 1996 (the "Base Date"), then Executive's annual base salary for the ensuing 12 months shall be equal to the product of (a) $295,277 and (b) one plus a percentage equal to the percentage increase in the Index on each such Anniversary Date over the Index on the Base Date. In the event the Bureau of Labor Statistics no longer publishes the Index the Company shall use that index then available which most closely replicates the Index. In addition, after the first year of the Employment Period, the Board of Directors of the the Company (or any appropriate committee thereof) shall review and may increase the Executive's annual base salary in its discretion, based upon the Company's performance and the Executive's particular contributions. (b) BONUS. Executive shall be eligible for and shall receive an annual cash bonus under the Company's Executive Incentive Compensation Plan, subject to the discretion of the Company's Board of Directors. 4. OTHER BENEFITS. (a) INSURANCE AND OTHER BENEFITS. The Executive shall be entitled to participate in, and shall receive the maximum benefits available under, the Company's insurance programs (including health and life insurance) and any ERISA benefit plans, as the same may be adopted and/or amended from time to time, and shall receive all other fringe benefits that are provided by the Company to other senior executives. The Company shall purchase a disability insurance policy which shall provide Executive with a minimum monthly benefit equal to sixty percent (60%) of Executive's monthly base salary, subject to a maximum monthly benefit of $15,000 after a six-month period of disability. The Company shall contribute the maximum amount permitted under current law to the Executive's 401(k) Plan, and any other Company pension or retirement plan during the Employment Period. (b) VACATION. Executive shall be entitled to an annual vacation of such duration as may be determined by the Board of Directors, but not less than that generally established for other executives of Company and in no event less than four (4) weeks, without interruption of salary. (c) AUTOMOBILE ALLOWANCE. The Company shall provide Executive with an automobile consistent with past practice. (d) REIMBURSEMENT OF EXPENSES. The Company shall reimburse Executive for all reasonable travel, entertainment and other expenses incurred or paid by the Executive in connection with, or related to, the performance of his duties or responsibilities under this Agreement, provided that Executive submits to the Company substantiation of such expenses sufficient to satisfy the record keeping guidelines promulgated from time to time by the Internal -2- 3 Revenue Service. All domestic and international airline travel may be in first class accommodations at the Executive's sole discretion. 5. TERMINATION BY THE COMPANY WITH CAUSE. Upon prior written notice to Executive, the Company may terminate this Agreement if any of the following events shall occur: (a) the conviction of Executive for a crime involving fraud or moral turpitude; (b) deliberate dishonesty of the Executive with respect to the Company or any of its subsidiaries; or (c) the refusal of the Executive to follow the reasonable and lawful written instructions of the Board of Directors of the Company with respect to the services to be rendered and the manner of rendering such services by Executive, provided such refusal is material and repetitive and is not justified or excused either by the terms of this Agreement or by actions taken by the Company in violation of this Agreement, and with respect to the first two refusals Executive has been given reasonable written notice and explanation thereof and reasonable opportunity to cure and no cure has been effected within a reasonable time after such notice. 6. TERMINATION BY THE EXECUTIVE; TERMINATION BY THE COMPANY WITHOUT CAUSE. 6.1 NOTICE/EVENTS/DEFINED TERMS. (a) Executive may terminate this Agreement at any time by providing written notice to the Company. (b) The Company may terminate this Agreement at any time, WITHOUT CAUSE, by providing written notice to the Executive. As used in this Agreement, the term "WITHOUT CAUSE" shall mean termination for any reason not specified in Section 5 hereof, and shall include, without limitation: (i) the Company's materially reducing Executive's duties or authority as President and Chief Executive Officer; or (ii) the disability of Executive; or (iii) the Executive's death. 6.2 SEVERANCE. (a) If the Company terminates this Agreement, WITHOUT CAUSE, the Company shall provide Executive with a severance package which shall consist of the following: (i) payment on the first business day of each month of an amount equal to one-twelfth of the Executive's then current annual base salary under Section 3(a) hereof; (ii) payment on the first business day of each month of an amount equal to one-twelfth of Executive's most recent bonus under Section 3(b) hereof; and (iii) continuation of all benefits under Section 4. (b) The Company's obligation to make the payments and provide the benefits required by this Section 6.2 shall commence on the date of termination of this Agreement -3- 4 by the Company, WITHOUT CAUSE, and continue for a period equal to the greater of: (i) two (2) years, or (ii) the duration of the Non-compete Period under Section 8 hereof. 7. DEATH OR DISABILITY. In the event of the Executive's death or disability, employment will automatically terminate effective as of the date of such death or disability. As used in this Agreement, the term "disability" shall mean inability on the part of Executive for a period of more than six (6) months in the aggregate during any twelve (12) month period to perform the services contemplated under this Agreement. A determination of disability shall be made by a physician satisfactory to both the Executive and the Company, provided that if the Executive and the Company do not agree on a physician, the Executive and the Company shall each select a physician and these two physicians together shall select a third physician, whose determination as to disability shall be binding on all parties. 8. NON-COMPETITION. During the Employment Period and after termination of this Agreement by the Executive under Section6.1(a), or by the Company under Section 5 or Section 6.1(b), the Company may restrict the Executive's subsequent involvement in the Restricted Business Activities, as defined below, for the period ending two (2) years after the date of termination of this Agreement (the "Non-compete Period"). As used in this Agreement, the term "Restricted Business Activities" shall mean the marketing and sale of ladies' and men's consumer soft lines to retail stores, which the Company sold and marketed during Executive's employment with the Company. During the Non-compete Period, if the Company requests in writing a restriction on Executive's Restricted Business Activities, Executive shall not, without the written approval of the Company, directly or indirectly, either as an individual, partner, joint venturer, employee or agent for any person, company, corporation or association, or as an officer, director or stockholder of a corporation or otherwise, enter into or engage in or have a proprietary interest in the Restricted Business Activities other than the ownership of (a) the stock of the Company then held by Executive, and (b) no more than five percent (5%) of the securities of any other publicly-held company. The minimum period for which Executive shall be provided the severance package set forth in Section 6.2 hereof shall be two (2) years. The Non-compete period may be extended for up to an additional three (3) years, at the option of the Company, provided that the Company continues to make the monthly payments and provides the benefits required under Section 6.2 hereof, for such additional period. The Executive recognizes and agrees that because a violation by him of his obligations under this Section 8 will cause irreparable harm to the Company that would be difficult to quantify and for which money damages would be inadequate, the Company shall have the right to injunctive relief to prevent or restrain any such violation, without the necessity of posting a bond. Executive expressly agrees that the character, duration and scope of this covenant not to compete are reasonable in light of the circumstances as they exist at the date upon which this Agreement has been executed. However, should a determination nonetheless be made by a court of competent jurisdiction at a later date that the character, duration or geographical scope of this covenant not to compete is unreasonable in light of the circumstances as they then exist, then it is the intention of both Executive and the Company that this covenant not to compete shall -4- 5 be construed by the court in such a manner as to impose only those restrictions on the conduct of Executive which are reasonable in light of the circumstances as they then exist and necessary to assure the Company of the intended benefit of this covenant to compete. 9. CONFIDENTIALITY COVENANTS. Executive understands that Company may impart to him confidential business information including, without limitation, designs, financial information, personnel information, real estate information, and the like (collectively "Confidential Information"). Executive hereby acknowledges Company's exclusive ownership of such Confidential Information. Executive agrees as follows: (1) only to use the Confidential Information to provide services to Company; (2) only to communicate the Confidential Information to fellow employees, agents and representatives on a need-to-know basis; and (3) not to otherwise disclose or use any Confidential Information. Upon demand by Company or upon termination of Executive's employment, Executive will deliver to Company all manuals, photographs, recordings, and any other instrument or device by which, through which, or on which Confidential Information has been recorded and/or preserved, which are in my Executive's possession, custody or control. 10. GOVERNING LAW/JURISDICTION. This Agreement shall be governed by and interpreted and governed in accordance with the laws of the State of Rhode Island. The parties agree that this Agreement was made and entered into in Rhode Island and each party hereby consents to the jurisdiction of a competent court in Rhode Island to hear any dispute arising out of this Agreement. 11. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and thereof and supercedes any and all previous agreements, written and oral, regarding the subject matter hereof between the parties hereto. This Agreement shall not be changed, altered, modified or amended, except by a written agreement signed by both parties hereto. 12. NOTICES. All notices, requests, demands and other communications required or permitted to be given or made under this Agreement shall be in writing and shall be deemed to have been given if delivered by hand, sent by generally recognized overnight courier service, telex or telecopy, or certified mail, return receipt requested. (a) to the Company at: 500 George Washington Highway Smithfield, Rhode Island 02917 (b) to the Executive at: 52 Second Street Newport, Rhode Island 02840 -5- 6 Any such notice or other communication will be considered to have been given (i) on the date of delivery in person, (ii) on the third day after mailing by certified mail, provided that receipt of delivery is confirmed in writing, (iii) on the first business day following delivery to a commercial overnight courier or (iv) on the date of facsimile transmission (telecopy) provided that the giver of the notice obtains telephone confirmation of receipt. Either party may, by notice given to the other party in accordance with this Section, designate another address or person for receipt of notices hereunder. 13. SEVERABILITY. If any term or provision of this Agreement, or the application thereof to any person or under any circumstance, shall to any extent be invalid or unenforceable, the remainder of this Agreement, or the application of such terms to the persons or under circumstances other than those as to which it is invalid or unenforceable, shall be considered severable and shall not be affected thereby, and each term of this Agreement shall be valid and enforceable to the fullest extent permitted by law. The invalid or unenforceable provisions shall, to the extent permitted by law, be deemed amended and given such interpretation as to achieve the economic intent of this Agreement. 14. WAIVER. The failure of any party to insist in any one instance or more upon strict performance of any of the terms and conditions hereof, or to exercise any right or privilege herein conferred, shall not be construed as a waiver of such terms, conditions, rights or privileges, but same shall continue to remain in full force and effect. Any waiver by any party of any violation of, breach of or default under any provision of this Agreement by the other party shall not be construed as, or constitute, a continuing waiver of such provision, or waiver of any other violation of, breach of or default under any other provision of this Agreement. 15. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the Company and any successors and assigns of the Company. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. ACCESSORIES ASSOCIATES, INC. By: /s/ Gerald F. Cerce ---------------------------------------- Title: Chairman EXECUTIVE: /s/ John H. Flynn, Jr. ------------------------------------- John H. Flynn, Jr. -6- EX-10.12 37 EMPLOYMENT AGREEMENT - RV LALLO 1 EXHIBIT 10.12 EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") is entered into as of the 31st day of May, 1996, by and between ACCESSORIES ASSOCIATES, INC., a Rhode Island corporation with a mailing address of 500 George Washington Highway, Smithfield, Rhode Island 02917 (the "Company"), and ROBERT V. LALLO, an individual with a residence address of 132 Division Street, E. Greenwich, Rhode Island 02818 ("Executive"). INTRODUCTION 1. The Company is in the business of developing, manufacturing, distributing and marketing ladies' and men's consumer soft lines sold in retail stores (the "Accessories Business"). Executive assisted in the conception and development of the concepts currently used in the Company's operations and possesses other skills and knowledge advantageous to the Company. 2. The Company desires to employ Executive and Executive desires to accept such employment on the terms and conditions set forth herein. AGREEMENT In consideration of the premises and mutual promises hereinbelow set forth, the parties hereby agree as follows: 1. EMPLOYMENT PERIOD. The term of this Agreement (the "Employment Period") shall commence on the date hereof and, subject to earlier termination as hereinafter provided, shall terminate three (3) years from the date hereof. Thereafter, Executive's employment will continue automatically on a year to year basis terminable by either party consistent with the terms of this Agreement. 2. EMPLOYMENT; DUTIES. Subject to the terms and conditions set forth herein, the Company hereby employs Executive to act as Chief Operating Officer of the Company during the Employment Period, and Executive hereby accepts such employment. The duties assigned and authority granted to Executive shall be as set forth in the By-laws of the Company and as determined by its Board of Directors from time to time. Executive agrees to perform his duties for the Company diligently, competently, and in a good faith manner. The Executive may also engage in civic and charitable activities to the extent they are not inconsistent with Executive's duties hereunder. 3. SALARY AND BONUS. (a) BASE SALARY. During the first year of the Employment Period, the Company agrees to pay Executive $156,707 per year, payable weekly in arrears. Executive's base -1- 2 salary shall not be decreased, and shall be increased on each anniversary date of this Agreement (the "Anniversary Date"), based upon the increase in the Consumer Price Index for all Urban Consumers (CPI-U), Boston, Massachusetts, published by the Bureau of Labor Statistics of the United States Department of Labor (1982-1984=100) (the "Index"). If, on an Anniversary Date, the Index shows an increase from the base date of May 31, 1996 (the "Base Date"), then Executive's annual base salary for the ensuing 12 months shall be equal to the product of (a) $156,707 and (b) one plus a percentage equal to the percentage increase in the Index on each such Anniversary Date over the Index on the Base Date. In the event the Bureau of Labor Statistics no longer publishes the Index the Company shall use that index then available which most closely replicates the Index. In addition, after the first year of the Employment Period, the Board of Directors of the the Company (or any appropriate committee thereof) shall review and may increase the Executive's annual base salary in its discretion, based upon the Company's performance and the Executive's particular contributions. (b) BONUS. Executive shall be eligible for and shall receive an annual cash bonus under the Company's Executive Incentive Compensation Plan, subject to the discretion of the Company's Board of Directors. 4. OTHER BENEFITS. (a) INSURANCE AND OTHER BENEFITS. The Executive shall be entitled to participate in, and shall receive the maximum benefits available under, the Company's insurance programs (including health and life insurance) and any ERISA benefit plans, as the same may be adopted and/or amended from time to time, and shall receive all other fringe benefits that are provided by the Company to other senior executives. The Company shall purchase a disability insurance policy which shall provide Executive with a minimum monthly benefit equal to sixty percent (60%) of Executive's monthly base salary, subject to a maximum monthly benefit of $15,000 after a six-month period of disability. The Company shall contribute the maximum amount permitted under current law to the Executive's 401(k) Plan, and any other Company pension or retirement plan during the Employment Period. (b) VACATION. Executive shall be entitled to an annual vacation of such duration as may be determined by the Board of Directors, but not less than that generally established for other executives of Company and in no event less than four (4) weeks, without interruption of salary. (c) AUTOMOBILE ALLOWANCE. The Company shall provide Executive with an automobile consistent with past practice. (d) REIMBURSEMENT OF EXPENSES. The Company shall reimburse Executive for all reasonable travel, entertainment and other expenses incurred or paid by the Executive in connection with, or related to, the performance of his duties or responsibilities under this Agreement, provided that Executive submits to the Company substantiation of such expenses sufficient to satisfy the record keeping guidelines promulgated from time to time by the Internal -2- 3 Revenue Service. All domestic and international airline travel may be in first class accommodations at the Executive's sole discretion. 5. TERMINATION BY THE COMPANY WITH CAUSE. Upon prior written notice to Executive, the Company may terminate this Agreement if any of the following events shall occur: (a) the conviction of Executive for a crime involving fraud or moral turpitude; (b) deliberate dishonesty of the Executive with respect to the Company or any of its subsidiaries; or (c) the refusal of the Executive to follow the reasonable and lawful written instructions of the Board of Directors of the Company with respect to the services to be rendered and the manner of rendering such services by Executive, provided such refusal is material and repetitive and is not justified or excused either by the terms of this Agreement or by actions taken by the Company in violation of this Agreement, and with respect to the first two refusals Executive has been given reasonable written notice and explanation thereof and reasonable opportunity to cure and no cure has been effected within a reasonable time after such notice. 6. TERMINATION BY THE EXECUTIVE; TERMINATION BY THE COMPANY WITHOUT CAUSE. 6.1 NOTICE/EVENTS/DEFINED TERMS. (a) Executive may terminate this Agreement at any time by providing written notice to the Company. (b) The Company may terminate this Agreement at any time, WITHOUT CAUSE, by providing written notice to Executive. As used in this Agreement, the term "WITHOUT CAUSE" shall mean termination for any reason not specified in Section 5 hereof, and shall include, without limitation: (i) the Company's materially reducing Executive's duties or authority as Chief Operating Officer of the Company; or (ii) disability of Executive; or (iii) the Executive's death. 6.2 SEVERANCE. (a) If the Company terminates this Agreement, WITHOUT CAUSE, the Company shall provide Executive with a severance package which shall consist of the following: (i) payment on the first business day of each month of an amount equal to one-twelfth of the Executive's then current annual base salary under Section 3(a) hereof; (ii) payment on the first business day of each month of an amount equal to one-twelfth of Executive's most recent bonus under Section 3(b) hereof; and (iii) continuation of all benefits under Section 4. (b) The Company's obligation to make the payments and provide the benefits required by this Section 6.2 shall commence on the date of termination of this Agreement -3- 4 by the Company, WITHOUT CAUSE, and continue for a period equal to the greater of: (i) two (2) years, or (ii) the duration of the Executive's obligations under Section 8 hereof. 7. DEATH OR DISABILITY. In the event of the Executive's death or disability, employment will automatically terminate effective as of the date of such death or disability. As used in this Agreement, the term "disability" shall mean inability on the part of Executive for a period of more than six (6) months in the aggregate during any twelve (12) month period to perform the services contemplated under this Agreement. A determination of disability shall be made by a physician satisfactory to both the Executive and the Company, provided that if the Executive and the Company do not agree on a physician, the Executive and the Company shall each select a physician and these two physicians together shall select a third physician, whose determination as to disability shall be binding on all parties. 8. NON-COMPETITION. During the Employment Period and after termination of this Agreement by Executive under Section 6.1(a), or the Company under Section 5 or Section 6.1(b) of Executive's employment under Section 5, the Company may restrict the Executive's subsequent involvement in the Restricted Business Activities, as defined below, for the period ending one (1) year after the date of termination of this Agreement (the "Non-compete Period"). As used in this Agreement, the term "Restricted Business Activities" shall mean the marketing and sale of ladies' and men's consumer soft lines to retail stores, which the Company sold and marketed during Executive's employment with the Company. During the Non-compete Period, Executive shall not, without the written approval of the Company, directly or indirectly, either as an individual, partner, joint venturer, employee or agent for any person, company, corporation or association, or as an officer, director or stockholder of a corporation or otherwise, enter into or engage in or have a proprietary interest in the Restricted Business Activities other than the ownership of (a) the stock of the Company then held by Executive, and (b) no more than five percent (5%) of the securities of any other publicly-held company. The Non-compete period may be extended for up to an additional two (2) years, at the option of the Company, provided that the Company continues to make the monthly payments and provides the benefits required under Section 6.2 hereof, for such additional period. The Executive recognizes and agrees that because a violation by him of his obligations under this Section 8 will cause irreparable harm to the Company that would be difficult to quantify and for which money damages would be inadequate, the Company shall have the right to injunctive relief to prevent or restrain any such violation, without the necessity of posting a bond. Executive expressly agrees that the character, duration and scope of this covenant not to compete are reasonable in light of the circumstances as they exist at the date upon which this Agreement has been executed. However, should a determination nonetheless be made by a court of competent jurisdiction at a later date that the character, duration or geographical scope of this covenant not to compete is unreasonable in light of the circumstances as they then exist, then it is the intention of both Executive and the Company that this covenant not to compete shall be construed by the court in such a manner as to impose only those restrictions on the conduct of -4- 5 Executive which are reasonable in light of the circumstances as they then exist and necessary to assure the Company of the intended benefit of this covenant to compete. 9. CONFIDENTIALITY COVENANTS. Executive understands that Company may impart to him confidential business information including, without limitation, designs, financial information, personnel information, real estate information, and the like (collectively "Confidential Information"). Executive hereby acknowledges Company's exclusive ownership of such Confidential Information. Executive agrees as follows: (1) only to use the Confidential Information to provide services to Company; (2) only to communicate the Confidential Information to fellow employees, agents and representatives on a need-to-know basis; and (3) not to otherwise disclose or use any Confidential Information. Upon demand by Company or upon termination of Executive's employment, Executive will deliver to Company all manuals, photographs, recordings, and any other instrument or device by which, through which, or on which Confidential Information has been recorded and/or preserved, which are in my Executive's possession, custody or control. 10. GOVERNING LAW/JURISDICTION. This Agreement shall be governed by and interpreted and governed in accordance with the laws of the State of Rhode Island. The parties agree that this Agreement was made and entered into in Rhode Island and each party hereby consents to the jurisdiction of a competent court in Rhode Island to hear any dispute arising out of this Agreement. 11. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and thereof and supercedes any and all previous agreements, written and oral, regarding the subject matter hereof between the parties hereto. This Agreement shall not be changed, altered, modified or amended, except by a written agreement signed by both parties hereto. 12. NOTICES. All notices, requests, demands and other communications required or permitted to be given or made under this Agreement shall be in writing and shall be deemed to have been given if delivered by hand, sent by generally recognized overnight courier service, telex or telecopy, or certified mail, return receipt requested. (a) to the Company at: 500 George Washington Highway Smithfield, Rhode Island 02917 (b) to the Executive at: 132 Division Street E. Greenwich, Rhode Island 02818 Any such notice or other communication will be considered to have been given (i) on the date of delivery in person, (ii) on the third day after mailing by certified mail, provided that -5- 6 receipt of delivery is confirmed in writing, (iii) on the first business day following delivery to a commercial overnight courier or (iv) on the date of facsimile transmission (telecopy) provided that the giver of the notice obtains telephone confirmation of receipt. Either party may, by notice given to the other party in accordance with this Section, designate another address or person for receipt of notices hereunder. 13. SEVERABILITY. If any term or provision of this Agreement, or the application thereof to any person or under any circumstance, shall to any extent be invalid or unenforceable, the remainder of this Agreement, or the application of such terms to the persons or under circumstances other than those as to which it is invalid or unenforceable, shall be considered severable and shall not be affected thereby, and each term of this Agreement shall be valid and enforceable to the fullest extent permitted by law. The invalid or unenforceable provisions shall, to the extent permitted by law, be deemed amended and given such interpretation as to achieve the economic intent of this Agreement. 14. WAIVER. The failure of any party to insist in any one instance or more upon strict performance of any of the terms and conditions hereof, or to exercise any right or privilege herein conferred, shall not be construed as a waiver of such terms, conditions, rights or privileges, but same shall continue to remain in full force and effect. Any waiver by any party of any violation of, breach of or default under any provision of this Agreement by the other party shall not be construed as, or constitute, a continuing waiver of such provision, or waiver of any other violation of, breach of or default under any other provision of this Agreement. 15. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the Company and any successors and assigns of the Company. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. ACCESSORIES ASSOCIATES, INC. By: /s/ Gerald F. Cerce --------------------------------------- Title: Chairman EXECUTIVE: /s/ Robert V. Lallo ------------------------------------------- Robert V. Lallo -6- EX-10.13 38 EMPLOYMENT AGREEMETN - FA PORCARO, JR. 1 EXHIBIT 10.13 EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") is entered into as of the 31st day of May, 1996, by and between ACCESSORIES ASSOCIATES, INC., a Rhode Island corporation with a mailing address of 500 George Washington Highway, Smithfield, Rhode Island 02917 (the "Company"), and FELIX PORCARO, JR., an individual with a residence address of 5 Lori Ellen Drive, Lincoln, Rhode Island 02865 ("Executive"). INTRODUCTION 1. The Company is in the business of developing, manufacturing, distributing and marketing ladies' and men's consumer soft lines sold in retail stores (the "Accessories Business"). Executive assisted in the conception and development of the concepts currently used in the Company's operations and possesses other skills and knowledge advantageous to the Company. 2. The Company desires to employ Executive and Executive desires to accept such employment on the terms and conditions set forth herein. AGREEMENT In consideration of the premises and mutual promises hereinbelow set forth, the parties hereby agree as follows: 1. EMPLOYMENT PERIOD. The term of this Agreement (the "Employment Period") shall commence on the date hereof and, subject to earlier termination as hereinafter provided, shall terminate three (3) years from the date hereof. Thereafter, Executive's employment will continue automatically on a year to year basis terminable by either party consistent with the terms of this Agreement. 2. EMPLOYMENT; DUTIES. Subject to the terms and conditions set forth herein, the Company hereby employs Executive to act as Vice Chairman of the Company during the Employment Period, and Executive hereby accepts such employment. The duties assigned and authority granted to Executive shall be as set forth in the By-laws of the Company and as determined by its Board of Directors from time to time. Executive agrees to perform his duties for the Company diligently, competently, and in a good faith manner. The Executive may also engage in civic and charitable activities to the extent they are not inconsistent with Executive's duties hereunder. 2 3. SALARY AND BONUS. (a) BASE SALARY. During the first year of the Employment Period, the Company agrees to pay Executive $201,400 per year, payable weekly in arrears. Executive's base salary shall not be decreased, and shall be increased on each anniversary date of this Agreement (the "Anniversary Date"), based upon the increase in the Consumer Price Index for all Urban Consumers (CPI-U), Boston, Massachusetts, published by the Bureau of Labor Statistics of the United States Department of Labor (1982-1984=100) (the "Index"). If, on an Anniversary Date, the Index shows an increase from the base date of May 31, 1996 (the "Base Date"), then Executive's annual base salary for the ensuing 12 months shall be equal to the product of (a) $201,400 and (b) one plus a percentage equal to the percentage increase in the Index on each such Anniversary Date over the Index on the Base Date. In the event the Bureau of Labor Statistics no longer publishes the Index the Company shall use that index then available which most closely replicates the Index. In addition, after the first year of the Employment Period, the Board of Directors of the Company (or any appropriate committee thereof) shall review and may increase the Executive's annual base salary in its discretion, based upon the Company's performance and the Executive's particular contributions. (b) BONUS. Executive shall be eligible for and shall receive an annual cash bonus under the Company's Executive Incentive Compensation Plan, subject to the discretion of the Company's Board of Directors. 4. OTHER BENEFITS. (a) INSURANCE AND OTHER BENEFITS. The Executive shall be entitled to participate in, and shall receive the maximum benefits available under, the Company's insurance programs (including health and life insurance) and any ERISA benefit plans, as the same may be adopted and/or amended from time to time, and shall receive all other fringe benefits that are provided by the Company to other senior executives. The Company shall purchase a disability insurance policy which shall provide Executive with a minimum monthly benefit equal to sixty percent (60%) of Executive's monthly base salary, subject to a maximum monthly benefit of $15,000 after a six-month period of disability. The Company shall contribute the maximum amount permitted under current law to the Executive's 401(k) Plan, and any other Company pension or retirement plan during the Employment Period. (b) VACATION. Executive shall be entitled to an annual vacation of such duration as may be determined by the -2- 3 Board of Directors, but not less than that generally established for other executives of Company and in no event less than four (4) weeks, without interruption of salary. (c) AUTOMOBILE ALLOWANCE. The Company shall provide Executive with an automobile consistent with past practice. (d) REIMBURSEMENT OF EXPENSES. The Company shall reimburse Executive for all reasonable travel, entertainment and other expenses incurred or paid by the Executive in connection with, or related to, the performance of his duties or responsibilities under this Agreement, provided that Executive submits to the Company substantiation of such expenses sufficient to satisfy the record keeping guidelines promulgated from time to time by the Internal Revenue Service. All domestic and international airline travel may be in first class accommodations at the Executive's sole discretion. 5. TERMINATION BY THE COMPANY WITH CAUSE. Upon prior written notice to Executive, the Company may terminate this Agreement if any of the following events shall occur: (a) the conviction of Executive for a crime involving fraud or moral turpitude; (b) deliberate dishonesty of the Executive with respect to the Company or any of its subsidiaries; or (c) the refusal of the Executive to follow the reasonable and lawful written instructions of the Board of Directors of the Company with respect to the services to be rendered and the manner of rendering such services by Executive, provided such refusal is material and repetitive and is not justified or excused either by the terms of this Agreement or by actions taken by the Company in violation of this Agreement, and with respect to the first two refusals Executive has been given reasonable written notice and explanation thereof and reasonable opportunity to cure and no cure has been effected within a reasonable time after such notice. 6. TERMINATION BY THE EXECUTIVE; TERMINATION BY THE COMPANY WITHOUT CAUSE. 6.1 NOTICE/EVENTS/DEFINED TERMS. (a) Executive may terminate this Agreement at any time by providing written notice to the Company. (b) The Company may terminate this Agreement at any time, WITHOUT CAUSE, by providing written notice to the -3- 4 Executive. As used in this Agreement, the term "WITHOUT CAUSE" shall mean termination for any reason not specified in Section 5 hereof, and shall include, without limitation: (i) the Company's materially reducing Executive's duties or authority as Vice Chairman of the Company; or (ii) the disability of Executive; or (iii) the Executive's death. 6.2 SEVERANCE. (a) If the Company terminates this Agreement, WITHOUT CAUSE, the Company shall provide Executive with a severance package which shall consist of the following: (i) payment on the first business day of each month of an amount equal to one-twelfth of the Executive's then current annual base salary under Section 3(a) hereof; (ii) payment on the first business day of each month of an amount equal to one-twelfth of Executive's most recent bonus under Section 3(b) hereof; and (iii) continuation of all benefits under Section 4. (b) The Company's obligation to make the payments and provide the benefits required by this Section 6.2 shall commence on the date of termination of this Agreement by the Company, WITHOUT CAUSE, and continue for a period equal to the greater of: (i) two (2) years, or (ii) the duration of the Executive's obligations under Section 8 hereof. 7. DEATH OR DISABILITY. In the event of the Executive's death or disability, employment will automatically terminate effective as of the date of such death or disability. As used in this Agreement, the term "disability" shall mean inability on the part of Executive for a period of more than six (6) months in the aggregate during any twelve (12) month period to perform the services contemplated under this Agreement. A determination of disability shall be made by a physician satisfactory to both the Executive and the Company, provided that if the Executive and the Company do not agree on a physician, the Executive and the Company shall each select a physician and these two physicians together shall select a third physician, whose determination as to disability shall be binding on all parties. 8. NON-COMPETITION. During the Employment Period and after termination of this Agreement by the Executive under Section 6.1(a), or by the Company under Section 5 or 6.1(b), the Company may restrict the Executive's subsequent involvement in the Restricted Business Activities, as defined below, for the period ending one (1) year after the date of termination of this Agreement (the "Non-compete Period"). As used in this Agreement, the term "Restricted Business Activities" shall mean the marketing and sale of ladies' and men's consumer soft lines to retail stores, which the Company sold and marketed during -4- 5 Executive's employment with the Company. During the Non-compete Period, Executive shall not, without the written approval of the Company, directly or indirectly, either as an individual, partner, joint venturer, employee or agent for any person, company, corporation or association, or as an officer, director or stockholder of a corporation or otherwise, enter into or engage in or have a proprietary interest in the Restricted Business Activities other than the ownership of (a) the stock of the Company then held by Executive, and (b) no more than five percent (5%) of the securities of any other publicly-held company. The Non-compete period may be extended for up to an additional two (2) years, at the option of the Company, provided that the Company continues to make the monthly payments and provides the benefits required under Section 6.2 hereof, for such additional period. The Executive recognizes and agrees that because a violation by him of his obligations under this Section 8 will cause irreparable harm to the Company that would be difficult to quantify and for which money damages would be inadequate, the Company shall have the right to injunctive relief to prevent or restrain any such violation, without the necessity of posting a bond. Executive expressly agrees that the character, duration and scope of this covenant not to compete are reasonable in light of the circumstances as they exist at the date upon which this Agreement has been executed. However, should a determination nonetheless be made by a court of competent jurisdiction at a later date that the character, duration or geographical scope of this covenant not to compete is unreasonable in light of the circumstances as they then exist, then it is the intention of both Executive and the Company that this covenant not to compete shall be construed by the court in such a manner as to impose only those restrictions on the conduct of Executive which are reasonable in light of the circumstances as they then exist and necessary to assure the Company of the intended benefit of this covenant to compete. 9. CONFIDENTIALITY COVENANTS. Executive understands that Company may impart to him confidential business information including, without limitation, designs, financial information, personnel information, real estate information, and the like (collectively "Confidential Information"). Executive hereby acknowledges Company's exclusive ownership of such Confidential Information. Executive agrees as follows: (1) only to use the Confidential Information to provide services to Company; (2) only to communicate the Confidential Information to fellow employees, -5- 6 agents and representatives on a need-to-know basis; and (3) not to otherwise disclose or use any Confidential Information. Upon demand by Company or upon termination of Executive's employment, Executive will deliver to Company all manuals, photographs, recordings, and any other instrument or device by which, through which, or on which Confidential Information has been recorded and/or preserved, which are in my Executive's possession, custody or control. 10. GOVERNING LAW/JURISDICTION. This Agreement shall be governed by and interpreted and governed in accordance with the laws of the State of Rhode Island. The parties agree that this Agreement was made and entered into in Rhode Island and each party hereby consents to the jurisdiction of a competent court in Rhode Island to hear any dispute arising out of this Agreement. 11. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and thereof and supersedes any and all previous agreements, written and oral, regarding the subject matter hereof between the parties hereto. This Agreement shall not be changed, altered, modified or amended, except by a written agreement signed by both parties hereto. 12. NOTICES. All notices, requests, demands and other communications required or permitted to be given or made under this Agreement shall be in writing and shall be deemed to have been given if delivered by hand, sent by generally recognized overnight courier service, telex or telecopy, or certified mail, return receipt requested. (a) to the Company at: 500 George Washington Highway Smithfield, Rhode Island 02917 (b) to the Executive at: 5 Lori Ellen Drive Lincoln, Rhode Island 02865 Any such notice or other communication will be considered to have been given (i) on the date of delivery in person, (ii) on the third day after mailing by certified mail, provided that receipt of delivery is confirmed in writing, (iii) on the first business day following delivery to a commercial overnight courier or (iv) on the date of facsimile transmission (telecopy) provided that the giver of the notice obtains telephone confirmation of receipt. -6- 7 Either party may, by notice given to the other party in accordance with this Section, designate another address or person for receipt of notices hereunder. 13. SEVERABILITY. If any term or provision of this Agreement, or the application thereof to any person or under any circumstance, shall to any extent be invalid or unenforceable, the remainder of this Agreement, or the application of such terms to the persons or under circumstances other than those as to which it is invalid or unenforceable, shall be considered severable and shall not be affected thereby, and each term of this Agreement shall be valid and enforceable to the fullest extent permitted by law. The invalid or unenforceable provisions shall, to the extent permitted by law, be deemed amended and given such interpretation as to achieve the economic intent of this Agreement. 14. WAIVER. The failure of any party to insist in any one instance or more upon strict performance of any of the terms and conditions hereof, or to exercise any right or privilege herein conferred, shall not be construed as a waiver of such terms, conditions, rights or privileges, but same shall continue to remain in full force and effect. Any waiver by any party of any violation of, breach of or default under any provision of this Agreement by the other party shall not be construed as, or constitute, a continuing waiver of such provision, or waiver of any other violation of, breach of or default under any other provision of this Agreement. 15. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the Company and any successors and assigns of the Company. -7- 8 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. ACCESSORIES ASSOCIATES, INC. By: /s/ Gerald F. Cerce ---------------------------------- Title: Chairman -------------------------------- EXECUTIVE: /s/ Felix Porcaro, Jr. -------------------------------------- Felix Porcaro, Jr. -8- EX-10.14 39 SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN 1 EXHIBIT 10.14 ACCESSORIES ASSOCIATES, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN This Supplemental Executive Retirement Plan (the "Plan") is adopted by Accessories Associates, Inc., a Rhode Island corporation (the "Company"), for the purpose of providing supplemental retirement, death, disability and severance benefits to Gerald F. Cerce (the "Participant") in consideration for his performance of services as a key executive of the Company. It is intended that the Plan constitute a non-qualified plan of deferred compensation. 1. DEFINITIONS. For purposes of this Plan, the following terms shall have the meanings set forth below: "BOARD" means the Board of Directors of Accessories Associates, Inc. "CHANGE OF CONTROL" means (i) the first purchase of shares of the common stock of the Company pursuant to a tender offer or exchange offer (other than by the Company) for all, or any part of, the common stock, (ii) approval by the Company's shareholders of a merger in which the Company does not survive, a consolidation, or a sale, exchange or other disposition of all or substantially all the Company's assets, (iii) any acquisition of 25% or more of the voting securities of the Company by any person, including the Company, any of its subsidiaries, and any existing shareholder, or (iv) a change in the composition of the Board during any period of two consecutive years such that individuals who at the beginning of such period were members of the Board cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election by the Company's shareholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. "DESIGNATED BENEFICIARY" means the person who is legally married to the Participant at the time of his death (the "Spouse"). In the event the Spouse dies prior to receiving the total benefits due under this Plan, or the Participant is not survived by a Spouse, the Designated Beneficiary shall be the person designated in writing by the Participant, or in the absence of any such designation, the Participant's estate. "DISABILITY" means a determination by the Board that the Participant is unable to perform the duties required of him by the Company as a result of physical or mental impairment. "EFFECTIVE DATE" means October 22, 1993. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. 2 "POLICY" means the insurance policy insuring the life of the Participant for the purpose of funding the Company's obligations hereunder attached hereto as EXHIBIT A or a substitute policy or policies as mutually agreed upon in writing by the Participant and the Company. "RETIREMENT" means the date of the Participant's voluntary termination of employment with the Company for any reason on or after age 60. "TRUST" means the rabbi trust established by the Company pursuant to that certain Trust Agreement attached hereto as EXHIBIT B. 2. FUNDING. On or within thirty (30) days after the Effective Date, the Company shall purchase the Policy, and at all times thereafter until the satisfaction of the Company's obligations to make benefit payments hereunder, pay (or cause the Trustee of the Trust to pay) all required premiums for and otherwise maintain the Policy for the purpose of funding the Company's obligations hereunder. The Participant and any Designated Beneficiary shall not have any rights under the Policy. No later than October 7, 1994, and at all times thereafter until all benefits payable under the Plan are paid, the Policy shall be held in the Trust. It is intended that the Trust will not cause the Plan to be considered "funded" for purposes of ERISA. Under the terms of the Trust, the Participant shall have only the rights of a general unsecured creditor of the Company with respect to any rights under the Plan in the event of the Company's insolvency as defined in the Trust agreement. Nothing contained in the Plan shall constitute a guaranty by the Company or any other entity or person that the assets of the Company will be sufficient to pay any benefit hereunder. Notwithstanding the foregoing, the Company's obligation to make benefit payments under the Plan shall not be limited to the Policy or other assets held in the Trust. 3. RETIREMENT BENEFIT. Subject to the terms and conditions contained herein, upon the Participant's Retirement, the Company shall pay to Participant the greater of (i) the existing cash surrender value of the Policy, or (ii) an amount equal to the total premiums paid on the Policy by the Company prior to Retirement, together with interest at a rate of 7%, compounded annually, through the date of Retirement. Payment shall be made, at the sole discretion of the Board, in a single lump sum payment no later than 90 days after Retirement, or in monthly installments over a 10 year period in accordance with Paragraph 8 hereof; provided, however, in the event the Participant's Retirement occurs within one year after a Change in Control, the retirement benefit payable pursuant to this Paragraph 3 shall be paid in a single lump sum no later than 90 days after Retirement. 4. DEATH BENEFIT. In the event the Participant dies while still employed by the Company, the Company shall pay a death benefit to the Designated Beneficiary in an amount equal to the death benefit payable under the Policy. The death benefit shall be paid in monthly installments over a 15 year period in accordance with Paragraph 8 hereof; provided, however, in the event the Participant's death occurs within one year after a Change of Control, the death benefit payable pursuant to this Paragraph 4 shall be paid in a single lump sum no later than 90 days after death. 2 3 5. DISABILITY BENEFITS. In the event the Participant terminates employment with the Company by reason of Disability, the Company shall pay a disability benefit to the Participant in an amount equal to the greater of (i) the existing cash surrender value of the Policy, or (ii) an amount equal to the total premiums paid on the Policy by the Company prior to Disability, together with interest at a rate of 7%, compounded annually, through the date of Disability. The disability benefit shall be paid, in the sole discretion of the Board, in a single lump sum no later than 90 days after Disability, or in monthly installments over a 10 year period in accordance with Paragraph 8 hereof; provided, however, in the event the Participant's Disability occurs within one year after a Change of Control, the disability benefit payable pursuant to this Paragraph 5 shall be paid in a single lump sum no later than 90 days after Disability. 6. OTHER TERMINATION OF EMPLOYMENT. In the event the Participant's employment with the Company is terminated for any reason other than Retirement, death or Disability, including voluntary termination prior to age 60, the Participant shall be entitled to receive the existing cash surrender value of the Policy. Payment shall be made, at the sole discretion of the Board, in a single lump sum payment no later than 90 days after termination of employment, or in monthly installments over a 10 year period in accordance with Paragraph 8 hereof; provided, however, in the event the Participant's termination occurs within one year after a Change of Control, the severance benefit payable pursuant to this Paragraph 6 shall be paid in a single lump sum no later than 90 days after termination of employment. 7. ELECTION TO RECEIVE POLICY IN LIEU OF LUMP SUM PAYMENT. In the event the Board determines that the benefits to be paid to the Participant pursuant to Paragraphs 3, 4 or 6 hereof shall be paid in a single lump sum, the Participant may, in lieu of receiving such benefits, elect to receive all right, title and interest in and to the Policy by sending written notice to the Company. Upon receipt of such notice, the Company shall cause the Trustee to so transfer the Policy to the Participant. 8. PAYMENT OF BENEFITS IN INSTALLMENTS. In the event the Board determines that the benefits under the Plan are to be paid in installments, the Company shall establish an Installment Account on its books for the benefit of the Participant or his Designated Beneficiary. The Installment Account shall be credited with the total benefit to be paid to the Participant or his Designated Beneficiary in accordance with Paragraphs 3, 4, 5 or 6 hereof. As of the end of each calendar quarter until such time as the full balance of the Installment Account has been distributed, the Installment Account shall be credited with interest at the rate of 7% of the average Installment Account balance during such calendar quarter. The amount of each installment shall be equal to the amount of the Participant's Installment Account balance divided by the number of remaining installment payments. The first installment shall be paid no later than the last day of the month following the month in which the Retirement, death, Disability, or termination of employment of the Participant occurs. Subsequent monthly installments shall be paid no later than the last day of each successive month until one hundred twenty (120) installments have been paid. 3 4 In the event the Participant dies after the commencement of installment payments but prior to receiving one hundred twenty (120) monthly payments, the Company shall continue making payments to the Participant's Designated Beneficiary until the Participant and his Designated Beneficiary or Beneficiaries, in the aggregate, have received one hundred twenty (120) payments. Notwithstanding the foregoing, in the event of a Change of Control after the commencement of installment payments but prior to the receipt by the Participant and his Designated Beneficiary of one hundred twenty (120) payments, in the aggregate, the remaining Installment Account balance shall be distributed to the Participant or his Designated Beneficiary, as applicable, in a single lump sum payment within 30 days of such Change of Control. 9. COMPANY'S RIGHTS TO THE POLICY. Upon the full payment of benefits due to the Participant pursuant to Paragraphs 3, 4 or 6 hereof in a single lump sum distribution from a source other than the Policy, the Company may direct the Trustee to transfer all right, title and interest in the Policy to the Company. In the event that the Board elects to make benefit distributions to the Participant in installment payments, at any time prior to the last installment payment, the Company may direct the Trustee to transfer all right, title and interest in the Policy to the Company upon payment to the Trust of an amount equal to the existing cash surrender value of the Policy. 10. AMENDMENT AND TERMINATION. The Plan may not be amended and/or terminated at any time without the mutual consent of the parties hereto in writing. 11. NO GUARANTY OF EMPLOYMENT. Nothing contained in this Plan shall be construed as a contract of employment between the Company and the Participant, or as a right of the Participant to be continued in the employment of the Company, or as a limitation of the right of the Company to discharge the Participant, with or without cause. 12. NON-TRANSFERABILITY. The benefits payable under this Plan may not be subject to alienation, assignment, transfer, garnishment, execution or levy of any kind, and any attempt to cause any benefits to be so subjected shall not be recognized. 13. TAX WITHHOLDING. The Company may withhold from any benefits payable under this Plan all federal, state, local or other taxes as shall be required pursuant to any law or governmental regulation or ruling. 14. NOTICE. Notice to the Company hereunder shall be addressed to it at its office, 4 Warren Avenue, North Providence, Rhode Island 02860, Attention: Board of Directors, and any notice to the Participant hereunder shall be addressed to the Participant at the address reflected on the payroll records of the Company, subject to the right of either party to designate at any time hereafter in writing a different address. 15. GOVERNING LAW. The Plan is executed under and will be construed according to the laws of the State of Rhode Island, to the extent that such laws are not preempted by ERISA and valid regulations published thereunder. 4 5 IN WITNESS WHEREOF, this Plan has been executed this 29th day of September, 1994. ACCESSORIES ASSOCIATES, INC. By: /s/ Gerald F. Cerce ---------------------- Title: CHAIRMAN ------------------ /s/ Gerald F. Cerce -------------------------- Gerald F. Cerce 6 FIRST AMENDMENT TO ACCESSORIES ASSOCIATES, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN This First Amendment to the Accessories Associates, Inc. Supplemental Executive Retirement Plan (hereinafter referred to as the "First Amendment") as made and entered into as of the 29th day of December, 1995, by and between Accessories Associates, Inc., a Rhode Island corporation (hereinafter referred to as the "Company"), and Gerald F. Cerce of Providence, Rhode Island (hereinafter referred to as the "Participant"). W I T N E S S E T H: WHEREAS, Participant and Company entered into the Accessories Associates, Inc. Supplemental Executive Retirement Plan (hereinafter referred to as the "Plan") on September 29, 1994, and WHEREAS, said Plan was effective as of October 22, 1993, and WHEREAS, Company and Participant are desirous of amending said Plan and certain particulars. NOW, THEREFORE, in consideration of the promises and agreements herein contained, and for other good and valuable consideration, the receipt whereof is hereby acknowledged, Company and Participant agree as follows: 7 1. The first sentence of Paragraph 3 of the said Plan is hereby amended to read as follows: "Subject to the terms and conditions contained herein, upon the Participant's Retirement, the Company shall pay to Participant the existing cash surrender value of the Policy." 2. The first sentence of Paragraph 5 is hereby amended to read as follows: "In the event the Participant terminates employment with the Company by reason of disability, the Company shall pay a disability benefit to the Participant in an amount equal to the cash surrender value of the Policy." 3. Except as modified herein, the Plan is hereby ratified and confirmed. IN WITNESS WHEREOF, the Company has caused this First Amendment to the Plan to be executed by its proper officer hereunto duly authorized and the Participant has executed this Plan both as of the 29th day of December, 1995. ACCESSORIES ASSOCIATES, INC. By: /s/ Gerald F. Cerce, Chairman ------------------------------- /s/ Gerald F. Cerce ----------------------------------- Gerald F. Cerce 2 8 SECOND AMENDMENT TO ACCESSORIES ASSOCIATES, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN This Second Amendment to the Accessories Associates, Inc. Supplemental Executive Retirement Plan (hereinafter referred to as the "Second Amendment") as made and entered into as of the 31st day of May, 1996, by and between Accessories Associates, Inc., a Rhode Island corporation (hereinafter referred to as "Company"), and Gerald F. Cerce of Providence, Rhode Island (hereinafter referred to as "Participant"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, Participant and Company entered into the Accessories Associates, Inc. Supplemental Executive Retirement Plan (hereinafter referred to as the "Plan") on September 29, 1994, and WHEREAS, said Plan was effective as of October 22, 1993, and WHEREAS, the First Amendment to said Plan was adopted as of December 29, 1995, and WHEREAS, Company and Participant are desirous of amending said Plan and certain particulars. NOW, THEREFORE, in consideration of the promises and agreements contained herein, and for other good and valuable consideration, the receipt whereof is hereby acknowledged, Company and Participant agree as follows: 9 1. Paragraph 1 of the said Plan is hereby amended by deleting the definition of "Change of Control" in its entirety and by inserting the following new definition in lieu thereof: "Change of Control" means: (i) the first purchase of shares of the common stock of the Company pursuant to a tender offer or exchange offer (other than by the Company) for all or any part of, the common stock; or (ii) approval by the Company's shareholders of a merger in which the Company does not survive, a consolidation, or a sale, exchange or other disposition of all or substantially all the Company's assets (other than a merger of the Company for purposes of reincorporating under Delaware law); or (iii) any acquisition of 25% or more of the voting securities of the Company, any of its subsidiaries, and any existing shareholder (other than the acquisition of 25% or more of the voting securities of the Company pursuant to that certain Securities Stock Purchase Agreement and related agreements by and between Accessories Associates, Inc, Weston Presidio II, L.P., BancBoston Ventures, Inc., St. Paul Fire and Marine Insurance Company and National City Capital Corporation dated as of the 31st day of May, 1996); or (iv) a change in the composition of the Board of Directors (other than that resulting from a Remedy Event as that term is defined in the rights, preference and privileges of the Company's Series A Redeemable Convertible Preferred Stock) during any period of two consecutive years such that individuals who at the beginning of such period were members of the Board cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election by the Company's shareholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. 2. Except as modified herein, the Plan is hereby ratified and confirmed. IN WITNESS WHEREOF, the Company has caused this Second Amendment to the Plan to be executed by its proper officer hereunto duly authorized and the Participant has executed this Plan both as of the 31st day of May, 1996. ACCESSORIES ASSOCIATES, INC. By: /s/ Gerald F. Cerce ----------------------------------- Its: Chairman /s/ Gerald F. Cerce --------------------------------------- Gerald F. Cerce EX-12.1 40 EARNINGS TO FIXED CHARGES 1 Exhibit 12.1 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES The following table sets forth the ratio of earnings to fixed charges of AAi.FosterGrant, Inc. and Subsidiaries for each of the five years in the period ended December 31, 1997, the three months ended March 31, 1997 and April 4, 1998 and on a pro forma basis for the year ended December 31, 1997 and the three months ended April 4, 1998. The ratio of earnings to fixed charges is computed by dividing net fixed charges (interest expense, amortization of debt issuance costs, accretion and noncash dividends and the portion of rental expense that is representative of the interest factor) into earnings before income taxes and fixed charges.
Three Months Ended, Year Ended December 31 ------------------------------ ---------------------------------------------------------------- March 31, April 4, April 4, 1993 1994 1995 1996 1997 1997 1997 1998 1998 ------ ------ ------ ---- ------ -------- --------- -------- -------- (Pro Forma) (Pro Forma) Earnings before income taxes excluding accretion and non cash dividends $4,954 $2,820 $8,467 $ 987 $ 2,015 $(1,107) $ 165 $ 543 $ (443) Interest expense including interest portion of rental expense 679 506 1,150 1,574 4,316 8,915 953 1,189 2,192 Undistributed earnings of unconsolidated subsidiaries -- (447) (275) -- -- -- -- -- (60) ------ ------ ------ ------ ------- ------- ------ ------ ------ Earnings before fixed charges 5,633 2,879 9,342 2,561 6,331 7,808 1,118 1,732 1,689 ------ ------ ------ ------ ------- ------- ------ ------ ------ Fixed Charges: Interest expense including interest portion of rental expense 679 506 1,150 1,574 4,316 8,915 953 1,189 2,192 Accretion and noncash dividends -- -- -- 1,872 6,138 6,138 1,471 1,246 1,246 ------ ------ ------ ------ ------- ------- ------ ------ ------ Fixed charges 679 506 1,150 3,446 10,454 15,053 2,424 2,435 3,438 ------ ------ ------ ------ ------- ------- ------ ------ ------ Ratio of earnings to fixed charges 8.30x 5.69x 8.12x -- -- -- -- -- --
EX-21.1 41 SUBSIDIARIES OF AAI 1 EXHIBIT 21.1 SUBSIDIARIES OF AAi.FOSTERGRANT, INC. ("AAi")
Name of Subsidiary Jurisdiction of Organization Shareholder - ------------------ ---------------------------- ----------- Foster Grant Holdings, Inc. ("Holdings") Delaware Common - AAi Preferred - Bolle, Inc. The Bonneau Company Texas Holdings Bonneau General, Inc. Delaware The Bonneau Company Bonneau Holdings, Inc. Delaware The Bonneau Company F.G.G. Investments, Inc. Delaware The Bonneau Company Opti-Ray, Inc. New York Holdings O-Ray Holdings, Inc. Delaware Opti-Ray, Inc. Foster Grant Group, L.P. Delaware 1% G.P. - Bonneau General Inc. 64% L.P. - Bonneau Holdings, Inc. 35% L.P. - O-Ray Holdings, Inc. Fantasma, LLC Delaware 80% - AAi 20% - Houdini Capital Ltd. AAi Company of Canada Nova Scotia AAi Canada Vendome Accessories Limited Nova Scotia 51% - AAi Company of Canada Canada 49% - Place Vendome Accessories, Inc. AAi.Foster Grant Limited United Kingdom AAi AAi/JOSKE'S, S. de R.L. de C.V. Mexico 55% - AAi 45% - Joske's de Mexico, S.A. de C.V.
EX-23.2 42 CONSENT OF ARTHUR ANDERSEN LLP 1 Exhibit 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports (and to all references to our Firm) included in or made a part of this registration statement. ARTHUR ANDERSEN LLP Boston, Massachusetts August 5, 1998 EX-23.3 43 CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 Exhibit 23.3 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form S-4 of AAi.FosterGrant Inc. of our report dated December 30, 1997, relating to the consolidated financial statements of Foster Grant Group LP, which appears in such Prospectus. We also consent to the reference to us under the heading "Experts" in such Prospectus. PRICEWATERHOUSECOOPERS LLP Dallas, Texas August 6, 1998 EX-24.1 44 POWER OF ATTORNEY - AAI.FOSTERGRANT 1 Exhibit 24.1 AAi.FOSTERGRANT, INC. POWER OF ATTORNEY TO SIGN REGISTRATION STATEMENT ON FORM S-4 KNOW ALL MEN BY THESE PRESENTS, that the undersigned do hereby constitute and appoint Gerald F. Cerce, Duane M. DeSisto and Stephen J. Carlotti, and each of them, with full power of substitution and full power to act without the other, as his true and lawful attorney-in-fact and agent to act in his name, place and stead and to execute in the name and on behalf of the undersigned, individually and in each capacity stated below, a Registration Statement on Form S-4 of AAi.FOSTERGRANT, Inc. (the "Company") relating to Company's 10 3/4% Series B Notes due 2006 and Guarantees by the Company's subsidiaries of the 10 3/4% Series B Notes due 2006, and any and all amendments (including post-effective amendments) thereto, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact, or their substitute or substitutes, may do or cause to be done by virtue hereof. This Power of Attorney has been signed by the following persons in the capacities and on the date or dates indicated. Signature Title Date - --------- ----- ---- /s/ Gerald F. Cerce Chairman, President and August 4, 1998 - --------------------------- Chief Executive Officer Gerald F. Cerce /s/ Duane M. DeSisto Chief Financial Officer August 4, 1998 - --------------------------- and Treasurer Duane M. DeSisto /s/ Stephen J. Korotsky Controller August 4, 1998 - --------------------------- Stephen J. Korotsky /s/ John H. Flynn, Jr. Director August 4, 1998 - --------------------------- John H. Flynn, Jr. /s/ Stephen J. Carlotti Director July 24, 1998 - --------------------------- Stephen J. Carlotti /s/ Michael F. Cronin Director August 4, 1998 - --------------------------- Michael F. Cronin /s/ Martin E. Franklin Director August 4, 1998 - --------------------------- Martin E. Franklin /s/ George Graboys Director August 4, 1998 - --------------------------- George Graboys EX-24.2 45 POWER OF ATTORNEY - THE BONNEAU CO. 1 Exhibit 24.2 THE BONNEAU COMPANY POWER OF ATTORNEY TO SIGN REGISTRATION STATEMENT ON FORM S-4 KNOW ALL MEN BY THESE PRESENTS, that the undersigned do hereby constitute and appoint Gerald F. Cerce, Duane M. DeSisto and Stephen J. Carlotti, and each of them, with full power of substitution and full power to act without the other, as his true and lawful attorney-in-fact and agent to act in his name, place and stead and to execute in the name and on behalf of the undersigned, individually and in each capacity stated below, a Registration Statement on Form S-4 of The Bonneau Company (the "Company") relating to the 10 3/4% Series B Notes due 2006 of AAi.FOSTERGRANT, Inc. ("AAi") and the Guarantees of the 10 3/4% Series B Notes due 2006 by several of AAi's subsidiaries, including the Company, and any and all amendments (including post-effective amendments) thereto, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact, or their substitute or substitutes, may do or cause to be done by virtue hereof. This Power of Attorney has been signed by the following persons in the capacities and on the date or dates indicated. Signature Title Date --------- ----- ---- /s/ Gerald F. Cerce President and Director August 4, 1998 - ------------------------ (Principal Executive Officer) Gerald F. Cerce /s/ Duane M. DeSisto Chief Financial Officer and Director August 4, 1998 - ------------------------ (Principal Financial Officer) Duane M. DeSisto /s/ Stephen J. Korotky Controller August 4, 1998 - ------------------------ (Principal Accounting Officer) Stephen J. Korotsky /s/ John H. Flynn, Jr. Director August 4, 1998 - ------------------------ John H. Flynn, Jr. EX-24.3 46 POWER OF ATTORNEY - BONNEAU GENERAL, INC. 1 Exhibit 24.3 BONNEAU GENERAL, INC. POWER OF ATTORNEY TO SIGN REGISTRATION STATEMENT ON FORM S-4 KNOW ALL MEN BY THESE PRESENTS, that the undersigned do hereby constitute and appoint Gerald F. Cerce, Duane M. DeSisto and Stephen J. Carlotti, and each of them, with full power of substitution and full power to act without the other, as his true and lawful attorney-in-fact and agent to act in his name, place and stead and to execute in the name and on behalf of the undersigned, individually and in each capacity stated below, a Registration Statement on Form S-4 of Bonneau General, Inc. (the "Company") relating to the 10 3/4% Series B Notes due 2006 of AAi.FOSTERGRANT, Inc. ("AAi") and the Guarantees of the 10 3/4% Series B Notes due 2006 by several of AAi's subsidiaries, including the Company, and any and all amendments (including post-effective amendments) thereto, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact, or their substitute or substitutes, may do or cause to be done by virtue hereof. This Power of Attorney has been signed by the following persons in the capacities and on the date or dates indicated. Signature Title Date --------- ----- ---- /s/ Gerald F. Cerce President and Director August 4, 1998 - ------------------------ (Principal Executive Officer) Gerald F. Cerce /s/ Duane M. DeSisto Chief Financial Officer and Director August 4, 1998 - ------------------------ (Principal Financial Officer) Duane M. DeSisto /s/ Stephen J. Korotsky Controller August 4, 1998 - ------------------------ (Principal Accounting Officer) Stephen J. Korotsky /s/ John H. Flynn, Jr. Director August 4, 1998 - ------------------------ John H. Flynn, Jr. EX-24.4 47 POWER OF ATTORNEY - BONNEAU HOLDINGS,INC. 1 Exhibit 24.4 BONNEAU HOLDINGS, INC. POWER OF ATTORNEY TO SIGN REGISTRATION STATEMENT ON FORM S-4 KNOW ALL MEN BY THESE PRESENTS, that the undersigned do hereby constitute and appoint Gerald F. Cerce, Duane M. DeSisto and Stephen J. Carlotti, and each of them, with full power of substitution and full power to act without the other, as his true and lawful attorney-in-fact and agent to act in his name, place and stead and to execute in the name and on behalf of the undersigned, individually and in each capacity stated below, a Registration Statement on Form S-4 of Bonneau Holdings, Inc. (the "Company") relating to the 10 3/4% Series B Notes due 2006 of AAi.FOSTERGRANT, Inc. ("AAi") and the Guarantees of the 10 3/4% Series B Notes due 2006 by several of AAi's subsidiaries, including the Company, and any and all amendments (including post-effective amendments) thereto, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact, or their substitute or substitutes, may do or cause to be done by virtue hereof. This Power of Attorney has been signed by the following persons in the capacities and on the date or dates indicated. Signature Title Date --------- ----- ---- /s/ Gerald F. Cerce President and Director August 4, 1998 - ------------------------- (Principal Executive Officer) Gerald F. Cerce /s/ Duane M. DeSisto Chief Financial Officer and Director August 4, 1998 - ------------------------- (Principal Financial Officer) Duane M. DeSisto /s/ Stephen J. Korotsky Controller August 4, 1998 - ------------------------- (Principal Accounting Officer) Stephen J. Korotsky /s/ John H. Flynn, Jr. Director August 4, 1998 - ------------------------- John H. Flynn, Jr. EX-24.5 48 POWER OF ATTORNEY - F.G.G. INVESTMENTS, INC. 1 Exhibit 24.5 F.G.G. INVESTMENTS, INC. POWER OF ATTORNEY TO SIGN REGISTRATION STATEMENT ON FORM S-4 KNOW ALL MEN BY THESE PRESENTS, that the undersigned do hereby constitute and appoint Gerald F. Cerce, Duane M. DeSisto and Stephen J. Carlotti, and each of them, with full power of substitution and full power to act without the other, as his true and lawful attorney-in-fact and agent to act in his name, place and stead and to execute in the name and on behalf of the undersigned, individually and in each capacity stated below, a Registration Statement on Form S-4 of F.G.G. Investments, Inc. (the "Company") relating to the 10 3/4% Series B Notes due 2006 of AAi.FOSTERGRANT, Inc. ("AAi") and the Guarantees of the 10 3/4% Series B Notes due 2006 by several of AAi's subsidiaries, including the Company, and any and all amendments (including post-effective amendments) thereto, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact, or their substitute or substitutes, may do or cause to be done by virtue hereof. This Power of Attorney has been signed by the following persons in the capacities and on the date or dates indicated. Signature Title Date --------- ----- ---- /s/ Gerald F. Cerce President and Director August 4, 1998 - ------------------------- (Principal Executive Officer) Gerald F. Cerce /s/ Duane M. DeSisto Chief Financial Officer August 4, 1998 - ------------------------- (Principal Financial Officer) Duane M. DeSisto /s/ Stephen J. Korotsky Controller August 4, 1998 - ------------------------- (Principal Accounting Officer) Stephen J. Korotsky /s/ John H. Flynn, Jr. Director August 4, 1998 - ------------------------- John H. Flynn, Jr. /s/ Thomas M. Strauss Director August 4, 1998 - ------------------------- Thomas M. Strauss EX-24.7 49 POWER OF ATTORNEY - FOSTER GRANT GROUP, L.P. 1 Exhibit 24.7 FOSTER GRANT GROUP, L.P. POWER OF ATTORNEY TO SIGN REGISTRATION STATEMENT ON FORM S-4 KNOW ALL MEN BY THESE PRESENTS, that the undersigned do hereby constitute and appoint Gerald F. Cerce, Duane M. DeSisto and Stephen J. Carlotti, and each of them, with full power of substitution and full power to act without the other, as his true and lawful attorney-in-fact and agent to act in his name, place and stead and to execute in the name and on behalf of the undersigned, individually and in each capacity stated below, a Registration Statement on Form S-4 of Foster Grant Group, L.P. (the "Partnership") relating to the 10 3/4% Series B Notes due 2006 of AAi.FOSTERGRANT, Inc. ("AAi") and the Guarantees of the 10 3/4% Series B Notes due 2006 by several of AAi's subsidiaries, including the Partnership, and any and all amendments (including post-effective amendments) thereto, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact, or their substitute or substitutes, may do or cause to be done by virtue hereof. This Power of Attorney has been signed by the following persons in the capacities and on the date or dates indicated. Signature Title Date --------- ----- ---- /s/ Gerald F. Cerce President and Chief August 4, 1998 - ------------------------- Executive Officer Gerald F. Cerce (Principal Executive Officer) /s/ Duane M. DeSisto Chief Financial Officer August 4, 1998 - ------------------------- (Principal Financial Officer) Duane M. DeSisto /s/ Stephen J. Korotsky Controller August 4, 1998 - ------------------------- (Principal Accounting Officer) Stephen J. Korotsky EX-24.8 50 POWER OF ATTORNEY - FOSTER GRANT HOLDINGS, INC. 1 Exhibit 24.8 FOSTER GRANT HOLDINGS, INC. POWER OF ATTORNEY TO SIGN REGISTRATION STATEMENT ON FORM S-4 KNOW ALL MEN BY THESE PRESENTS, that the undersigned do hereby constitute and appoint Gerald F. Cerce, Duane M. DeSisto and Stephen J. Carlotti, and each of them, with full power of substitution and full power to act without the other, as his true and lawful attorney-in-fact and agent to act in his name, place and stead and to execute in the name and on behalf of the undersigned, individually and in each capacity stated below, a Registration Statement on Form S-4 of Foster Grant Holdings, Inc. (the "Company") relating to the 10 3/4% Series B Notes due 2006 of AAi.FOSTERGRANT, Inc. ("AAi") and the Guarantees of the 10 3/4% Series B Notes due 2006 by several of AAi's subsidiaries, including the Company, and any and all amendments (including post-effective amendments) thereto, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact, or their substitute or substitutes, may do or cause to be done by virtue hereof. This Power of Attorney has been signed by the following persons in the capacities and on the date or dates indicated. Signature Title Date --------- ----- ---- /s/ Gerald F. Cerce President and Director August 4, 1998 - -------------------------- (Principal Executive Officer) Gerald F. Cerce /s/ Duane M. DeSisto Treasurer and Director August 4, 1998 - -------------------------- (Principal Financial Officer) Duane M. DeSisto /s/ Stephen J. Korotsky Controller August 4, 1998 - -------------------------- (Principal Accounting Officer) Stephen J. Korotsky /s/ John H. Flynn, Jr. Director August 4, 1998 - -------------------------- John H. Flynn, Jr. EX-24.9 51 POWER OF ATTORNEY - OPTI-RAY, INC. 1 Exhibit 24.9 OPTI-RAY, INC. POWER OF ATTORNEY TO SIGN REGISTRATION STATEMENT ON FORM S-4 KNOW ALL MEN BY THESE PRESENTS, that the undersigned do hereby constitute and appoint Gerald F. Cerce, Duane M. DeSisto and Stephen J. Carlotti, and each of them, with full power of substitution and full power to act without the other, as his true and lawful attorney-in-fact and agent to act in his name, place and stead and to execute in the name and on behalf of the undersigned, individually and in each capacity stated below, a Registration Statement on Form S-4 of Opti-Ray, Inc. (the "Company") relating to the 10 3/4% Series B Notes due 2006 of AAi.FOSTERGRANT, Inc. ("AAi") and the Guarantees of the 10 3/4% Series B Notes due 2006 by several of AAi's subsidiaries, including the Company, and any and all amendments (including post-effective amendments) thereto, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact, or their substitute or substitutes, may do or cause to be done by virtue hereof. This Power of Attorney has been signed by the following persons in the capacities and on the date or dates indicated. Signature Title Date --------- ----- ---- /s/ Gerald F. Cerce President and Director August 4, 1998 - ------------------------- (Principal Executive Officer) Gerald F. Cerce /s/ Duane M. DeSisto Chief Financial Officer and Director August 4, 1998 - ------------------------- (Principal Financial Officer) Duane M. DeSisto /s/ Stephen J. Korotsky Controller August 4, 1998 - ------------------------- (Principal Accounting Officer) Stephen J. Korotsky /s/ John H. Flynn, Jr. Director August 4, 1998 - ------------------------- John H. Flynn, Jr. EX-24.10 52 POWER OF ATTORNEY - O-RAY HOLDINGS, INC. 1 Exhibit 24.10 O-RAY HOLDINGS, INC. POWER OF ATTORNEY TO SIGN REGISTRATION STATEMENT ON FORM S-4 KNOW ALL MEN BY THESE PRESENTS, that the undersigned do hereby constitute and appoint Gerald F. Cerce, Duane M. DeSisto and Stephen J. Carlotti, and each of them, with full power of substitution and full power to act without the other, as his true and lawful attorney-in-fact and agent to act in his name, place and stead and to execute in the name and on behalf of the undersigned, individually and in each capacity stated below, a Registration Statement on Form S-4 of O-Ray Holdings, Inc. (the "Company") relating to the 10 3/4% Series B Notes due 2006 of AAi.FOSTERGRANT, Inc. ("AAi") and the Guarantees of the 10 3/4% Series B Notes due 2006 by several of AAi's subsidiaries, including the Company, and any and all amendments (including post-effective amendments) thereto, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact, or their substitute or substitutes, may do or cause to be done by virtue hereof. This Power of Attorney has been signed by the following persons in the capacities and on the date or dates indicated. Signature Title Date --------- ----- ---- /s/ Gerald F. Cerce President and Director August 4, 1998 - ------------------------- (Principal Executive Officer) Gerald F. Cerce /s/ Duane M. DeSisto Chief Financial Officer and Director August 4, 1998 - ------------------------- (Principal Financial Officer) Duane M. DeSisto /s/ Stephen J. Korotsky Controller August 4, 1998 - ------------------------- (Principal Accounting Officer) Stephen J. Korotsky /s/ John H. Flynn, Jr. Director August 4, 1998 - ------------------------- John H. Flynn, Jr. EX-25.1 53 FORM T-1 1 Exhibit 25.1 ------------------------------------------------------ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 ----------------------- FORM T-1 STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO SECTION 305(b)(2)/_/ ----------------------- IBJ SCHRODER BANK & TRUST COMPANY (Exact name of trustee as specified in its charter) New York 13-5375195 (Jurisdiction of incorporation (I.R.S. Employer or organization if not a U.S. national bank) Identification No.) One State Street, New York, New York 10004 (Address of principal executive offices) (Zip code) IBJ SCHRODER BANK & TRUST COMPANY One State Street New York, New York 10004 (212) 858-2000 (Name, address and telephone number of agent for service) AAI.FOSTERGRANT, INC. (Exact name of obligor as specified in its charter) Rhode Island 05-0419304 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2 THE BONNEAU COMPANY (Exact name of obligor as specified in its charter) Texas 75-1280454 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) BONNEAU GENERAL, INC. (Exact name of obligor as specified in its charter) Delaware 75-2572796 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) BONNEAU HOLDINGS, INC. (Exact name of obligor as specified in its charter) Delaware 51-0364025 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) F.G.G. INVESTMENTS, INC. (Exact name of obligor as specified in its charter) Delaware 36-3956826 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) FANTASMA, LLC (Exact name of obligor as specified in its charter) Delaware 11-3340245 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) FOSTER GRANT GROUP, L.P. (Exact name of obligor as specified in its charter) Delaware 75-2572797 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) FOSTER GRANT HOLDINGS, INC. (Exact name of obligor as specified in its charter) Delaware 05-050018 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3 O-RAY HOLDINGS, INC. (Exact name of obligor as specified in its charter) Delaware 51-0364026 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) OPTI-RAY, INC. (Exact name of obligor as specified in its charter) New York 11-1812045 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 500 George Washington Highway Smithfield, Rhode Island 02917 (Address of principal executive offices) (Zip code) ----------------------- 10 3/4% SERIES B SENIOR NOTES DUE 2006 (Title of Indenture Securities) -------------------------------------------------------- 4 Item 1. General information Furnish the following information as to the trustee: (a) Name and address of each examining or supervising authority to which it is subject. New York State Banking Department Two Rector Street, New York, New York Federal Deposit Insurance Corporation Washington, D.C. Federal Reserve Bank of New York Second District 33 Liberty Street New York, New York (b) Whether it is authorized to exercise corporate trust powers. Yes Item 2. Affiliations with the Obligor. If the obligor is an affiliate of the trustee, describe each such affiliation. The obligor is not an affiliate of the trustee. Defaults by the Obligor. (a) State whether there is or has been a default with respect to the securities under this indenture. Explain the nature of any such default. None (b) If the trustee is a trustee under another indenture under which any other securities, or certificates of interest or participation in any other securities, of the obligor are outstanding, or is trustee for more than one outstanding series of securities under the indenture, state whether there has been a default under any such indenture or series, 5 identify the indenture or series affected, and explain the nature of any such default. None Item 13. Defaults by the Obligor. (a) State whether there is or has been a default with respect to the securities under this indenture. Explain the nature of any such default. Not Applicable (b) If the trustee is a trustee under another indenture under which any other securities, or certificates of interest or participation in any other securities, of the obligor are outstanding, or is trustee for more than one outstanding series of securities under the indenture, state whether there has been a default under any such indenture or series, identify the indenture or series affected, and explain the nature of any such default. Not Applicable Item 16. LIST OF EXHIBITS. List below all exhibits filed as part of this statement of eligibility. *1. A copy of the Charter of IBJ Schroder Bank & Trust Company as amended to date. (See Exhibit 1A to Form T-1, Securities and Exchange Commission File No. 22-18460). *2. A copy of the Certificate of Authority of the trustee to Commence Business (Included in Exhibit 1 above). *3. A copy of the Authorization of the trustee to exercise corporate trust powers, as amended to date (See Exhibit 4 to Form T-1, Securities and Exchange Commission File No. 22-19146). 6 *4. A copy of the existing By-Laws of the trustee, as amended to date (See Exhibit 4 to Form T-1, Securities and Exchange Commission File No. 22-19146). 5. Not Applicable 6. The consent of United States institutional trustee required by Section 321(b) of the Act. 7. A copy of the latest report of condition of the trustee published pursuant to law or the requirements of its supervising or examining authority. * The Exhibits thus designated are incorporated herein by reference as exhibits hereto. Following the description of such Exhibits is a reference to the copy of the Exhibit heretofore filed with the Securities and Exchange Commission, to which there have been no amendments or changes. NOTE In answering any item in this Statement of Eligibility which relates to matters peculiarly within the knowledge of the obligor and its directors or officers, the trustee has relied upon information furnished to it by the obligor. Inasmuch as this Form T-1 is filed prior to the ascertainment by the trustee of all facts on which to base responsive answers to Item 2, the answer to said Item are based on incomplete information. Item 2, may, however, be considered as correct unless amended by an amendment to this Form T-1. Pursuant to General Instruction B, the trustee has responded to Items 1, 2 and 16 of this form since to the best knowledge of the trustee, the obligor is not in default under any indenture under which the applicant is trustee. 7 SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939, the trustee, IBJ Schroder Bank & Trust Company, a corporation organized and existing under the laws of the State of New York, has duly caused this statement of to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of New York, and State of New York, on the 31st day of July 1998. IBJ SCHRODER BANK & TRUST COMPANY By: /s/Stephen J. Giurlando ------------------------------- Stephen J. Giurlando Assistant Vice President 8 EXHIBIT 6 CONSENT OF TRUSTEE Pursuant to the requirements of Section 321(b) of the Trust Indenture Act of 1939, as amended, in connection with the issue by AAI.FOSTERGRANT, INC. of its 10 3/4% SERIES B SENIOR NOTES DUE 2006, we hereby consent that reports of examinations by Federal, State, Territorial, or District authorities may be furnished by such authorities to the Securities and Exchange Commission upon request therefor. IBJ SCHRODER BANK & TRUST COMPANY By: /s/ Stephen J. Giurlando ------------------------------- Stephen J. Giurlando Assistant Vice President Dated: July 31, 1998 9 EXHIBIT 7 REPORT OF CONDITION CONSOLIDATED REPORT OF CONDITION OF IBJ SCHRODER BANK & TRUST COMPANY of New York, New York And Foreign and Domestic Subsidiaries Report as of June 30, 1998 Dollar Amounts in Thousands ASSETS 1. Cash and balance due from depository institutions: a. Non-interest-bearing balances and currency and coin $ 36,963 b. Interest-bearing balances $ 13,296 2. Securities: a. Held-to-maturity securities $ 189,538 b. Available-for-sale securities $ 101,159 3. Federal funds sold and securities purchased under agreements to resell in domestic offices of the bank and of its Edge and Agreement subsidiaries and in IBFs: Federal Funds sold and Securities purchased under agreements to resell $327,500 4. Loans and lease financing receivables: a. Loans and leases, net of unearned income $ 1,800,351 b. LESS: Allowance for loan and lease losses $ 65,836 c. LESS: Allocated transfer risk reserve $ -0- d. Loans and leases, net of unearned income, allowance, and reserve $ 1,814,515 5. Trading assets held in trading accounts $ 572 6. Premises and fixed assets (including capitalized leases) $ 2,194 7. Other real estate owned $ 819 8. Investments in unconsolidated subsidiaries and associated companies $ -0- 9. Customers' liability to this bank on acceptances outstanding $ 640 10. Intangible assets $ 11,293 11. Other assets $ 58,872 12. TOTAL ASSETS $ 2,557,361 10 LIABILITIES 13. Deposits: a. In domestic offices $ 657,513 (1) Noninterest-bearing $ 178,024 (2) Interest-bearing . . . . . . . . . . . . . . . . . $ 479,489 b. In foreign offices, Edge and Agreement subsidiaries, and IBFs $ 1,362,365 (1) Noninterest-bearing . . . . . . . . . . . . . . . . . . . . . $ 20,278 (2) Interest-bearing . . . . . . . . . . . . . . . . . . . . . . $ 1,342,087 14. Federal funds purchased and securities sold under agreements to repurchase in domestic offices of the bank and of its Edge and Agreement subsidiaries, and in IBFs: Federal Funds purchased and Securities sold under agreements to repurchase $ 60,000 15. a. Demand notes issued to the U.S. Treasury $ 5,000 b. Trading Liabilities $ 406 16. Other borrowed money: a. With a remaining maturity of one year or less $ 49,916 b. With a remaining maturity of more than one year $ 1,375 c. With a remaining maturity of more than three years $ 1,550 17. Not applicable. 18. Bank's liability on acceptances executed and outstanding $ 640 19. Subordinated notes and debentures $ 100,000 20. Other liabilities $ 69,920 21. TOTAL LIABILITIES $ 2,308,685 22. Limited-life preferred stock and related surplus $ N/A EQUITY CAPITAL 23. Perpetual preferred stock and related surplus $ -0- 24. Common stock $ 29,649 25. Surplus (exclude all surplus related to preferred stock) $ 217,008 26. a. Undivided profits and capital reserves $ 1,885 11 b. Net unrealized gains (losses) on available-for-sale securities $ 134 27. Cumulative foreign currency translation adjustments $ -0- 28. TOTAL EQUITY CAPITAL $ 248,676 29. TOTAL LIABILITIES AND EQUITY CAPITAL $ 2,557,361 EX-27.1 54 FINANCIAL DATA SCHEDULE WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997 AND THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH REGISTRATION STATEMENT FORM S-4. 1,000 U.S. DOLLARS YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 1 2,779 0 28,714 10,338 32,795 63,624 21,616 11,431 94,915 58,402 18,501 26,918 0 6 (6,240) 94,915 149,411 149,411 77,928 77,928 65,285 28,386 4,214 2,015 1,177 838 0 0 0 (1,658) (2.73) (2.73)
EX-27.2 55 FINANCIAL DATA SCHEDULE WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AS OF APRIL 4, 1998 (UNAUDITED) AND THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED APRIL 4, 1998 (UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH REGISTRATION STATEMENT FORM S-4. 1,000 U.S. DOLLARS 3-MOS JAN-02-1999 JAN-01-1998 APR-04-1998 1 439 0 48,223 11,080 34,873 79,604 30,865 12,688 121,759 84,555 20,934 27,613 0 6 (6,596) 121,759 42,703 42,703 23,431 23,431 17,627 9,569 1,178 543 239 304 0 0 0 (379) (.62) (.62)
EX-99.1 56 FORM OF LETTER OF TRANSMITTAL 1 EXHIBIT 99.1 LETTER OF TRANSMITTAL THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON _________,1998, UNLESS EXTENDED (THE "EXPIRATION DATE"). AAi.FOSTERGRANT, INC. LETTER OF TRANSMITTAL 10 3/4% NOTES DUE 2006 TO: IBJ SCHRODER BANK & TRUST COMPANY, THE EXCHANGE AGENT By Registered or Certified Mail: By Hand or Overnight Delivery: IBJ Schroder Bank & Trust Company IBJ Schroder Bank & Trust Company P.O. Box 84 One State Street Bowling Green Station New York, New York 10004 New York, New York 10274-0084 Attention: Securities Processing Window Attention: Reorganization Subcellar One, (SC-1) Operations Department By Facsimile: (212) 858-2611 Attention: Customer Service 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 one 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 acknowledges that he or she has received the Prospectus dated _________, 1998, (the "Prospectus") of AAi.FosterGrant, Inc. (the "Company") and this Letter of Transmittal (the "Letter of Transmittal"), which together constitute the Company's offer (the "Exchange Offer") to exchange $1,000 principal amount of its 10 3/4% Series B Senior Notes due 2006 (the "New 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 2 outstanding 10 3/4% Series A Senior Notes due 2006 (the "Old Notes"), of which $75,000,000 principal amount is outstanding. The Old Notes and the New Notes are sometimes collectively referred to as the "Notes." Other capitalized terms used but not defined herein have the meanings given to them in the Prospectus. This Letter of Transmittal is to be used by Holders of Old Notes (i) if certificates representing the Old Notes are to be physically delivered herewith; or (ii) if tender of Old Notes is to be made by book-entry transfer to the Exchange Agent's account at The Depository Trust Company ("DTC"), pursuant to the procedures set forth in the Prospectus under "The Exchange Offer -- Procedures for Tendering" by any financial institution that is a participant in DTC and whose name appears on a security position listing as the owner of Old Notes; or (iii) if tender of Old Notes is to be made according to the guaranteed delivery procedures set forth in the Prospectus under "The Exchange Offer -- Guaranteed Delivery Procedures." Delivery of documents to DTC does not constitute delivery to the Exchange Agent. The term "Holder" with respect to the Exchange Offer means any person (i) in whose name Old 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; or (ii) whose Old Notes are held of record by DTC who desires to deliver such Old Notes by book-entry transfer at DTC. 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 Old Notes must complete this Letter of Transmittal in its entirety. PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL CAREFULLY BEFORE CHECKING ANY BOX BELOW - -------------------------------------------------------------------------------- DESCRIPTION OF 10 3/4% SERIES A SENIOR NOTES DUE 2006 ("OLD NOTES"): - -------------------------------------------------------------------------------- PRINCIPAL AMOUNT TENDERED AGGREGATE PRINCIPAL AMOUNT REPRESENTED BY CERTIFICATE(S) - -------------------------- ----------------------------- (MUST BE IN INTEGRAL MULTIPLES OF $1,000)* NAME(S) AND ADDRESS(ES) OF REGISTERED HOLDER(S) (PLEASE FILL IN, IF BLANK) - -------------------------------------------------------------------------------- ----------------------------- ----------------------------- ----------------------------- ----------------------------- 2 3 ----------------------------- ----------------------------- ----------------------------- Total * Need not be completed if Old Notes are being tendered by book-entry transfer. Unless indicated in the column labeled "Principal Amount Tendered," any tendering Holder of Old Notes will be deemed to have tendered the entire aggregate principal amount in the column labeled "Aggregate Principal Amount Represented by Certificate(s)." If the space provided above is inadequate, list the principal amounts on a separate signed schedule and affix the list to this Letter of Transmittal. The minimum permitted tender is $1,000 in principal amount of Old Notes. All other tenders must be in integral multiples of $1,000. - -------------------------------------------------------------------------------- LADIES AND GENTLEMEN: Subject to the terms and conditions of the Exchange Offer, the undersigned hereby tenders to the Company the principal amount of Old Notes indicated above. Subject to and effective upon the acceptance for exchange of the principal amount of Old Notes tendered in accordance with this Letter of Transmittal, the undersigned sells, assigns and transfers to, or upon the order of, the Company all right, title and interest in and to the Old Notes tendered hereby. The undersigned hereby irrevocably constitutes and appoints the Exchange Agent its agent and attorney-in-fact (with full knowledge that the Exchange Agent also acts as the agent of the Company) with respect to the tendered Old Notes with full power of substitution to (i) deliver certificates for such Old Notes to the Company, or transfer ownership of such Old Notes on the account books maintained by DTC, and deliver all accompanying evidences of transfer and authenticity to, or upon the order of, the Company; and (ii) present such Old Notes for transfer on the books of the Company and receive all benefits and otherwise exercise all rights of beneficial ownership of such Old Notes, all in accordance with the terms of the Exchange Offer. The power of attorney granted in this paragraph shall be deemed irrevocable and coupled with an interest. The undersigned hereby represents and warrants that he or she has full power and authority to tender, sell, assign, and transfer the Old Notes tendered hereby and that the Company will acquire good and unencumbered title thereto, free and clear of all liens, restrictions, charges and encumbrances and not subject to any adverse claim, when such Notes are acquired by the Company. THE UNDERSIGNED HEREBY FURTHER REPRESENTS THAT ANY NEW NOTES ACQUIRED IN EXCHANGE FOR OLD NOTES TENDERED HEREBY WILL HAVE BEEN ACQUIRED IN THE ORDINARY COURSE OF BUSINESS OF THE HOLDER RECEIVING SUCH NEW NOTES, THAT NEITHER THE HOLDER NOR ANY SUCH OTHER PERSON HAS AN ARRANGEMENT OR UNDERSTANDING WITH ANY PERSON TO PARTICIPATE IN THE DISTRIBUTION OF SUCH NEW NOTES AND THAT NEITHER THE HOLDER NOR ANY SUCH OTHER PERSON IS AN "AFFILIATE," AS DEFINED UNDER RULE 405 OF THE SECURITIES ACT, OF THE COMPANY OR ANY OF ITS SUBSIDIARIES. If the undersigned is not a broker-dealer, the undersigned represents 3 4 that it is not engaged in, and does not intend to engage in, a distribution of New Notes. If the undersigned is a broker-dealer that will receive New Notes, it represents that the Old Notes to be exchanged for New Notes were acquired as a result of market-making activities or other trading activities and not acquired directly from the Company, and it acknowledges that it will deliver a prospectus in connection with any resale of such New 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 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 assignment, transfer and purchase of the Old Notes tendered hereby. For purposes of the Exchange Offer, the Company shall be deemed to have accepted validly tendered Old Notes when, as and if the Company has given oral or written notice thereof to the Exchange Agent. If any tendered Old Notes are not accepted for exchange pursuant to the Exchange Offer for any reason, certificates for any such unaccepted Old Notes will be returned (except as noted below with respect to tenders through DTC), without expense, to the undersigned at the address shown below or at a different address as may be indicated herein under "Special Payment Instructions" as promptly as practicable after the Expiration Date. All authority conferred or agreed to be conferred by this Letter of Transmittal shall survive the death, incapacity or dissolution of the undersigned and every obligation of the undersigned under this Letter of Transmittal shall be binding upon the undersigned's heirs, personal representatives, successors and assigns. The undersigned understands that tenders of Old Notes pursuant to the procedures described under the caption "The Exchange Offer -- Procedures for Tendering" in the Prospectus and in the instructions hereto will constitute a binding agreement between the undersigned and the Company in accordance with the terms and subject to the conditions of the Exchange Offer. Unless otherwise indicated under "Special Payment Instructions," please issue the certificates representing the New Notes issued in exchange for the Old Notes accepted for exchange and return any Old Notes not tendered or not exchanged, in the name(s) of the undersigned (or in either such event in the case of Old Notes tendered by DTC, by credit to the undersigned's account at DTC). Similarly, unless otherwise indicated under "Special Delivery Instructions," please send the certificates representing the New Notes issued in exchange for the Old Notes accepted for exchange and any certificates for Old Notes not tendered or not exchanged (and accompanying documents, as appropriate) to the undersigned at the address shown above in the box entitled "Description of 10 3/4% Series A Senior Notes due 2006", unless, in either event, tender is being made through DTC. In the event that both "Special Payment Instructions" and "Special Delivery Instructions" are completed, please issue the certificates representing the New Notes issued in exchange for the Old Notes accepted for exchange and return any Old Notes not tendered or not exchanged in the name(s) of, and send said certificates to, the person(s) so indicated. The undersigned recognizes that the Company has no obligation pursuant to the "Special Payment Instructions" and "Special Delivery Instructions" to transfer any Old Notes from the name of the 4 5 registered holder(s) thereof if the Company does not accept for exchange any of the Old Notes so tendered. Holders of Old Notes who wish to tender their Old Notes and (i) whose Old Notes are not immediately available, or (ii) who cannot deliver their Old Notes, this Letter of Transmittal or any other documents required hereby to the Exchange Agent, or cannot complete the procedure for book-entry transfer, prior to the Expiration Date, may tender their Old Notes according to the guaranteed delivery procedures set forth in the Prospectus under the caption "The Exchange Offer -- Guaranteed Delivery Procedures." See Instruction 1 regarding the completion of this Letter of Transmittal printed below. SPECIAL PAYMENT INSTRUCTIONS (SEE INSTRUCTIONS 4, 5 AND 7) To be completed ONLY if certificates for Old Notes in a principal amount not tendered or not accepted for exchange, or New Notes issued in exchange for Old Notes accepted for exchange, are to be issued in the name of someone other than the undersigned, or if the Old Notes tendered by book-entry transfer that are not accepted for exchange are to be credited to an account maintained by DTC other than the account indicated below from which the Old Notes were tendered. ISSUE CERTIFICATE(S) TO: Name ____________________________________ (PLEASE PRINT) Address ____________________________________ ____________________________________ (INCLUDE ZIP CODE) ____________________________________ (SOCIAL SECURITY OR EMPLOYER IDENTIFICATION NUMBER) [ ] Credit unexchanged Old Notes delivered by book-entry transfer to an account maintained by DTC other than the account indicated below from which the Old Notes were tendered. (BOOK-ENTRY TRANSFER FACILITY ACCOUNT NUMBER, IF APPLICABLE) SPECIAL DELIVERY INSTRUCTIONS (SEE INSTRUCTIONS 4 AND 5) To be completed ONLY if certificates for Old Notes in a principal amount not tendered or not accepted for exchange, or New Notes issued in exchange for Old Notes accepted for exchange, are to be sent to someone other than the undersigned, or to the undersigned at an address other than that shown above. 5 6 MAIL TO : Name ____________________________________ (PLEASE PRINT) Address ____________________________________ ____________________________________ (INCLUDE ZIP CODE) [__] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY DTC TO THE EXCHANGE AGENT'S ACCOUNT AT DTC AND COMPLETE THE FOLLOWING: Name of Tendering Institution: DTC Participant No.: DTC Book-Entry Account No.: Transaction Code No.: [__] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE THE FOLLOWING: Name(s) of Registered Holder(s): Window Ticket Number (if any): Date of Execution of Notice of Guaranteed Delivery: Name of Institution which guaranteed delivery: IF DELIVERY BY BOOK-ENTRY TRANSFER, COMPLETE THE FOLLOWING: 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: 6 7 PLEASE SIGN HERE WHETHER OR NOT OLD NOTES ARE BEING PHYSICALLY TENDERED HEREBY ____________________________________ _____________________________ SIGNATURE(S) OF HOLDER(S) DATE OR AUTHORIZED SIGNATORY Area Code and Telephone Number: The above lines must be signed by the Holder(s) of Old Notes as their name(s) appear(s) on the Old Notes or, if the Old Notes are tendered by a participant in DTC, as such participant's name appears on a security position listing as the owner of the Old Notes, or by person(s) authorized to become Holder(s) by a properly completed bond power from the Holder(s), a copy of which must be transmitted with this Letter of Transmittal. If Old Notes to which this Letter of Transmittal relates are held of record by two or more joint Holders, then all such Holders must sign this Letter of Transmittal. If signature is by a trustee, executor, administrator, guardian, attorney-in-fact, officer of a corporation or other person acting in a fiduciary or representative capacity, such person must (i) set forth his or her full title below and (ii) unless waived by the Company, submit evidence satisfactory to the Company of such person's authority so to act. See Instruction 4 regarding the completion of this Letter of Transmittal printed below. Name(s): ___________________________ (PLEASE PRINT) Capacity: __________________________ Address: ___________________________ ____________________________________ (INCLUDE ZIP CODE) SIGNATURE(S) GUARANTEED BY AN ELIGIBLE INSTITUTION: (IF REQUIRED BY INSTRUCTION 4) ____________________________________ (AUTHORIZED SIGNATURE) ____________________________________ (TITLE) ____________________________________ (NAME OF FIRM) Dated: _________, 1998 7 8 INSTRUCTIONS FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER 1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND OLD NOTES. The tendered Old Notes (or a confirmation of a book-entry transfer into the Exchange Agent's account at DTC of all Old Notes delivered electronically), as well as a properly completed and duly executed copy of this Letter of Transmittal or facsimile hereof and any other documents required by this Letter of Transmittal, 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. The method of delivery of the tendered Old Notes, this Letter of Transmittal and all other required documents to the Exchange Agent 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 or confirmed by the Exchange Agent. Instead of delivery by mail, it is recommended that the Holder use an overnight or hand-delivery service. In all cases, sufficient time should be allowed to assure timely delivery. No Letter of Transmittal or Old Notes should be sent to the Company. Holders who wish to tender their Old Notes and (i) whose Old Notes are not immediately available; or (ii) who cannot deliver their Old Notes, this Letter of Transmittal or any other documents required hereby to the Exchange Agent, or cannot complete the procedure for book-entry transfer, prior to 5:00 P.M., New York City time, on the Expiration Date must tender their Old Notes according to the guaranteed delivery procedures set forth in the Prospectus. Pursuant to such procedures: (i) such tender must be made by or 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 institution which falls within the definition of "Eligible Guarantor Institution" contained in Rule 17Ad-15 promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended (each, an "Eligible Institution"); (ii) prior to 5:00 P.M., New York City time, on the Expiration Date, the Exchange Agent must have received from the Eligible Institution a properly completed and duly executed Notice of Guaranteed Delivery (by facsimile transmission, mail or hand delivery) setting forth the name and address of the Holder of the Old Notes and the principal amount of Old Notes tendered, stating that the tender is being made thereby and guaranteeing that, within three New York Stock Exchange trading days after the date of execution of the Notice of Guaranteed Delivery, this Letter of Transmittal (or facsimile hereof) together with the certificate(s) representing the Old Notes to be tendered in proper form for transfer (or a confirmation of electronic delivery of book-entry transfer into the Exchange Agent's account at DTC) and any other required documents will be deposited by the Eligible Institution with the Exchange Agent; and (iii) such properly completed and executed Letter of Transmittal (or facsimile hereof), as well as all other documents required by this Letter of Transmittal and the certificate(s) representing all tendered Old Notes in proper form for transfer (or a confirmation of electronic delivery of book-entry transfer into the Exchange Agent's account at DTC), must be received by the Exchange Agent within three New York Stock Exchange trading days after the date of execution of the Notice of Guaranteed Delivery, all as provided in the Prospectus under the caption "Exchange Offer -- Guaranteed Delivery Procedures." Any Holder of Old Notes who wishes to tender his or her Old Notes pursuant to the guaranteed delivery procedures described above must ensure that the Exchange Agent receives the Notice of Guaranteed Delivery prior to 5:00 P.M., New York City time, on the Expiration Date. Upon request to the Exchange 8 9 Agent, a Notice of Guaranteed Delivery will be sent to Holders who wish to tender their Old Notes according to the guaranteed delivery procedures set forth above. All questions as to the validity, form, eligibility (including time of receipt) and acceptance of tendered Old Notes and withdrawal of tendered Old Notes will be determined by the Company in its sole discretion, which determination will be final and binding on all parties. The Company reserves the absolute right to reject any and all Old Notes not properly tendered or any Old Notes the Company's acceptance of which would, in the opinion of counsel for the Company, be unlawful. The Company also reserves the right to waive any defects or irregularities or conditions of tender as to the Exchange Offer and/or particular Old 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 Old Notes must be cured within such time as the Company shall determine. None of the Company, the Exchange Agent nor any other person shall be under any duty to give notification of defects or irregularities with respect to tenders of Old Notes, nor shall any of them incur any liability for failure to give such notification. Tenders of Old Notes will not be deemed to have been made until such defects or irregularities have been cured or waived. Any Old Notes received by the Exchange Agent that are not properly tendered and as to which any defects or irregularities have not been cured or waived will be returned by the Exchange Agent to the tendering Holder(s) of Old Notes, unless otherwise provided in this Letter of Transmittal, as soon as practicable following the Expiration Date. 2. MUTILATED, LOST, STOLEN OR DESTROYED OLD NOTES. Any tendering Holder whose Old Notes have been mutilated, lost, stolen or destroyed should contact the Exchange Agent at the address indicated herein for further instructions. 3. PARTIAL TENDERS. Tenders of Old Notes will be accepted only in integral multiples of $1,000. If less than the entire principal amount of any Old Note is tendered, the tendering Holder should fill in the principal amount tendered in the last column of the box entitled "Description of 10 3/4% Series A Senior Notes due 2006 ("Old Notes")" above. The entire principal amount of Old Notes delivered to the Exchange Agent will be deemed to have been tendered unless otherwise indicated. If the entire principal amount of all Old Notes is not tendered, then Old Notes for the principal amount of Old Notes not tendered and a certificate or certificates representing New Notes issued in exchange for any Old Notes accepted will be sent to the Holder at his or her registered address, unless a different address is provided in the appropriate box on this Letter of Transmittal, or credited to an appropriate account at DTC, if applicable, promptly after the Old Notes are accepted for exchange. 4. SIGNATURES ON THIS LETTER OF TRANSMITTAL; BOND POWERS AND ENDORSEMENTS; GUARANTEE OF SIGNATURES. If this Letter of Transmittal (or facsimile hereof) is signed by the record Holder(s) of the Old Notes tendered hereby, the signature must correspond with the name(s) as written on the face of the Old Notes or, if the Old Notes are tendered by a participant in DTC, as such participant's name appears on a security position listing as the owner of the Old Notes, without alteration, enlargement or any change whatsoever. If this Letter of Transmittal (or facsimile hereof) is signed by the Holder(s) of the Old Notes tendered hereby and the certificate or certificates for New Notes issued in exchange therefor are to 9 10 be issued (or any untendered principal amount of Old Notes is to be reissued) to the Holder, said Holder need not and should not endorse any tendered Old Notes, nor provide a separate bond power. In any other case, such Holder must either properly endorse the Old Notes tendered or transmit a properly completed separate bond power with this Letter of Transmittal, with the signatures on the endorsement or bond power guaranteed by an Eligible Institution. If this Letter of Transmittal (or facsimile hereof) is signed by a person other than the Holder(s) of the Old Notes tendered hereby, such Old Notes must be endorsed or accompanied by appropriate bond powers signed as the name(s) of the registered Holder(s) appear(s) on the Old Notes, with the signatures on the endorsement or bond power guaranteed by an Eligible Institution. If this Letter of Transmittal (or facsimile hereof) or any Old 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 so to act must be submitted with this Letter of Transmittal. Except as otherwise provided below, all signatures on this Letter of Transmittal (or facsimile hereof) must be guaranteed by an Eligible Institution. Signatures on this Letter of Transmittal need not be guaranteed if (i) this Letter of Transmittal is signed by the Holder(s) of the Old Notes tendered herewith (which term, for these purposes, includes any participant in DTC whose name appears on a security position listing as the holder of such Old Notes) and such Holder(s) have not completed the box set forth herein entitled "Special Payment Instructions" or the box entitled "Special Delivery Instructions"; or (ii) such Old Notes are tendered for the account of an Eligible Institution. 5. SPECIAL PAYMENT AND DELIVERY INSTRUCTIONS. Tendering Holders should indicate, in the applicable box or boxes, the name and address to which New Notes or substitute Old Notes for principal amounts not tendered or not accepted for exchange are to be issued or sent, if different from the name and address of the person signing this Letter of Transmittal (or in the case of tender of Old Notes through DTC, if different from DTC). In the case of issuance in a different name, the taxpayer identification or social security number of the person named must also be indicated. 6. TAX IDENTIFICATION NUMBER. Federal income tax law requires that a Holder whose offered Old Notes are accepted for exchange must provide the Company (as payer) with his, her or its correct Taxpayer Identification Number ("TIN"), which, in the case of an exchanging Holder who is an individual, is his or her social security number. If the Company is not provided with the correct TIN or an adequate basis for exemption, such Holder may be subject to a $50 penalty imposed by the Internal Revenue Service (the "IRS"). In addition, delivery to such Holder of New Notes may be subject to backup withholding in an amount equal to 31% of the gross proceeds resulting from the Exchange Offer. If withholding results in an overpayment of taxes, a refund may be obtained from the IRS by the Holder. Exempt Holders (including, among others, all corporations and certain foreign individuals) are not subject to these backup withholding and reporting requirements. See instructions to the enclosed Guidelines of Certificate of Taxpayer Identification Number on Substitute Form W-9. 10 11 To prevent backup withholding, each exchanging Holder must provide his, her or its correct TIN by completing the Substitute Form W-9 set forth below, certifying that the TIN provided is correct (or that such Holder is awaiting a TIN) and that (i) the Holder is exempt from backup withholding; (ii) the Holder has not been notified by the IRS that he, she or it is subject to backup withholding as a result of a failure to report all interest or dividends; or (iii) the IRS has notified the Holder that he, she or it is no longer subject to backup withholding. In order to satisfy the Exchange Agent that a foreign individual qualifies as an exempt recipient, such Holder must submit a statement signed under penalty of perjury attesting to such exempt status. Such statements may be obtained from the Exchange Agent. If the Old Notes are in more than one name or are not in the name of the actual owner, consult the Form W-9 for information on which TIN to report. If you do not provide your TIN to the Company within 60 days, backup withholding will begin and continue until you furnish your TIN to the Company. 7. TRANSFER TAXES. The Company will pay all transfer taxes, if any, applicable to the exchange of Old Notes pursuant to the Exchange Offer. If, however, certificates representing New Notes or Old Notes for principal amounts not tendered or accepted for exchange are to be delivered to, or are to be registered or issued in the name of, any person other than the Holder of the Old Notes tendered hereby, or if tendered Old Notes are registered in the name of any person other than the person signing this Letter of Transmittal, or if a transfer tax is imposed for any reason other than the exchange of Old Notes pursuant to the Exchange Offer, then the amount of any such transfer taxes (whether imposed on the Holder or on any other person(s)) will be payable by the tendering Holder. If satisfactory evidence of payment of such taxes or exemption therefrom is not submitted with this Letter of Transmittal, the amount of such transfer taxes will be billed directly to such tendering Holder. Except as provided in this Instruction 7, it will not be necessary for transfer tax stamps to be affixed to the Old Notes listed in this Letter of Transmittal. 8. WAIVER OF CONDITIONS. The Company reserves the absolute right to amend, waive or modify specified conditions in the Exchange Offer in the case of any Old Notes tendered. 9. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions and requests for assistance and requests for additional copies of the Prospectus or this Letter of Transmittal may be directed to the Exchange Agent at the address specified above. Holders may also contact their broker, dealer, commercial bank, trust company or other nominee for assistance concerning the Exchange Offer. 11 12 (DO NOT WRITE IN SPACE BELOW) CERTIFICATE(S) OLD NOTES OLD NOTES SURRENDERED TENDERED ACCEPTED ================================================================================ ================================================================================ Delivery Prepared by Checked By Date ================================================================================ ================================================================================ TO BE COMPLETED BY ALL TENDERING HOLDERS (SEE INSTRUCTION 6) PAYER'S NAME: AAi.FOSTERGRANT, INC. - -------------------------------------------------------------------------------- SUBSTITUTE PART 1-PLEASE PROVIDE YOUR TIN IN THE BOX SOCIAL SECURITY FORM W-9 AT RIGHT AND CERTIFY BY SIGNING AND NUMBER OR DEPARTMENT DATING BELOW EMPLOYER OF THE TREASURY IDENTIFICATION INTERNAL REVENUE NUMBER SERVICE --------------------------------------------------------------- Certification-Under the penalties of perjury, I certify that: PAYER'S REQUEST 1. The number shown on this form is my correct taxpayer FOR TAXPAYER identification number (or I am waiting for a number to be IDENTIFICATION issued to me), and NUMBER ("TIN") 2. I am not subject to backup withholding because: (a) I am exempt from backup withholding, or (b) I have not been notified by the Internal Revenue Service that I am subject to backup withholding as a result of a failure to report all interest or dividends, or (c) the IRS has notified me that I am no longer subject to backup withholding. Certification Instructions-You must cross out item 2 above if you have been notified by the IRS that you are currently subject to backup withholding because of underreporting interest or dividends on your tax return. 12 13 Name _______________________________ (PLEASE PRINT) Address ____________________________ ____________________________________ (INCLUDE ZIP CODE) Signature __________________________ PART 2-Awaiting TIN [__] Date _______________________________ ----------------------------------------------- YOU MUST COMPLETE THE FOLLOWING CERTIFICATION IF YOU CHECKED THE BOX IN PART 2 OF 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, notwithstanding that I have checked the box in Part 2 (and have completed this Certificate of Awaiting Taxpayer Identification Number), all reportable payments made to me prior to the time I provide the US Depository with a properly certified taxpayer identification number will be subject to a 31% back-up withholding tax. =============================================== SIGNATURE DATE _____________________________ ___________________________ _____________________________ ___________________________ 13 EX-99.2 57 FORM OF LETTER OF GUARANTY DELIVERY 1 EXHIBIT 99.2 NOTICE OF GUARANTEED DELIVERY FOR 10 3/4% SERIES A SENIOR NOTES DUE 2006 OF AAi.FOSTERGRANT, INC. This form or one substantially equivalent hereto must be used to accept the Exchange Offer of AAi.FosterGrant, Inc. (the "Company") made pursuant to the Prospectus dated _________, 1998 (the "Prospectus") if certificates for the 10 3/4% Series A Senior Notes due 2006 (the "Old Notes") of the Company are not immediately available or if the Old Notes, the Letter of Transmittal or any other documents required thereby cannot be delivered to the Exchange Agent or the procedure for book-entry transfer cannot be completed, prior to 5:00 P.M., New York City time, on the Expiration Date (as defined in the Prospectus). Such form may be delivered by hand or transmitted by facsimile transmission, overnight courier or mail to the Exchange Agent. Capitalized terms used by not defined herein have the meanings given to them in the Prospectus. TO: IBJ SCHRODER BANK & TRUST COMPANY, THE EXCHANGE AGENT By Registered or Certified Mail: By Hand or Overnight Delivery: IBJ Schroder Bank & Trust Company IBJ Schroder Bank & Trust Company Bowling Green Station One State Street P.O. Box 84 New York, New York 10004 New York, New York 10274-0084 Attention: Securities Processing Window Attention: Reorganization Operations Subcellar One, (SC-1) Department By Facsimile: (212) 858-2611 Attention: Customer Service Confirm by telephone: (212) 858-2103 DELIVERY OF THIS INSTRUMENT TO AN ADDRESS, OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE, OTHER THAN AS SET FORTH ABOVE, DOES NOT CONSTITUTE A VALID DELIVERY. 2 This form is not to be used to guarantee signatures. If a signature on the Letter of Transmittal to be used to tender Old Notes is required to be guaranteed by an "Eligible Institution" under the instructions thereto, such signature guarantee must appear in the applicable space provided on the Letter of Transmittal. LADIES AND GENTLEMEN: The undersigned hereby tenders to AAi.FosterGrant, Inc., a Rhode Island corporation (the "Company"), upon the terms and subject to the conditions set forth in the Prospectus and the Letter of Transmittal (which together constitute the "Exchange Offer"), receipt of which is hereby acknowledged, the principal amount of Old Notes pursuant to the guaranteed delivery procedures set forth in "The Exchange Offer--Guaranteed Delivery Procedures" in the Prospectus. DESCRIPTION OF SECURITIES TENDERED
Name and address of registered holder as it appears on the 10 3/4% Senior Notes due Certificate Number(s) Principal Amount 2006 ("Notes") of Notes Tendered of Notes Tendered (Please Print) - --------------------- --------------------- --------------------- - --------------------- --------------------- --------------------- - --------------------- --------------------- --------------------- - --------------------- --------------------- --------------------- - --------------------- --------------------- ---------------------
Area Code and Tel. No. ----------------------------------------------- Certificate Nos. (if available) Signature(s) - ------------------------------ ----------------- Dated: ----------- If Old Notes will be delivered by book-entry transfer at The Depository Trust Company ("DTC"), Depository Account No.: ---------------------------------------- This Notice of Guaranteed Delivery must be signed by the Holder(s) of Old Notes exactly as its (their) name(s) appear(s) on certificates for Old Notes or on a security position listing as the owner of the Old Notes, or by person(s) authorized to become Holder(s) by endorsements and documents transmitted with this Notice of Guaranteed Delivery. If signature is by a trustee, executor, administrator, guardian, attorney-in-fact, officer of a corporation or other person acting in a fiduciary or representative capacity, such person must provide the following information: 2 3 Please print name(s) and address(es) Name(s): ----------------------------------------- ----------------------------------------- Capacity: ---------------------------------------- Address(es): ---------------------------------------- ---------------------------------------- GUARANTEE (NOT TO BE USED FOR SIGNATURE GUARANTEE) The undersigned, 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 Securities Exchange Act of 1934, as amended (the "Exchange Act"), hereby guarantees that delivery to the Exchange Agent of certificates for the Old Notes tendered hereby, in proper form for transfer (or confirmation of electronic delivery of book-entry transfer of such Old Notes into the Exchange Agent's account at DTC, pursuant to the procedures for book-entry transfer set forth in the Prospectus), with delivery of a properly completed and duly executed Letter of Transmittal (or manually signed facsimile thereof) with any required signature guarantees and any other required documents, will be received by the Exchange Agent at one of its addresses set forth above within three New York Stock Exchange trading days after the date of execution of the Notice of Guaranteed Delivery. Name of Firm: -------------------------- --------------------------- (Authorized Signature) Address: Title: ------------------------------- ---------------------- Name: - --------------------------------------- ---------------------- (Zip Code) (Please type or print) Area Code and Telephone Number: Date: ----------------------- - --------------------------------------- NOTE: DO NOT SEND OLD NOTES WITH THIS FORM; OLD NOTES SHOULD BE SENT WITH YOUR LETTER OF TRANSMITTAL SO THAT THEY ARE RECEIVED BY THE EXCHANGE AGENT WITHIN THREE NEW YORK STOCK EXCHANGE TRADING DAYS AFTER THE DATE OF EXECUTION OF THE NOTICE OF GUARANTEED DELIVERY. 3 EX-99.3 58 FORM OF LETTER TO BROKER, DEALERS 1 EXHIBIT 99.3 AAi.FosterGrant, Inc. OFFER TO EXCHANGE ITS 10 3/4% SERIES B SENIOR NOTES DUE 2006 WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, FOR ANY AND ALL OF ITS OUTSTANDING 10 3/4% SERIES A SENIOR NOTES DUE 2006 THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON _____, 1998, UNLESS THE OFFER IS EXTENDED. August ___, 1998 To Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees: We are enclosing the material listed below relating to the offer of AAi.FosterGrant, Inc., a Rhode Island corporation (the "Company"), to exchange $1,000 principal amount of its 10 3/4% Series B Senior Notes due 2006 (the "New Notes"), which have been registered under the Securities Act of 1933, as amended, pursuant to a registration statement, for each $1,000 principal amount of its 10 3/4% Series A Senior Notes due 2006 (the "Old Notes"), of which $75,000,000 principal amount is outstanding, upon the terms and subject to the conditions set forth in the Prospectus, dated _________, 1998 (the "Prospectus") and in the related Letter of Transmittal (which together constitute the "Exchange Offer"). THE EXCHANGE OFFER IS NOT CONDITIONED UPON ANY MINIMUM NUMBER OF OLD NOTES BEING TENDERED. The Exchange Offer is, however, subject to other conditions. See the section "The Exchange Offer -- Conditions" in the Prospectus. We are asking you to contact your clients for whom you hold Old Notes registered in your name (or in the name of your nominee) or who hold Old Notes registered in their own names. Please bring the Exchange Offer to their attention as promptly as possible. For your information and for forwarding to your clients, we are enclosing the following documents: 1. The Prospectus, dated _________, 1998; 2. The Letter of Transmittal for your use and for the information of your clients; 3. The Notice of Guaranteed Delivery to be used to accept the Exchange Offer if the Old Notes are not immediately available or if the Old Notes and all other required documents cannot be delivered to the Exchange Agent, IBJ Schroder Bank & Trust Company, by the Expiration Date (as defined in the Prospectus) or if the procedure for book-entry transfer cannot be completed on a timely basis; and 2 4. A form of letter which may be sent to your clients for whose account you hold Old Notes registered in your name or the name of your nominee, with space provided for obtaining such clients' instructions with regard to the Exchange Offer. WE URGE YOU TO CONTACT YOUR CLIENTS AS PROMPTLY AS POSSIBLE. PLEASE NOTE THAT THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON _________, 1998, UNLESS THE EXCHANGE OFFER IS EXTENDED BY THE COMPANY. To participate in the Exchange Offer, a duly executed and properly completed Letter of Transmittal (or facsimile thereof), with any required signature guarantees and any other required documents, should be sent to the Exchange Agent and certificates representing the Old Notes should be delivered to the Exchange Agent, all in accordance with the instructions set forth in the Letter of Transmittal and the Prospectus. If holders of Old Notes wish to tender, but it is impracticable for them to forward their certificates for Old Notes prior to the expiration of the Exchange Offer or to comply with the book-entry transfer procedures on a timely basis, a tender may be effected by following the guaranteed delivery procedures described in the Prospectus under "The Exchange Offer -- Guaranteed Delivery Procedures." Any questions or requests for assistance or additional copies of the enclosed materials may be directed to IBJ Schroder Bank & Trust Company, the Exchange Agent, at the address and telephone number set forth below: 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 HAND OR OVERNIGHT DELIVERY: 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 Attention: Customer Service Confirm by telephone: (212) 858-2103 Very truly yours, AAi.FosterGrant, Inc. 2 -----END PRIVACY-ENHANCED MESSAGE-----